It’s been almost 15 years since the Government Sponsored Enterprises (GSE) Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corp) have been put into what is described as ‘Conservatorship’. I have always found both the GSE’s and their history interesting for the simple reason that they combine appealing economics, with decades of bizarre financial lore. The plan this week is to write a little bit about both, while price of their equity (traded over-the-counter at this point) appears to be a in the proverbial toilet.
First History…
Fannie Mae began it’s life as a New Deal program. Founded in 1938, it was constituted primarily to create a liquid secondary market for mortgages. This was desperately needed at the time due to the fact that the circumstances of the Great Depression had put almost a quarter of US mortgages into default. 80 years ago available mortgage products were somewhat different than what we would expect now. Down payments were at-least half the value of the home, and money was short term with large balloon payments due at the end of the loan.
For those of us who are obsessed with the history of mortgage securitisation and the 30 year mortgage regime (which of my loyal Buybackoooors is not?) this was a fairly crucial moment. The infrastructure that supports the existence of such a regime was born at this very moment.
Like Insurance Services Office (now Verisk Analytics) and Versign, Fannie Mae stumbled through various ownership structures. Firstly as a chartered organisation, before being acquired by the HHFA, and then as a mixed ownership corporation (with the government holding a preferred interest and private individuals and entities owning the common). Finally, it took on it’s current (somewhat anyways) form as a privately held corporation in 1968, as the federal government wished to remove it’s considerable debt load from it’s balance sheet. The Housing and Urban Development Act of 1968, which catalysed it’s existence as a privately held corporation, also split the government assisted insurance function. This activity is now conducted by Ginnie Mae. A few years later the government also created Fannie’s counterparty - Federal Home Loan Mortgage Corp or Freddie Mac - to encourage competition in the secondary mortgage market.
Initially equity interests were offered to various Savings and Loans (SNLs), and by happy coincidence Buffett and Munger controlled Wesco Financial through Blue Chip Stamps (or even directly depending on the exact date), and were able to max out the initial maximum allowed investment. The pair would tout the shares again in a 1988 Fortune Magazine article:
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