5 Things You Probably Didn’t Know About Fannie Mae

Following the financial crisis and subsequent government bailout and FHFA-run conservatorship, Fannie Mae (FNMA 2.17%) is often in the news for all the wrong reasons. Yet, despite its continual coverage in the press, there are five surprising things you likely didn't know about this company.

1. It's enormous -- and growing
Many have complained that the largest banks in the country have grown too big -- as Bank of America and JPMorgan Chase each have over $2 trillion (yes -- with a T) in assets, and Citigroup and Wells Fargo aren't that far behind them, as shown in the chart below:

Source: Federal Reserve

While those are certainly staggering -- consider that Fannie Mae has $3.3 trillion in assets -- an amount that is almost equal to Wells Fargo and Citigroup combined. Not only is it huge, it's actually getting bigger -- in June, it grew assets by roughly 2% over its December levels.

While 2% growth doesn't sound like much, it equated to roughly $60 billion, which means the amount of its asset growth through the first six months of this year would make it the 37th largest bank in the country, ahead of Huntington Bancshares.

2. It makes money -- a lot of it
While Fannie Mae is enormous in size, the amount of money it makes is also quite staggering. Consider that, through the first six months of 2013, Fannie Mae earned over $20 billion in pre-tax income, and in all of 2012, it earned $17.2 billion. That amount is more than General Electric ($13.6 billion in 2012) and Wal-Mart ($17.0 billion).

Although many believe that Fannie Mae is a floundering enterprise thanks to its numerous government bailouts, and while, in reality, it is still principally controlled by its conservator, it certainly is no slouch when it comes to making money.

3. It doesn't issue mortgages -- it guarantees and buys them
On the subject of its income, it's easy to think that Fannie Mae actually issues mortgages. Yet, that is not how it functions or makes its money. Instead, Fannie Mae makes its money not from issuing mortgages, but by buying them from banks, and guaranteeing them.

In the instance of it buying the mortgage, it will then bundle a whole host of mortgages together and create a mortgage-backed security, known as an MBS. It will then either sell MBS certificates (taking a cut of the proceeds), or hold onto the MBS itself and collect all of the payments and interest from the mortgages.

When it guarantees a loan, Fannie Mae looks at the characteristics of the borrower, and essentially provides insurance to the MBS investor saying that, if the borrower can't pay his or her mortgage,  it will cover the rest -- for a fee, of course.

4. It doesn't hurt the mortgage market -- it helps it
While many may think that Fannie Mae is an evil government entity bent on bringing down the United States economy, it actually provides a great service to the U.S. By guaranteeing loans, it provides ever-important liquidity in the mortgage markets. Without its guarantees and purchases, many banks would be less willing to issue 30-year mortgages that allow millions to buy homes each year.

Yet, not only does it help support the mortgage market, in general, it also helps those who are less fortunate and have low incomes. Fannie Mae has housing goals in place that dictate 23% of the mortgages it purchases must be from those designated as low income, which is defined as people who have less than 80%of the median area income, and 7% must be from those who have very-low income (less than 50% of the median). This, too, helps incentivize banks to make mortgages to those people who they may otherwise underserve.

Certainly, Fannie Mae played its part, and has its fair share of culpability, related to the housing bubble and corresponding financial crisis -- but at its core, it provides a beneficial economic good to the United States housing market.

5. It doesn't care about its shareholders or debt holders... or really anyone else
In September of 2008, both Fannie Mae and Freddie Mac were placed into conservatorship and are now run by the Federal Housing Finance Agency (FHFA). According to the FHFA, this means that, "As conservator, the [FHFA] assumed all the powers of the shareholders, directors, and officers, with the goal of preserving and conserving the assets and property of Fannie Mae and Freddie Mac."

Although it is in conservatorship -- you can still buy stock in Fannie Mae. Yet, on the concerning side of things, the annual report from Fannie Mae includes this somewhat alarming quote:

Our directors do not have any fiduciary duties to any person or entity except to the conservator. Accordingly, our directors are not obligated to consider the interests of the company, the holders of our equity or debt securities or the holders of Fannie Mae MBS unless specifically directed to do so by the conservator.

While Fannie Mae ultimately provides a necessary and helpful service to help support the housing and mortgage markets, in the end, that is its only purpose. It will do whatever it takes to preserve itself first, and then meet that goal.