Business
Fannie Mae made money partly by borrowing at low rates, and lending at higher rates. It borrowed by selling bonds, and lent by creating mortgages and mortgage backed securities which it held on its own books. Since its implied government guarantee meant it could borrow at very low rates, it earned a higher profit than did the non-government companies doing the same work. This was called "The big, fat gap" by Alan Greenspan. By August, 2008, Fannie Mae's mortgage portfolio was in excess of $700 billion.
Fannie Mae also earned a significant portion of its income from guaranty fees it received as compensation for assuming the credit risk on the mortgage loans underlying its single-family Fannie Mae MBS and on the single-family mortgage loans held in its retained portfolio. Investors, or purchasers of Fannie Mae MBSs, are willing to let Fannie Mae keep this fee in exchange for assuming the credit risk; that is, Fannie Mae's guarantee that the scheduled principal and interest on the underlying loan will be paid even if the borrower defaults.
Fannie Mae's charter has historically prevented it from guaranteeing mortgages with a loan-to-values over 80% without mortgage insurance or a repurchase agreement with the lender; however, in 2006 and 2007 Fannie Mae did purchase subprime and Alt-A loans as investments.
Read more about this topic: Fannie Mae
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