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Fannie Mae was created back in 1938 by then President Franklin D. Roosevelt, to provide liquidity for all the people,allthe time and wherever they may be. FNM is a secondary buyer of mortgages and does not originate home loans. FNM is a GSE or government sponsored enterprise which means FNM can borrow funds from the government at less than the going rate to lower the costs of the loan,but are not guaranteed nor funded by the U.S. government. FNM was originally a government agency in 1938,but became a publicly traded company in 1968 and is funded by investors from around the world. In theory FNM takes a bite of the spread between the government loan rate and what FNM actually charges the borrower. FNM also in theory takes about 1/2 per cent of all the secondary mortgages they purchase on the market as a guarantor of principal and interest.
FNM is under a cloud lately and I'm not sure when the sky will clear. FNM as it strives to put low income or subprime borrowers into a residence of their own,the risk and losses for FNM are escalating. They are ignoring the basis of any sensible loan-can you pay it back? The mortgages FNM are sorted into pools of subprime and other sectors such as nonverified income pools. Also,the art of leverage is becoming a serious factor for FNM. A bank can originate a loan without regard to the borrowers means to pay it back,sell it to FNM and then buy another mortgage and sell it to FNM and so on. But,FNM bundles these questionable loans into MBSs or mortgage backed sucurities and sell these to banks or brokerages and you then have the "subprime meltdown". And guess who will be left holding the bag? You and the other tax payers in America. FNM has guaranteed the payment of principal and interest to the loan originator and though not actually guranteed by the Fed. no one thinks FNM will be allowed to collaspe.
I was getting to FNMs current quarterly report and just read what I thought would happen soon-FNM is cutting their dividend.FNM lost $2.2 billion for 1st quarter 2008,FNM actually cut the dividend in December and are cutting it "again'from .35 cents to .25 cennts,and will be raising $6 billion for future writedowns as they expect the housing downturn to continue. FNMs fair value of net assets was down 66% to $12.8 billion due to falling housing prices. And FNMs exposure is deepening as Congress has lowered the amount of required down payment and raised the maximum loan FNM can make and as the housing market falls,FNM and the other government housing loan agencys are taking on a bigger percentage of the mortgage market.
While I think it is a very noble idea for FNM and the other agencys to put everyone in a house,I wish they would add one stipulation-you have to make the payments. Since the beginning of time,man has had to have a place to live. And in the last 3 or 4 centurys you were expected to buy and pay for the home. This program has some successes and people do indeed make their house payments,but an ever widening number don't.
I think there are much better and safer investments available. The dividend will most likely be cut out completely and the share price I would guess is no where near bottom yet.
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