The Federal National Mortgage Association (GNMA) was created by Congress is 1938 to promote homeownership. If you squinted while looking at the letters FNMA and inserted a few vowels, you might come up with … FaNnie MAe. It sold shares to the public for the first time – going public – in 1970. To further the home ownership mission, in 1970 it also created the Federal Home Loan Mortgage Corporation (FHLMC), which became known as Freddie Mac. While they were created by Congress, they were publicly-held corporations which sold stock and borrowed money by selling bonds.
Together, they supported home ownership by buying home loans (ie: mortgages) from banks which had earlier lent money to homeowners. That is, they gave banks the amount of money they’d lent out (plus a little more so the bank could make a profit) in return for the right to receive the homeowners’ monthly loan payments. With money back in their hands, the banks were able to loan again. Homeownership supported.
To see a preview of what would go wrong, click the powerful article Fannie Mae Eases Credit To Aid Mortgage Lending. In order to achieve what the article discusses, these organizations grew so big that together they guarantee about $5 trillion in mortgages, around half of all mortgages. Among those trillions of dollars in mortgages were too many that were made to borrowers who could not afford to pay them back. With a struggling economy, millions unemployed and home prices having fallen significantly, the problem has gotten worse.
On September 7, 2008, with many billions of dollars of their loans going bad and no end in sight to the bleeding, Fannie Mae and Freddie Mac were taken over by the U.S. Government. The government said that they are too big and too important to let fail, so it will give them whatever money they need now and in the future so they can pay their debts.
Recently, Bloomberg put things into perspective this with the following chart which shows the cumulative profits that Fannie Mae has made since it went public. Cumulative means keeping a running total by adding this year’s profits to the sum of the prior years’ profits, and of course, subtracting if there were losses this year:
