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In order to prevent any further monopolization of the market, a second GSE known as Freddie Mac was created in 1970. At this point, Fannie Mae began operating as a GSE, generating profits for stock holders while enjoying the benefits of exemption from taxation and oversight as well as implied government backing.

Johnson privatized Fannie Mae in order to remove it from the national budget. In 1968, due to fiscal pressures created by the Vietnam War, Lyndon B. Fannie Mae makes a profit from the difference between the interest rates homeowners pay and foreign lenders charge.įor the first thirty years following its inception, Fannie Mae held a veritable monopoly over the secondary mortgage market. It is this ability to borrow at low rates that allows Fannie Mae to provide fixed interest rate mortgages with low down payments to home buyers. Within the secondary mortgage market, companies such as Fannie Mae are able to borrow money from foreign investors at low interest rates because of the financial support that they receive from the U.S. This lead to the development of what is now known as the secondary mortgage market.

Initially, Fannie Mae operated like a national savings and loan, allowing local banks to charge low interest rates on mortgages for the benefit of the home buyer. Fannie Mae was established in order to provide local banks with federal money to finance home mortgages in an attempt to raise levels of home ownership and the availability of affordable housing. The collapse of the national housing market in the wake of the Great Depression discouraged private lenders from investing in home loans. A recent accounting scandal at Freddie Mac that resulted in the replacement of three of the company's top executives has led to mounting concerns over the privileged status these GSEs enjoy in the marketplace.įannie Mae was created in 1938 as part of Franklin Delano Roosevelt's New Deal. Treasury, exemption from state and local income taxes and exemption from SEC oversight. These government protections include access to a line of credit through the U.S. This means that, although the two companies are privately owned and operated by shareholders, they are protected financially by the support of the Federal Government. The Federal National Mortgage Association, nicknamed Fannie Mae, and the Federal Home Mortgage Corporation, nicknamed Freddie Mac, have operated since 1968 as government sponsored enterprises (GSEs). In recent months, the nation's two largest mortgage finance lenders have come under increasing scrutiny at the hands of Congress, the Justice Department and the Securities and Exchange Commission (SEC). “The rapid tide of the financial market deterioration combined with the persistent escalation in unemployment has managed to overwhelm the effectiveness of these interventions,” said Ashraf Laidi, chief FX strategist at CMC Markets US.Editor's Note: This article was published in 2003. China and Japan, the biggest buyers of the two companies’ bonds, welcomed the bailout.Īnalysts noted this was only the latest in a string of rescue plans for banks and for the two government sponsored enterprises though, none of which had achieved lasting success. Large holders of the two companies debt, including overseas central banks, had shown increasing nervousness recently, dumping more than $27 billion in agency securities in just the last two months. In July, Paulson had hatched a plan to shore up the firms with a promise of fresh loans and a government injection of capital if either company was pushed to the brink of collapse.īut talks on an aid package ended abruptly in the past few days and policy-makers decided to seize the firms, industry sources with knowledge of the events said.