Showing posts with label Fannie Mae. Show all posts
Showing posts with label Fannie Mae. Show all posts

Thursday, September 8, 2016

Fannie Mae and Freddie Mac

The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a government-sponsored enterprise (GSE) and, since 1968, a publicly traded company.

Founded in 1938 during the Great Depression as part of the New Deal,the corporation's purpose is to expand the secondary mortgage market by securitizing mortgages in the form of mortgage-backed securities (MBS),allowing lenders to reinvest their assets into more lending and in effect increasing the number of lenders in the mortgage market by reducing the reliance on locally based savings and loan associations (or "thrifts"). Its brother organization is the Federal Home Loan Mortgage Corporation (FHLMC), better known as Freddie Mac.

Fannie Mae headquarters at 3900 Wisconsin Avenue, NW in Washington, D.C.
Government-sponsored enterprise and public company
Traded as OTCQB: FNMA
Industry Financial services
Founded 1938; 78 years ago
Headquarters Washington, D.C., U.S.
Key people
Tim Mayopoulos, CEO
Products Diversified investments
Revenue Decrease US$ 25.8 billion (2014)
Net income
Decrease US$ 14.2 billion (2014)
Total assets Decrease US$ 3.248 trillion (2014)
Total equity Decrease US$ 3.7 billion (2014)
Number of employees
7,200 (2013)

 The Great Depression wrought havoc on the U.S. housing market. By 1933, an estimated 20-25% of the nation's outstanding mortgage debt was in default. Fannie Mae was established in 1938 by amendments to the National Housing Actas part of Franklin Delano Roosevelt's New Deal.

Originally chartered as the National Mortgage Association of Washington, the organization's explicit purpose was 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.

Fannie Mae created a liquid secondary mortgage market and thereby made it possible for banks and other loan originators to issue more housing loans, primarily by buying Federal Housing Administration (FHA) insured mortgages. For the first thirty years following its inception, Fannie Mae held a monopoly over the secondary mortgage market.

 Other considerations may have motivated the New Deal focus on the housing market: about a third of the nation's unemployed were in the building trade, and the government had a vested interest in getting them back to work by giving them homes to build.

Fannie Mae was acquired by the Housing and Home Finance Agency from the Federal Loan Agency as a constituent unit in 1950. In 1954, an amendment known as the Federal National Mortgage Association Charter Act made Fannie Mae into "mixed-ownership corporation" meaning that federal government held the preferred stock while private investors held the common stock; in 1968 it converted to a privately held corporation, to remove its activity and debt from the federal budget. In the 1968 change, arising from the Housing and Urban Development Act of 1968, Fannie Mae's predecessor (also called Fannie Mae) was split into the current Fannie Mae and the Government National Mortgage Association ("Ginnie Mae").

In 1970, the federal government authorized Fannie Mae to purchase conventional mortgages, the same year it went public on New York and Pacific Exchanges.

In 1981, Fannie Mae issued its first mortgage pass through and called it a mortgage-backed security. The Fannie Mae laws did not require the Banks to hand out subprime loans in any way.

Ginnie Mae had guaranteed the first mortgage pass through security of an approved lender in 1968 and in 1971 Freddie Mac issued its first mortgage pass through, called a participation certificate, composed primarily of private mortgages.

 In 1999, Fannie Mae came under pressure from the Clinton administration to expand mortgage loans to low and moderate income borrowers by increasing the ratios of their loan portfolios in distressed inner city areas.

Additionally, institutions in the primary mortgage market pressed Fannie Mae to ease credit requirements on the mortgages it was willing to purchase, enabling them to make loans to subprime borrowers at interest rates higher than conventional loans.

House Price Index - HPI

House Price Index (HPI) measures the price changes of residential housing. Methodologies commonly used to calculate HPI are the hedonic regression (HR), simple moving average (SMA) and repeat-sales regression (RSR).

The HPI was developed in conjunction with OFHEO's (now FHFA) responsibilities as a regulator of Fannie Mae and Freddie Mac. It is used to measure the adequacy of their capital against the value of their assets, which are primarily home mortgages.
In Canada, the New Housing Price Index is calculated monthly by Statistics Canada. Additionally, a resale house price index is also maintained by the Canadian Real Estate Association, based on reported sale prices submitted by real estate agents, and averaged by region. In December 2008, the private National Bank and the information technology firm Teranet began a separate monthly house price index based on resale prices of individual single-family houses in selected metropolitan areas, using a methodology similar to the Case-Shiller index and based on actual sale prices taken from government land registry databases. This allows Teranet and the National Bank to track prices without allowing periods of high sales in one city to push up the national average. The National Bank also operates a forward market on Canadian housing prices.

Hedonic Regression(HR)

 In economics, hedonic regression or hedonic demand theory is a revealed preference method of estimating demand or value. It decomposes the item being researched into its constituent characteristics, and obtains estimates of the contributory value of each characteristic. 
In real estate economics, hedonic pricing is used to adjust for the problems associated with researching a good that is as heterogeneous as buildings. Because buildings are so different, it is difficult to estimate the demand for buildings generically. Instead, it is assumed that a house can be decomposed into characteristics such as number of bedrooms, size of lot, or distance to the city center. 
A hedonic regression equation treats these attributes (or bundles of attributes) separately, and estimates prices (in the case of an additive model) or elasticity (in the case of a log model) for each of them. This information can be used to construct a price index that can be used to compare the price of housing in different cities, or to do time series analysis. 
As with CPI calculations, hedonic pricing can be used to correct for quality changes in constructing a housing price index. It can also be used to assess the value of a property, in the absence of specific market transaction data. It can also be used to analyze the demand for various housing characteristics, and housing demand in general. It has also been used to test assumptions in spatial economics. 

Hedonic models are commonly used in tax assessment, litigation, academic studies, and other mass appraisal projects

Simple Moving Average (SMA)

In statistics, a moving average (rolling average or running average) is a calculation to analyze data points by creating series of averages of different subsets of the full data set. It is also called a moving mean (MM) or rolling mean and is a type of finite impulse response filter. Variations include: simple, and cumulative, or weighted forms
In financial applications a simple moving average (SMA) is the unweighted mean of the previous n data. However, in science and engineering the mean is normally taken from an equal number of data on either side of a central value.

If those prices are p_{M},p_{M-1},\dots ,p_{M-(n-1)} then the formula is
{\displaystyle {\begin{aligned}SMA&={\frac {p_{M}+p_{M-1}+\cdots +p_{M-(n-1)}}{n}}\\&={\frac {1}{n}}\sum _{i=0}^{n-1}p_{M-i}\end{aligned}}}
When calculating successive values, a new value comes into the sum and an old value drops out, meaning a full summation each time is unnecessary for this simple case,

{\displaystyle {\textit {SMA}}_{\mathrm {today} }={\textit {SMA}}_{\mathrm {yesterday} }+{p_{M} \over n}-{p_{M-n} \over n}}

 Repeat Sales Regression (RSR)

Perhaps the most well-known housing index that uses the repeat-sales method is the Case-Shiller Index, which measures changes in house prices. It excludes new construction, condos and co-ops. It also excludes non-arms-length transactions, such as home sales between family members at below-market prices. It does include foreclosure sales. 

Other indexes that use the repeat-sales method are the Federal Housing Finance Agency’s monthly House Price Index, which is based on Fannie Mae and Freddie Mac’s data on single-family home sale prices and refinance appraisals; and Core Logic’s Loan Performance 

Home Price Index, which covers a broader geographic area than the Case-Shiller or FHFA indexes. Canada’s major home price index, the National Composite House Price Index, uses the repeat-sales method, too. Indexes such as these typically report changes in home prices from the previous month, quarter and year. Increasing home prices indicate increasing demand, while decreasing prices indicate decreasing demand.

An advantage of repeat-sales methods is that they calculate changes in home prices based on sales of the same property, so they avoid the problem of trying to account for price differences in homes with varying characteristics. Repeat-sales methods also offer a more accurate alternative to regression analysis or to calculating average sales price by geographic area. A shortcoming of repeat-sales methods is that they don’t account for homes that were sold only once during the reported time period.

Office of Federal Housing Enterprise Oversight (OFHEO)

The Office of Federal Housing Enterprise Oversight (OFHEO) was an agency within the Department of Housing and Urban Development of the United States of America. It was charged with ensuring the capital adequacy and financial safety and soundness of two government sponsored enterprises—the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). It was established by the Federal Housing Enterprises Financial Safety and Soundness Act of 1992.

OFHEO was managed by a Director, appointed by the President and ratified by the Senate.


The US Federal Housing Finance Agency (formerly Office of Federal Housing Enterprise Oversight a.k.a. OFHEO) publishes the HPI inx, a quarterly broad measure of the movement of single-family house prices.

Federal Housing Finance Agency (FHFA

The Federal Housing Finance Agency (FHFA) is an independent federal agency created as the successor regulatory agency resulting from the statutory merger of the Federal Housing Finance Board (FHFB), the Office of Federal Housing Enterprise Oversight (OFHEO), and the U.S. Department of Housing and Urban Development government-sponsored enterprise mission team, absorbing the powers and regulatory authority of both entities, with expanded legal and regulatory authority, including the ability to place government sponsored enterprises (GSEs) into receivership or conservatorship.

In its role as regulator, it regulates Fannie Mae, Freddie Mac, and the 11 Federal Home Loan Banks (FHLBanks, or FHLBank System). It is wholly separate from the Federal Housing Administration, which largely provides mortgage insurance.