How do Fannie Mae make their money? Why are they in such a bad financial situation.?

Question

How do Fannie Mae make their money? Why are they in such a bad financial situation.?

Answer 1

They had each a couple of billion in assets, but lent 9Trillion.  Some(a lot of the money they lent out is defaulting).  So a month ago when one of these companies tried a new bond issue to raise capital the bonds did not sell as well as needed.  That left them both without the ability to get more capital into their systems to finance new loans.  They make money off origination of new loans.  They had been packaging up and selling some loans on wall street as A+ financial securities.  Obviously these were loans that had been seasoned to some extent. That business is also gone.

So

They cannot originate loans

They cannot sell loans

They cannot stop people from defaulting on bad loans.

Answer 2

In short, they make their money from us.

Answer 3

In the old days, your local bank would sit down with you in person and ask you questions.  You would be approved or rejected for a loan to buy a house.  If approved, that bank would loan you the $50,000.  For 30 years you would make payments to that bank.  If you lived close, you could drop off your payments.

That used up a lot of the banks money.  THey had to get a lot of small Savings and Checking accounts to gather that much.

Federal National Mortgage Association said to that same bank.... give the loan to that buyer and we'll buy it from you.  The bank wouldn't get 30 years of payments.  Their only profit might be a $500 fee to process the loan.  FNMA would send the bank $50,000 cash and FNMA would collect the payments.  The homeowner didn't know that and probably didn't care.  The coupon book still had the name of the local bank but they no longer let you drop off your payments there.  FNMA would gather up 100 of these small loans and sell them off in $25,000 increments to individuals.  A big buyer of them were Pension funds for big companies and state governments.  Very reliable source of money for 30 years.  People have been amazingly good about paying to keep their home.

They relaxed and stopped checking to see if the local bank was still doing a great job of "sitting down with the home buyer".  THe local bank got lazy and approved everyone who walked in the door.  They didn't care any more...it wasn't their money.   Instead of Pension funds, people in Germany and CHina started buying the FNMA investments.  When the buyers stopped making payments, no one received any money.  That was ok as long as 3% of the homeowners didn't pay.  Still ok if 5% didn't pay.  But when it got to 12% not paying, the investments ceased to have any investment value.  THey were almost worthless. No one will buy them.  FNMA suffers because no one will invest with them and they need money coming in to remain open.

Answer 4

They make their money by charging fees to provide liquidity in the mortgage market.  They buy mortgages from lending institutions.  They are in bad shape because they bought many bad loans.

Answer 5

Has anyone ever heard of a ponsi scheme? Well now you have, just look up the definition. They were outlawed in the US until we got the Federal Reserve.

Answer 6

Leverage is the answer.  That is both how they make their money and why they are in such bad financial difficulty.  It works both ways.  They live and die on borrowed money.  For each $1 of equity they have almost $20 of debt counting their preferred stock. Now that their mortgage portfolio is going into default, they are hurting big time.