FANNIE MAE

WHAT DOES IT DO? http://www.investopedia.com/mortgage/fannie-mae-loans/

http://www.fanniemae.com/portal/about-fm/what-we-do.html

Fannie Mae (officially the Federal National Mortgage Association, or FNMA) is a government-
sponsored enterprise (GSE) that is, a publicly traded company which operates under
Congressional charter that serves to stimulate homeownership and expand the liquidity of
mortgage money by creating a secondary market. Established in 1938 during the Great
Depression as part of the New Deal, Fannie Mae channels its efforts into increasing the
availability and affordability of homeownership for low-, moderate- and middle-income
Americans.
As a secondary mortgage market participant, Fannie Mae does not originate loans or provide
mortgages to borrowers. Instead, it keeps funds flowing to mortgage lenders (e.g., credit
unions, local and national banks, thrifts and other financial institutions) through the purchase
and guaranty of mortgages made by these firms. In fact, it's one of two of the largest
purchasers of mortgages on the secondary market: The other is its sibling, the Federal Home
Loan Mortgage Corporation, or Freddie Mac, which is also a government-sponsored enterprise
created by Congress.
By investing in the mortgage market, Fannie Mae creates more liquidity for lenders, such as
banks, thrifts and credit unions, which in turn allows them to underwrite or fund more
mortgages. The entity estimates it has funded the market with $5 trillion since 2009, financing
approximately six million home purchases, 14 million refinancings, and three million rental
apartments. It is the largest funder or backer of 30-year fixed-rate mortgages in the U.S.

Fannie Mae serves the people who house America. Its mission is to provide access to reliable,
affordable mortgage financing in all markets at all times.
Fannie Mae is a leader in providing housing finance for homebuyers and renters in the United
States. It serves the people who house America. Together with their partners, it makes sure
that homeowners, homebuyers, and renters across the country have access to affordable
financing opportunities.
Fannie Mae aspires to be America's most valued housing partner. It provides its customers with
products and tools they need to enable mortgage lending in the 21st century. It provides
technology and risk tools to help its customers advance their businesses. It listens to and
supports their customers to make the mortgage process more efficient and effective.
It continually works to improve the way it operates because it wants to make the housing
finance system safer and more effective for its company, its customers, homeowners,
homebuyers, renters, and for America.
It has two primary lines of business: Single-family and Multifamily.

Why did Fannie Mae and Freddie Mac fail? http://reason.org/news/show/what-caused-the-

meltdown-a-fin#faq9
Date of Failures: Sunday, September 7th, 2008
Fannie Mae and Freddie Mac are public-private hybrid institutions called government-
sponsored enterprises (GSE). Although they were owned privately (before the bailout), the
government originally set them up as part of an effort to support the housing market by
guaranteeing mortgages in the 1960s and 1970s. Fannie and Freddie backed up their mortgage
guarantees by issuing debt, which was implicitly guaranteed by the government because of
their government charter. The GSEs also were given directives by Congress and the Department
of Housing and Urban Development (HUD), further tying them to the government and implicit
promise that if the directives led the firms into trouble that Washington would save them.
This arrangement caused Fannie and Freddie to make unsound lending decisions for two
reasons. First, because of their government sponsorship, politicians pressured Fannie and
Freddie to promote affordable housing. The Clinton administration, both Bush administrations,
Congress, and HUD all pushed Fannie and Freddie to encourage more and more subprime loans
to low-income homebuyers. The banks recognized that these directives meant they could issue
more mortgages with lowered lending standards, collect the fees associated with origination,
and then sell the loans to the GSEs. Banks also packaged the subprime mortgages into
securities, which they sold both to GSEs and investors. Without the directives from the
government that Fannie and Freddie buy more subprime mortgages, the banks would not have
been as cavalier in issuing them (see Q1).
Second, government sponsorship permitted Fannie and Freddie to accumulate much higher
levels of debt than other companies because investors considered their debt to be as reliable as
U.S. Treasury Securities. Fannie and Freddie used this advantage to accrue enormous profits,
exploiting their privileged status to rack up $1.5 trillion in mortgages and mortgage-backed
securities by the summer of 2008. However, of those $168 billion were subprime mortgages.
Eventually, the debt and losses from the housing market became overwhelming and the GSEs
were in effect nationalized via bailout.

CORPORATE GOVERNANCE FAILURES AT FANNIE MAE http://www.chegg.com/homework-

help/questions-and-answers/governance-failures-fannie-mae-freddie-mac-1-read-
illustration-capsule-24-text-corporate-g-q19611020

Excessive executive compensation in the financial services industry ranks high among examples
of failed corporate governance. Corporate governance at the government-sponsored mortgage
giants Fannie Mae and Freddie Mac was particularly weak. The politically appointed boards at
both enterprises failed to understand the risks of the subprime loan strategies being employed,
did not adequately monitor the decisions of the CEO, did not exercise effective oversight of the
accounting principles being employed (which led to inflated earnings), and approved executive
compensation systems that allowed management to manipulate earnings to receive lucrative
performance bonuses. The audit and compensation committees at Fannie Mae were
particularly ineffective in protecting shareholder interests, with the audit committee allowing
the companys financial officers to audit reports prepared under their direction and used to
determine performance bonuses. Fannie Maes audit committee also was aware of
managements use of questionable accounting practices that reduced losses and recorded one-
time gains to achieve financial targets linked to bonuses. In addition, the audit committee failed
to investigate formal charges of accounting improprieties filed by a manager in the Office of the
Controller.
Fannie Maes compensation committee was equally ineffective. The committee allowed the
companys CEO, Franklin Raines, to select the consultant employed to design the mortgage
firms executive compensation plan and agreed to a tiered bonus plan that would permit Raines
and other senior managers to receive maximum bonuses without great difficulty. The
compensation plan allowed Raines to earn performance-based bonuses of $52 million and a
total compensation of $90 million between 1999 and 2004. Raines was forced to resign in
December 2004 when the Office of Federal Housing Enterprise Oversight found that Fannie
Mae executives had fraudulently inflated earnings to receive bonuses linked to financial
performance. Securities and Exchange Commission investigators also found evidence of
improper accounting at Fannie Mae and required the company to restate its earnings between
2002 and 2004 by $6.3 billion.
Poor governance at Freddie Mac allowed its CEO and senior management to manipulate
financial data to receive performance-based compensation as well. Freddie Mac CEO Richard
Syron received 2007 compensation of $19.8 million while the mortgage companys share price
declined from a high of $70 in 2005 to $25 at year-end 2007. During Syrons tenure as CEO, the
company became embroiled in a multibillion-dollar accounting scandal, and Syron personally
disregarded internal reports dating to 2004 that cautioned of an impending financial crisis at
the company. Forewarnings within Freddie Mac and by federal regulators and outside industry
observers proved to be correct, with loan underwriting policies at Freddie Mac and Fannie Mae
leading to combined losses at the two firms in 2008 of more than $100 billion. The price of
Freddie Macs shares had fallen to below $1 by the time of Syrons resignation in September
2008.
Both organizations were placed into a conservatorship under the direction of U.S. government
in September 2008 and were provided bailout funds of more than $180 billion by mid-2012. At
that point, the U.S. Treasury amended the organizations bailout terms to require that all profits
be transferred to the government while downsizing firms. By early 2014, the bailout had finally
been fully repaid.

REMEDIAL CORPORATE GOVERNANCE ACTIONS

http://online.wsj.com/public/resources/documents/ofheo20060523.pdf

OFHEO directed the Board of Directors to separate the Chairman of the Board and the Chief
Executive Officer positions and to provide to OFHEO the new written requirements for the Chief
Executive Officer and the Chief Financial Officer. OFHEO also directed the Board to cause to be
conducted a review of committee structures, resources, reporting requirements, procedures,
and quality of financial disclosures, as well as any potential changes to management and
internal systems to meet the Boards oversight responsibilities.

OFHEO has directed Fannie Mae to create a new Office of Compliance and Ethics that reports to
the Chief Executive Officer and independently to the Compliance Committee. The office is
directed by an officer that has no other duties at Fannie Mae and who operates independently,
including with regard to communication with the Board and OFHEO, particularly on matters of
wrongdoing. The office will have a separate internal investigative function that is adequately
staffed and resourced to perform investigations regarding internal complaints, whistleblower
reports, ethics matters, and related topics. That investigative function will report on its findings
to OFHEO in a prompt manner. The head of the office cannot be removed without Board
approval.

OFHEO directed the Board to establish a Compliance Committee, staffed with a minimum of
three independent members of the Board. The Committee monitors and coordinates
compliance with the September 2004 agreement and the March 2005 Supplemental Agreement
and meets with OFHEO representatives regarding compliance with those agreements. OFHEO
directed that the Board or the Compliance Committee establish an appropriate tracking system
in consultation with OFHEO to allow for the monthly reporting of material events and the
monitoring of the implementation of and progress under the agreements.

OFHEO directed the Board to cause an external review to gather recommended changes to the
organizational structures, responsibilities, and personnel required to comply with law and
regulation, particularly for regulatory reporting and data processing services. The Board shall
consult with, and report to, OFHEO on any proposed changes.

OFHEO directed that the Board establish a program for no less than annual briefings to the
Board and senior management on legal and regulatory compliance requirements applicable to
Fannie Mae. The briefings are to include reviewing any Enterprise policies and practices that
inhibit the effective compliance with those requirements.

OFHEO revised its corporate governance regulation in 2005 to address matters raised in its
special examinations of Freddie Mac and Fannie Mae and developments in corporate
governance practices. Additional duties and requirements for the Board and senior
management were added to that regulation,including a requirement to establish compliance
and risk management programs.

OFHEO directed the Board to create a procedure, approved by OFHEO, for the General Counsel
of Fannie Mae to report directly to the Board any information relating to actual or possible
misconduct by an Executive Officer or member of the Board, or the possibility of significant
misconduct by an employee, while keeping counsels professional and ethical duties to Fannie
Mae. The procedure will call for the Board to notify OFHEO of the substance of the allegations,
with the Boards comments, in a timely manner. Additionally, if the Board fails to notify OFHEO,
the General Counsel will notify OFHEO of the information submitted to the Board.

RECOMMENDATIONS

Based on the special examination of Fannie Mae, OFHEOs staff recommends to the Director
that the following actions be taken to enhance the goal of maintaining the safety and
soundness of the Enterprise.
1. Fannie Mae should be subject to penalties and fines consistent with the findings of this
report.
2. Fannie Mae must meet all of its commitments for remediation and do so with an
emphasis on implementationwith dates certainof plans already presented to
OFHEO.
3. Fannie Mae must maintain a capital surplus until the Director determines a change in
the surplus amount is warranted.
4. Fannie Mae must continue to use independent consultants acceptable to the Director to
validate and assure compliance with requirements. Cyclical targeted exams by
independent consultants, at least every two years, are needed to assure systems and
practices are being implemented properly.
5. Fannie Mae must develop new structures and operational plans for its Board of
Directors related to Board reporting, maintenance of minutes, and other changes that
will enhance Board oversight of the Enterprises management.
6. Fannie Mae must review OFHEOs report to determine additional steps to take to
improve its controls, accounting systems, risk management practices and systems,
external relations program, data quality, and corporate culture. Once OFHEO has
approved the Enterprises plans, an emphasis must be placed on implementation of
those plans.
7. Fannie Mae must undertake a review of individuals currently with the Enterprise that
are mentioned in OFHEOs report and provide OFHEO a report as to conclusions
regarding terminations, transfers, or other remedial steps (such as disgorgement,
restitution, or alteration of benefits) in cases of misconduct.
8. Fannie Mae must assure that departments are fully and appropriately staffed with
skilled professionals who have available regular training opportunities in financial
services industry standards.
9. Due to Fannie Maes current operational and internal control deficiencies and other
risks, the Enterprises growth should be limited.
10. OFHEO should continue to develop its program of regulatory infrastructure to add
additional rules and regulations that enhance the transparency of its supervision of the
Enterprises. With the end of the special examination, OFHEO staff should be directed to
address additional items raised during the preparation of this report as part of the
regular examination program.
11. OFHEO should continue to support legislation to provide the powers essential to
meeting its mission of assuring safe and sound operations at the Enterprises.
12. Matters identified in this report should be referred to OFHEOs Office of the General
Counsel for determination of enforcement actions that the Director may wish to
consider.
13. Matters identified for remediation by Fannie Mae should be considered by the Director
for application to both Enterprises.
CHANGES IN CORPORATE GOVERNANCE AFTER THE CRISIS

The years from 2000 to 2010 were bookended by two major economic crises. The bursting of
the dotcom bubble and the extended bear market of 2000 to 2002 prompted Congress to pass
the SarbanesOxley Act, which was directed at core aspects of corporate governance. At the
end of the decade came the bursting of the housing bubble, followed by a severe credit crunch,
and the worst economic downturn in decades. In response, Congress passed the DoddFrank
Act, which changed vast swathes of financial regulation. Among these changes were a number
of significant corporate governance reforms.

In the US, the US Treasury implemented regulations aimed at recipients of funds under the
Troubled Asset Relief Program (TARP), a program established under the Emergency Economic
Stabilization Act of 2008. Among other things, the regulations included the following:
1. Limits on executive compensation, bonuses, retention awards and other incentive
compensation;

2. Measures designed to address unnecessary and excessive risk; and

3. Requirements that executive compensation be subject to a shareholder vote (Say on Pay)

for firms receiving governmental assistance.

On 21 July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act) was approved by President Barack Obama and made law. The Dodd-Frank Act is a
comprehensive and hefty new law to, inter alia, promote the financial stability of the United
States by improving accountability and transparency in the financial system, end too big to
fail, protect the American taxpayer by ending bailouts, [and] protect consumers from
abusive financial services practices.

The Dodd-Frank Act creates a Financial Stability Council to identify and address systemic risks
posed by large, complex companies, products, and which threaten the stability of the US
economy. Additionally, the Dodd-Frank Act seeks to eliminate loopholes for certain instruments
which allow risky and abusive practices to go on unnoticed and unregulated including
loopholes for over-the-counter derivatives, asset-backed securities, hedge funds, mortgage
brokers and payday lenders. In relation to executive compensation and Corporate Governance
specifically, the Dodd-Frank Act provides shareholders with a Say on Pay and corporate affairs
with a non-binding vote on executive compensation.