Introduction
The Federal National Mortgage Association (FNMA) aka Fannie Mae was originally created during the Great Depression and was one of the ways out of the economical crisis during those years (Acharaya 3). It was a great step forward signed by a New Deal. It has gone through many reshaping procedures and in 1968 it was ultimately declared a government-sponsored enterprise. Today, it is the second largest company in the country working with investors of all kinds. It is a stable company that offers money funds to US homebuyers. Moreover, the Fannie Mae Company is on good terms with the government publicly after Treasury Secretary Henry Paulson claimed the Congress was going to back up Fannie if their profits drop too low.
Overall, the company has many advantages over other US companies. One of those is that they do not pay taxes and have $2.25 billion credit from the US Treasury. Besides, they have backing from the Government, not publically expressed, of course. However, such an unseen support is a wonderful opportunity for the company to overcome crisis and feel much better at the market as a player. What they do is using the mortgages at their disposal in order to pay interest on the mortgage based securities. This is a process of leveling up the foreclosure rates to make it profitable to own these mortgages. Of course, this sound particularly means to make people pay more afterwards, but the company has seen significant changes on this marker and hurried to write off such deals as they were not granting any income. Nevertheless, the initial goal of the company is to make it easier for the family to get their houses and take loans from banks sooner by buying out the loan from the bank and paying it the bonds. It is about $5.3 trillion that Fannie Mae holds from overall $12 trillion of the US mortgage debts. When the crisis burst out, everyone began to doubt in the company’s further survival. However, in 2009 the US Treasury Department disproved all rumors and confirmed continuing government support.
Net Losses of Three Segments
According to the latest data, in 2009 Fannie Mae’s profits constituted $3.2 trillion in mortgages. The net interest income of Fannie Mae is $14.5 billion. Nevertheless, as any other company it does have its leaks in the system and losses are about $9.9 billion. Overall with credit expenses and losses of other income, the company experienced $72 billion in 2009.
Business Shares
Funnie Mae made a significant work sharing its spheres of influences among different kinds of financial groups. This is a great division that the company follows: the segments they head for are single family, housing and community development, and capital markets group. The single families rely on guaranty fees. Remarkably, they decreased from 8.4 to 8 billion dollars within a year. Apparently, this business does not seem to come really successfully because $64 billion net loss in 2009 compared to 27.1 billion dollars net loss in 2008 is a great change that does not work for the company. One of the foremost issues to blame in such a decreasing profit is the mortgage backed securities. Moreover, the defaults and poor housing market has been getting worse all around the US. The Housing and Community Development knew less misfortune but their losses are pretty great, as well. For instance, they lost $9 billion in comparison with 2008 when it was only $2.2 billion. Nevertheless, Fannie still experienced the increase in guaranty fees because they gained $633 million in 2008 and $675 million in 2009. This can be considered a success but not a significant one as per the overall sums of money they have to deal with annually. The capital markets group segment seems to be one of the most successful parts to pay attention to. The company earned $857 million in 2009 while they failed to do it a year ago due to net loss of $29.4 million. They are masterful at earning money through interest which was $14.3 billion, whereas a year ago (2008) it was only $8.7 billion.
Future Prospects
Although the company has been long enough at The US market in order to derive conclusions and make prospects for future, it is absolutely unclear what the company will undergo further on, primarily because the Government’s support prospects are unknown. The reason for everything was the world’s financial crisis on its peak. There were hot debates on whether the company is worth funding by the government treasury or not after the market gets stable. However, the experts claimed that granting funds in a limited way would be very mutually beneficial, though others stated it would mean too much risk. Therefore, this solution is a significant possible change for the Fannie Mae’s future.
The company is to have a wonderful and prosperous future simply because they do implement innovations and check on the way system works; particularly they find leaks in the system and vanish them. That being said, they started looking more precisely at their mortgages loans and the borrowers’ paying abilities. The reason for that was the increasing in the number of non-performing loans up to $119.2 billion. Therefore, Fannie Mae launched their pursuing program of banks and other lenders in the scope of insufficient or incorrect documentation with the borrowers’ information. It is necessary to mention there also were outright lies in those files that simply dragged the company to the bottom. Thus, Fannie Mae managed to sell back $2.7 billion of fraud loans to banks. As a result, the company signed an agreement in 2011 that the Bank of America will pay back $1.52 billion for the loan the company failed to benefit from due to irrelevant data.
Subprime Recession
Unbelievably well went the subprime sector for the company. They started the program when the mortgage industry expanded in 1990s. The first subprime loans were given out with a high risk but then they proved to be pretty lucrative. The year 1995 showed about 100,000 subprime loans taken, whereas until 2004 there were about 1.5 million of those. The essence of the subprime loans is in borrowing loans to the people with a poor background in previous loans’ payment. Such borrowers had problems with banks in the past or their reputation is just not perfect, the rates for them are much higher than for the rest borrowers. Interestingly, this very risk enables banks to charge premium interests as if making sure they would compensate the risk in case anything happens. So, evidently, such loans are just a find for Fannie Mae. In 2007 repayment rates decreased and home values did too, so subprime sector experienced decay. I n2007 the subprime loans saw the 13.5% being delinquent in comparison to 11.5% of the previous year it was a failure (Barth 65). Furthermore, Fannie Mae’s losses have been increasing since 2007 and the rumors about their market insulation have spread rapidly. The reason for that is $2.05 billion net loss in this sector in 2007. Besides, the losses did not stop mounting.
Fixed Rates Harm the Company
Fannie Mae Company decided they would fix rate mortgages which will subsequently decrease flexibility. The company majorly holds the mortgages that are fixed. This means that the rates are never changed throughout the payment period from what was signed right at beginning when the borrower got his/her loan. Of course, this may affect the company in a bad way in some sense – they sell bonds and the rates cannot get lower than the current rates. In case the rates level up, Fannie Mae cannot do the same to their borrowers and, hence, they will lose money on that and not be able to use profits for back securities. Everything is pretty simple an the same time devastating: Fannie Mae holds mortgage with 2.5% of interest rates, when those are increased up to 5% throughout the banking system in the country, Fannie Mae still has to earn profit according to 2.5%, whereas it pays out 5% for the investors to buy the bonds. So, it became hard to keep up with the current trends in economy and finance because of the changing rates.
Competition
It is hard to make any comparisons because of Fannie Mae’s size and reputation. The company is very specific in its business, so the only one to put in line is it sister company Freddie Mac (FRE), both of them are government funded and are similar in size (Wallison 34).The net interest income of Freddie Mac is $17.1 billion, though it is a little smaller in size than Fannie Mae. However, their net loss is $21.6 billion as per the data of 2009.
Works Cited
Acharaya, Viral. V. Guaranteed to Fail: Fannie Mae, Freddie Mac, and the Debacle of Mortgage Finance. Woodstock: Princeton University Press, 2011. Print.
Barth, James. The Rise and Fall of the US Mortgage and Credit Markets: A Comprehensive Analysis of the Market Meltdown. New Jersey: Wiley, 2009. Print.
Wallison, Peter. Serving Two Masters, Yet Out of Control: Fannie Mae and Freddie Mac. London: Aei Press, 2001. Print.