Fannie Mae And Freddie Mac

The mortgage crisis of 2007 marked catastrophe for millions of homeowners who suffered from foreclosure and short sales. Most of the problems involving the foreclosing of families’ homes could boil down to risky borrowing and lending. Lenders were pushed to ensure families would be eligible for a loan, when in previous years the same families would have been deemed too high-risk to obtain any kind of loan. With the increase in high-risk families obtaining loans, there was a huge increase in home buyers and subsequently a rapid increase in home prices. As a result, prices peaked and then began falling just as fast as they rose. Soon after families began to default on their mortgages forcing them either into foreclosure or short sales. Who was to blame for the risky lending and borrowing that caused the mortgage meltdown? Many might blame the company Fannie Mae and Freddie Mac, but in reality the entire system of buying and selling and free market failed home owners and the housing economy.

The world’s financial system was almost brought down in 2008 by the collapse of Lehman Brothers that was a major international investment bank at that time. The government sponsored these banks’ bailouts that were funded by tax money in order to restore the industry. Before the crisis, banks were lending irresponsible mortgages to subprime borrowers who had poor credit histories. These mortgages were purchased by banks and packaged into low-risk securities known as collateralized debt obligations (CDOs). CDOs were divided into tranches by its default risk. The ratings of those risks were determined by rating agencies such as Moody’s and Standard & Poor’s. However, those agencies were paid by banks and created an environment in which agencies were being generous to ratings since banks were their major clients.

Since mid 1990s, the subprime mortgage market has grown rapidly experiencing a phenomenal 23% compound annual growth rate to 2006. The total subprime loan originations increased from $65 billion in 1995 to $613 billion in 2006. The subprime sector has become a significant sub-sector of the total residential market accounting for 21% of all residential mortgage originations in 2006. Similarly, by year-end 2006, total outstanding balance of subprime loans grew to $1.2 trillion, approximately 12.6% of all outstanding mortgage debt.

Simply put, it all commenced within the United States housing market. In the years leading up to 2008, buying and selling mortgages became a very popular way for lenders to make money. While housing prices continued to increase, lenders found themselves in a win-win situation. If homeowners paid their mortgages, the lenders made money. If homeowners could not pay their mortgages, they would

On June 27, 1934, President Franklin Roosevelt signed the National Housing Act, with the goal to improve the housing standards and conditions, as well as provide a mutual mortgage insurance system. It came at a time when at least half of the nation’s home mortgages were in default, millions of people were losing their homes, and the construction industry was halted. This law in turn created the Federal Housing Administration (FHA). The FHA set standards for construction and underwriting, and it provided mortgage issuers, such as banks and private lenders, a federal guarantee of repayment. The purpose of this was to revive mortgage lending for house construction, home improvement projects, and home purchases. Not only did the FHA’s program

Over the last half century, our government has been increasing in size. Hamilton might say this is good in terms of centralized government but he also noted that humans are weak and tempted, especially those who are motivated by their own self-interest. The enormous size of government makes opportunities for corruption. By reducing the size of our government, we are cutting spending and overall reducing our national debt issues. One of the issues that our government had created was the housing bubble. Between 2002-2007, the government created new programs under Fannie Mae and Freddie Mac that guaranteed lenders their money back. This was an ultimate opportunity for bankers to take greater risks than ever before. They can keep their profits if it goes according to plan. But if not, the government would step in and bail them out. The current National Debt level is $18T and rising. Year after year, our government has been spending more than what we can afford. Abide by the Constitution of the United States, we can help reduce the overall size of the government. Smaller and smarter government means lower taxes thus creating an environment for small businesses to develop and

The Federal National Mortgage Association, referred to as “Fannie Mae”, was founded as a government sponsored entity

The Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) were to central semi-public organizations that assisted buyers with qualifying for mortgages. The both the company failed during the year 2008 when they were left with no money and were bankrupt. Like every company they were unable to pay back the money and they were in the looking for the help of government via taxpayer’s money. Hence, after the bankruptcy of 2008, the government has utilized huge amount of the taxpayer’s money for not letting them to shutdown and recovering them.

"The Wall Street Journal" found that the current bond yields were 0.20. These bonds are issued by the US government. In view of the fact that Fannie Mae Securities is a mortgage-backed securities issued by FNMA. We have observed that Fannie Mae and Treasury yields are somewhat different because FNMA Personal Securities and Treasury bonds are issued by the US government. Therefore, we note that there should be some difference between the two rates. As a result, Fannie Mae gets money from investors and financial institutions and sells their mortgages.

Created by Congress, Fannie and Freddie -- called G.S.E.'s, for government-sponsored entities -- bought trillions of dollars' worth of mortgages to hold or sell to investors as guaranteed securities. The companies were also Washington powerhouses, stuffing lawmakers' campaign coffers and hiring bare-knuckled lobbyists.

The barriers to enter seems to be on the medium scope of the analysis and this is because to enter the mortgage market there are many regulations set by government and other institutions to guarantee the clarity and transparency of the loans. Also, to enter this specific market there is the need for high capital investment which in todays economic is hard to achieve.

The Federal Housing Administration (FHA) and their mortgage financing and subdivision regulations was one of the most impactful pieces of federal legislation, effecting generations, and laid the foundation for future housing policies. Rising into legislation after a period of massive mortgage defaults, the federal government devised the FHA as a plan to increase housing standards and conditions, make home financing more reasonable, and bring stability to the mortgage market, by insuring long-term mortgage loans from private lenders for residential construction and sale (Jackson 203).

With all that being said, the mortgages that were rated as excellent were actually bad for homebuyers. To the homebuyers’ surprise, the interest rates rose and they could no longer afford to pay their mortgages. This meant that the investors lost their money and subsequently stopped buying these mortgage-backed securities. This sent housing prices falling by thirty percent and the stock market falling by fifty percent, and also led to nine million jobs being lost. Some of companies involved in the mortgages, such as AIG, almost went bankrupt as a result. AIG lost all their money because they insured these bad mortgages and had no money to pay for all the mortgages they insured. These companies did this because they knew the Fed would always have their backs. Because the Fed bailed these businesses out, they were essentially allowed to keep making money off of these bad banking practices. According to Mike Collins, an editor at Forbes Magazine, the actual bailout of these businesses turned out to cost $7.7 trillion, about the same as the US national debt at the time. Without the Fed, the free market would have let these businesses collapse, allowing new and better businesses to take their place, or even better, keep companies from using these bad practices in the first place.

Another New York Times tells that financial institutions that are dependent on mortgages, like Fannie Mae and Freddie Mac, have not been able to pay back the money they owe to the federal government.2 They are still asking for more money because of the continuing real estate crisis. Instead of simply giving these mortgage giants money to stay afloat, the federal government would be more effective if it were to support them by putting the money directly towards the root of the problem.

The federal government has intervened in the past and is still adjusting market outcomes.They are keeping up with the needs of workers. The Home Ower Loan Corporation, Continental Illinois in 1994, The Savings and Loan Crisis of the 1980s, and Brady bonds in 1989 are some government interventions which modify market outcomes.