GOVERNMENT SPONSORED ENTERPRISES

In 1968, in order to further promote affordable housing, Congress split Fannie Mae
in two, creating one private corporation and one government owned corporation.
The government owned corporation was Ginnie Mae (Government National
Mortgage Association). GNMA would guarantee certain types of loans so lenders
could resell those loans in capital markets at a good price, and thereby allowing
those lenders to make new loans. Also, the power of the GNMA guarantee would
lower the cost of financing which could then be passed on to consumers (creating
affordable housing). GNMA only guaranteed loans, as well as guaranteed
repayment of securities that were backed by mortgages to government employees
or veterans (the underlying loans contained in the securities were also guaranteed
by other government organizations like the Veterans Association or Federal
Housing Administration). Fannie Mae continued, but in a new form. FNMA
could now buy conventional mortgages (not guaranteed or insured by the
government, but still meeting specified standards) and they were also permitted to
issue securities backed by FNMA guaranteed mortgages. FNMA would only
guarantee mortgages that were “conforming” loans, i.e. extended according to
strict criteria such as documentation requirements, acceptable debt-to-income
ratios, etc.; all part of the “4 Cs.” Fannie Mae is a GSE (government sponsored
enterprise) and has a federal charter, but is OWNED by private investors.
However, in September of 2008, it was taken over in Conservatorship by the U.S.
Government-- at least temporarily.

Another GSE chartered in 1970 is Freddie Mac (Federal Home Loan Mortgage
Corporation). Freddie was set up to provide competition for Fannie Mae and to
further increase funds for mortgage financing and home ownership. It has
essentially the same charter as Fannie Mae—to buy mortgages from S&Ls and
other institutions. Like Fannie Mae, they could also pool the mortgages they
bought from the secondary markets and sell mortgage backed security bonds
(MBS) to investors on open markets.
Freddie makes money mostly by charging a fee to guarantee the principal and
interest on the underlying loans they have purchased (which are then pooled into
MBSs). However, the U.S. Government does not back the loans.
In 1971, several foreign governments insisted on converting U.S. debt to gold. The
U.S. was unable to accommodate the demand. Then President, Richard Nixon,
responded by eliminating such an exchange. The Gold Standard was officially
abandoned in the U.S. (ending the Bretton Woods system).