The Federal National Mortgage Association (FNMA), generally known as Fannie Mae, is a government-sponsored corporation operating in the diversified financial services sector. The company was founded in 1938 and is based in Washington, D.C.; it was founded as a part of a great deal. Its primary purpose was to operate in the secondary mortgage market, securitize mortgage loans, and package them into a single tradable vehicle such as Mortgage Back Security (MBS). The company is the largest mortgage lenders in the U.S. Fannie Mae has an important role in the expansive U.S. housing market. The company has played a vital role during the pandemic in 2020, the greatest labour market disruption since the Great Depression. The company helped 1.3 million single-family homeowners to enter forbearance, a legal measure to stop the endorsement of debt (Fannie Mae, 2021). Porter’s five forces analysis is a valuable tool to assess the business and financial risk Fannie Mae is exposed to in the global financial services sector.
Competitive Rivalry in The Market
The U.S. financial services market is highly competitive. There are established mega corporations operating in the sector, therefore, intensifies the competition. Fannie Mae is the largest corporation operating in the secondary-mortgage market and has immense significance due to its impact on society. Its major competitors are Fidelity National Financials (FNF), Freddie Mac and Ocwen Financial. Currently, Fannie Mae is ranked at 25th place on the Fortune 500 global companies list. It has reported $106.4 billion in revenues and $11.8 billion in profit with an annual decrease of 16.6% (Fortune, 2021), mainly attributed to a global pandemic. FNF has reported revenue and profit of $10.7 billion and $1.4 billion (Fortune, 2021). Freddie has reported revenue of $75.1 billion with a 2.1% change year-on-year and profit of $7.2 billion, and ten years annualized ROI is 7.4% (Fortune, 2021). Ocwen Financial earned a revenue of $2.1 billion in 2020 (Fortune, 2021).
Threat of Substitutes
The threat of substitute in the diversified financial services market is assessed to be low. The threat is perceived to be high in better alternatives, their acceptance by the consumer and the competition in the market. Digitization has changed consumer preference, and the industries are shifting towards digital solution adjusting with consumer preference. Millennials’ shifting preference away from traditional services will continue to be the driving force in the consumer lending market (RSM, 2021). Fannie Mae has given mortgage servicers the green light to use third-party digital vendors to verify income and asset information; unsurprisingly, mortgage tech firms are thrilled (Kromrei, 2021). The digital market has allowed other innovators to disrupt the lending market. However, there are no natural substitutes available for consumers in lending markets, and therefore the threat remains low
Threat Of New Entrants
The threat of new entrants is directly proportional to the ease of certain factors such as required capital, regulatory environment and potential for growth. Diversified financials market, especially lending market, has its own limitations. The industry is capital intensive, and significant equity is required to break into the market. The high capital requirement generally discourages new entrants and serve the existing market players. Another significant barrier to entry is the increased compliance cost in the industry. Since the financial crisis of 2008, the compliance cost has increased due to stricter compliance requirements. The monetary policy addresses the scenarios where systems failure would lead to economic instability (Coetzee & De Beer, 2016). Finally, the market is already saturated, and there are established, incumbents. Therefore, the threat of new entrants remains low.
Bargaining Power of Buyers
The buyers possess moderate bargaining power in the lending market. It depends on the following underlying factors: buyers’ concentration, importance for the business, switching cost, and competition. The primary buyers are government institutes, retail mortgage buyers and securities buyers. Government institutes hold higher bargaining power as they have the ability to legislate and negatively impact the business. Retail buyers’ have options to choose from when they seek a mortgage, but there is a high switching cost when a person is committed to an institute. High switching cost binds consumer with the service provider and makes an exit difficult (Aydin et al., 2005). Lastly, buyers are not in concentration as people tend to make a decision as a family unit or in an individual capacity; therefore, the housing market consumers overall bargaining power remains moderate.
Bargaining Power of Suppliers
Suppliers usually hold moderate bargaining power in the mortgage housing market. Their control is directly proportional to the factors such as the importance of the supplies, the business’s reliance on the inflows and the nature of product or services. There are two major sources of inflows: retail customers, the buyer of mortgages and the institutions that securitize and sell the securities. The retail buyers hold moderate bargaining power as they are aware of their importance for the business. But buyers have high switching cost; thus, they cannot easily switch between lenders. In contrast, institutions hold higher bargaining power as they can sell to other parties, requiring a high-risk premium. When suppliers are aware of their importance to the business and can sell their products to anyone else, it reduces customers’ importance for the supplier (Reichenbachs, 2017). Overall, suppliers have moderate bargaining power.
References
Aydin, S., Özer, G., & Arasil, Ö. (2005). Customer loyalty and the effect of switching costs as a moderator variable: A case in the Turkish mobile phone market. Marketing intelligence & planning.
Coetzee, Johan & De Beer, Jesse. (2016). Financial Regulation in the South African Banking Industry.
Fannie Mae. (2021). About Us. Delivering in a time of turmoil. Available at: https://www.fanniemae.com/about-us/delivering-time-turmoil
Fortune. (2021). Fannie Mae. Available at: https://fortune.com/company/fannie-mae/fortune500/
Fortune. (2021). Fidelity National Financial. Available at: https://fortune.com/company/fidelity-national-financial/fortune500/
Fortune. (2021). Freddie Mac. Available at: https://fortune.com/company/freddie-mac/fortune500/
Fortune. (2021). Ocwen Financial. Available at: https://fortune.com/fortune500/2015/ocwen-financial/
Kromrei, G. (2021). Fannie Mae gives go-ahead for digital verification. Available at: https://www.housingwire.com/articles/fannie-mae-gives-go-ahead-for-digital-verification/
Reichenbachs, M., Schiele, H., & Hoffmann, P. (2017). Strategic supply risk: exploring the risks deriving from a buying firm being of low importance for its suppliers. International Journal of Risk Assessment and Management, 20(4), 350-373.