FNMA (Fannie Mae) bonds
Also known as: Fannie Mae bonds, Fannie Mae securities
FNMA bonds are debt securities issued by the Federal National Mortgage Association (Fannie Mae), a government-sponsored enterprise that supports the U.S. mortgage market. They are not backed by the full faith and credit of the U.S. government.
FNMA bonds are securities issued by the Federal National Mortgage Association, better known as Fannie Mae. Fannie Mae is a government-sponsored enterprise (GSE): a publicly chartered but shareholder-owned company created to keep mortgage money flowing. It does not lend to homebuyers directly; instead, it buys mortgages from banks and other lenders, giving those lenders fresh cash to make new loans, and finances itself by issuing debt and mortgage-backed securities to investors.
Fannie Mae's mortgage-backed securities pass through the monthly principal and interest payments from pools of home loans, which exposes investors to prepayment risk — when interest rates fall, homeowners refinance and return principal early, exactly when reinvestment options are worst. Fannie Mae also issues conventional debentures and notes that pay interest like ordinary bonds.
The most tested feature of FNMA securities is what does not stand behind them. Unlike Ginnie Mae (GNMA) securities, which carry the full faith and credit of the U.S. government, Fannie Mae's obligations are backed only by the company itself — the government guarantee is implied, not legal. FNMA yields therefore run slightly higher than Treasury yields. Interest on FNMA securities is fully taxable at the federal, state, and local levels, unlike Treasury interest, which is exempt from state and local tax.
The Series 65 exam covers Fannie Mae in its unit on U.S. federal agency debt. Remember the pairing tested most often: GNMA is a government agency with full faith and credit backing; FNMA and FHLMC (Freddie Mac) are GSEs without it.
Key takeaways
- Fannie Mae (FNMA) is a government-sponsored enterprise that buys mortgages from lenders to support the housing market.
- FNMA securities are not backed by the full faith and credit of the U.S. government — only GNMA securities are.
- Mortgage-backed FNMA securities expose investors to prepayment risk when rates fall.
- Interest on FNMA bonds is taxable at the federal, state, and local levels.