Why is Frannie Mae in Trouble?
Fannie Mae is the common name for Federal National Mortgage Association. It was set up as a stockholder owned corporation in 1968 when it was chartered by Congress as a government sponsored enterprise. However it actually started in 1938 during the Great Depression to create a secondary mortgage market.
Fannie Mae has become a mortgage giant together with Freddie Mac by offering more accessible loans to middle to low income families. This enabled more families to own homes. The company now owns or guarantees half of the loans in the US$11 trillion mortgage market together with Freddie Mac.
However, the trouble for Fannie Mae began when these families who were given approval for mortgages failed to remit their payments. This happened in the years 2005 to 2007 when there was a boom in home mortgage transactions. However, with the unsafe underwriting standards, they were really not able to do a thorough background check on the people applying for mortgages.
This resulted to home foreclosures and lowering of home rates. With the application for mortgage getting stricter making it hard for those without credit history to apply for one, a surplus of homes has resulted. This situation led to huge losses for the company. There have also been allegations of incorrect accounting practices resulting in its seizure by the federal government.
They are being questioned by the Congressional Committee on House Financial Services on the allegations of improprieties of the corporation’s accounting practices. The unrecorded losses that amount to US$9 billion are something that must be taken a look at. Although a bailout by the US government will help it survive this storm that it has ran into. However there are still some things that have to be clarified for the sake of the many borrowers and home owners that have placed their trust in this government sponsored enterprise.
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