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
Famous quotes containing the word business:
“And what if my descendants lose the flower
Through natural declension of the soul,
Through too much business with the passing hour,
Through too much play, or marriage with a fool?”
—William Butler Yeats (1865–1939)
“The enemy are no match for us in a fair fight.... The young men ... of the upper class are kind-hearted, good-natured fellows, who are unfit as possible for the business they are in. They have courage but no endurance, enterprise, or energy. The lower class are cowardly, cunning, and lazy. The height of their ambition is to shoot a Yankee from some place of safety.”
—Rutherford Birchard Hayes (1822–1893)
“The point is that nationalism, even in its latest madhouse frenzies under Mussolini and Hitler, is still, like advertising, an arm of big business. Nations as we know them today, were the invention of business and it is natural that business should still consider itself slightly above patriotism and that the strongest international should still be the international of profits.”
—John Dos Passos (1896–1970)