Fannie Mae and Foreclosures

 

 

Arizona neighborhoods are filled with foreclosed properties touted as Bank Owned.  But that foreclosed property may be owned by Fannie Mae, not a bank.    Why is Fannie Mae responsible for some foreclosures instead of the banks?

The short answer is because they lost a bet.

The longer answer is a little more complicated.  FNMA is the Federal National Mortgage Association, a corporation created by Congress to support the secondary mortgage market. It purchases Federal Home Administration (FHA), Veterans Affairs (VA) and Conventional mortgages (loan amounts under $417,000 in Arizona) from primary lenders and sells them to investors.

By purchasing mortgages, Fannie Mae and Freddie Mac provide banks and lenders with replacement cash to make new loans. The banks collect the monthly payments, and along with their own investors, shoulders partial recourse of the loans.

Before 2006, Fannie Mae did not purchase mortgages with a loan-to-value over 80%, unless there was mortgage insurance or a repurchase agreement from the lender.  The pit bosses on Wall Street insisted Fannie Mae join the debt frenzy and ease their restrictions. Along with mirror-fogging underwriting guidelines, Fannie also began purchasing subprime loans as investments.

Fannie Mae concocted another money-making angle by collecting additional bucks for assuming the credit risk on some of their mortgage loans.  Investors, or purchasers of Fannie Mae Mortgage Backed Securities (MBS), were willing to pay Fannie Mae additional funds.  In exchange for the supplementary compensation, Fannie guaranteed the investors would be paid if the borrower defaulted.    What could possibly go wrong?

Fannie Mae and Freddie Mac purchased $1,116 billion (you are reading correctly) in mortgages from Countrywide alone, between 2004 and 2008.  Today, $559 billion remain outstanding.

Any bets of how many of those loans will end up back with Fannie Mae? After all, what's there to lose?