How does Fannie Mae (FNMA) make money?

By Jean Folger AAA
A:

Fannie Mae (the Federal National Mortgage Association, or FNMA) is a government-sponsored enterprise (GSE) established in 1938 to expand the flow of mortgage money by creating a secondary mortgage market. In September 2008, as the housing market crashed and hundreds of thousands of borrowers began to default on their mortgages, Fannie Mae and "little brother" Freddie Mac were taken over by the government (technically, a conservatorship of the Federal Housing Finance Agency) and received $187.4 billion in bailouts to remain solvent.

Under the previous agreement, Fannie Mae (and Freddie Mac) drew money from the Treasury Department as needed for its capital reserves, for which the companies issued preferred stock to the government on which they paid a 10% dividend. In August of 2012, the terms governing the company's dividend obligations changed so that Treasury claims all profits at the end of each quarter, and provides capital if either company has a quarterly loss. So even though Fannie Mae makes money, its profits are handed over each quarter to the government. As of March 2014, Fannie Mae and Freddie Mac had paid more in dividends to the U.S. Treasury than they had received since the 2008 bailout.

As secondary market participant, Fannie Mae does not lend money directly to consumers. Instead, it keeps liquidity flowing to mortgage lenders (e.g., credit unions, local and national banks, thrifts and other financial institutions) through the purchase and guaranty (for a fee) of mortgages made by these firms, which help ensure that families can buy homes, refinance existing mortgages, or find affordable rental housing. The loans are then packaged into Fannie Mae MBS (mortgage-backed securities) and sold to private investors worldwide. Since Fannie Mae guarantees timely payments of principal and interest, investors don't have to be concerned about credit risk. Fannie Mae also holds some loans and mortgage securities in its own investment portfolio.

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