Fannie Mae And Freddy Mac Failures

These losses necessitated governmental action in the financial markets. Companies such as Lehman Brothers and Bear Stearns lost all of their stock’s value and were forced into bankruptcy. This risk spread throughout the American banks, forcing the American government to step in and buy all of the securitized, troubled assets from the balance sheets of

The Federal Reserve made emergency loans to the big companies in order to prevent large banks from failing when their investors frightened. With the stock market crashing, on October 3, 2008, President George Bush signed the Troubled Asset Relief Program into law. TARP used 250 billion dollars of federal money to “bail out” the banks, and later automakers including General Electric. Government-working accountants reviewed large Wall Street banks’ balance sheets and disclosed to the public which were sound in order to instill more confidence within investors.

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.

Securitization history can be traced back to 18th century, but the first examples of mortgage-backed securities can be found in 19th century in United States, that are the farm railroad mortgage bonds of the 1860s. After the Great Depression, the government took several initiatives to increase the supply of funds for mortgages loans. Their aim was to support the primary market first, and then the secondary market. In 1934, the Housing Act was enacted and FHA (the Federal Housing Administration) is created by the U.S. federal government. The FHA developed the fixed-rate mortgage, which is an alternative of balloon payment mortgage. In 1938, the federal government also created Fannie Mae, a government-sponsored corporation, in order to create a liquid secondary market of mortgages.

In recent years, financial organizations have been bailed out to prevent the financial collapse of the economy. The Troubled Asset Relief Program (TARP) provided relief funds to financial institutions. This program is a part of the Emergency Economic Stabilization Act of 2008. While controversial, the Obama administration determined it was necessary to prevent worldwide economic failure. This bail out was necessary to add stability to the financial markets after high-risk investments and fraudulent practices of the largest banking institutions in the US

Was Fannie and Freddie’s implied government backing working in the best interest of the companies, their management and their investors or the U.S. homeowners, as was the intention according to their mission? It was their government-sponsored monopoly on a large part of the U.S. secondary mortgage market and the government’s implicit guarantee to prevent these firms from filing for bankruptcy that contributed to the collapse of the mortgage market. Although, Fannie Mae and Freddie Mac had positive influences on the mortgage market, the consequences of being able to function as an ‘implied government-backed monopoly’ outweighed the benefits that these organizations provided. Although, there were critics, consisting of their rivals and as well as some public authorities, who raised concerns about the risks these organizations were taking on, the companies continued to grow and take on risk under their congressional charters and implied federal backing. Why were these companies supported by the U.S.

During Reagan's administration, Continental Illinois, the 8th largest commercial bank at the time, was bailed out because there was a fear that if International bond holders saw a large bank failing, they would pull money out of all American bank. So, after Continental Illinois was bailed out, large banks started to become dependant on the government. They began to act riskier with investments because they knew the government would bail them out. During Bill Clinton’s presidency a similar situation occurred, further clearing the message that if you are a large bank and are about to fail, the government will take tax payer’s money to bail you out. Again, during Bush’s last year as president, because of a fear of a recession, Bush once again bailed out large banks. It is a continuous cycle that unnecessarily and negatively impacts everyday people. Government has now got itself trapped in a bubble where they will constantly bail out large banks due to the fear of a economic collapse, but each time the government bails out the banks, the potential crisis worsens. The government is not responsible for saving the banks, only our

In October of 2008 Congress, passed a $700 billion rescue bill to bail out, and possibly save, the doomed U.S. and global financial systems from collapsing. This decision was only a piece to the $1 trillion government plan to level off the stock market and unfreeze the credit which was needed after the collapses of the financial institutions of Lehman Brothers and Washington Mutual. The government also stepped in and federally took over such institutions as Fannie Mae and Freddie Mac, which together hold about $5.4 trillion in mortgage loans; 45 percent of the national total. The governmental firms were heavily burdened because of bad investments in subprime mortgages and

The 2008 financial crisis led to numerous mortgage foreclosure rates (Angelides et al, 2011). Many mortgage companies filed for bankruptcy and this because many of them were running under drastic losses. Financial institutions were unable to lend money because they were operating under losses and this slowed down the economic activities. This unease led central banks to take relevant action to provide funds in order to encourage lending and also to reestablish faith in the commercial paper markets ( United States. Financial Crisis Inquiry Commission , 2010). Not only did the central banks help in relieving the crisis, the federal government was involved in helping the financial institutions by assuming major additional financial commitments. Federal government funded financial institutions dealing with mortgage purchasing and repackaging, Fannie Mae and Freddie Mac were declared bankrupt. Alongside the two government funded institutions that were declared bankrupt, several other main investment banks, insurance companies, and commercial banks tied to the real-estate lending were

This was to help good banks from collapsing because lenders were panicking. The government eventually came up with a program called tarp also known as the troubled assets relief program. This program gave 700 billion dollars to help sure up banks. White, L. H. (2009, August 1). Housing Finance and the 2008 Financial Crisis. Retrieved November 3, 2016, from https://www.downsizinggovernment.org/hud/housing-finance-2008-financial-crisis. This helped stop all the panicking in the financial system. Congress later on incorporated a stimulus package which gave the economy over 800 billion dollars from new spending and tax cuts. Amadeo, Kimberly Subprime mortgage crises: Effect and Timeline. (2016, September 8) Retrieved from: https://www.thebalance.com/treasury-yields-3305741)) This helped slow down the fall in the economy. In 2010 congress also passed a law named the DODD Frank law which basically stopped banks from taking big

During 2008 many people were unable to pay their mortgages; therefore people went to private banks to loan money for paying their mortgages. Fannie Mae and Freddie Mac provided local banks with federal money to finance home mortgages, but in 2008 many people were unable to pay their mortgages but there was not enough money in local banks to loan out money to the people. In 2008 Fannie Mae and Freddie Mac had owned about U.S.’s $12 trillion in the mortgage market. Unfortunately, if Fannie Mae and Freddie Mac collapsed then mortgages would be hard to obtain and cost more money. Moreover, by demolishing Fannie Mae and Freddie Mac altogether then the U.S. would not have to worry about the cost of mortgages with the potential of it being more expensive and harder to

When a person is allowed to fail, they get a chance to learn from their mistakes. The same applies to business. When businesses are allowed to fail, they have an opportunity to study their mistakes. Bailouts prevent businesses from determining what their mistakes are. John Tamny acknowledged this when he said, “...thanks to a government willing to cushion their every mistake (think Citigroup). If the government protects these business from their every mistake they will never learn , and they will continue to make the same mistakes. Tamny declared, “the beauty of failure is that it ensures that poorly managed assets are released at frequently low prices to managers with a stated objective to develop those human, mechanical and financial inputs more effectively on the way to growth” (Tamny). Basically what this statement means is that when business fail their assets are released to other business. The businesses that end up with these assets have a chance to manage them more effectively. In effect, when businesses don't learn from their mistakes it can affected the banks connected to them or vice

One of the major problems associated with Fannie Mae and Freddie Mac purchasing these loans from banks and lending institutions is that a lot of the loans were very risky due to the lending officer not following proper protocol since they knew the loans would eventually be transferred out of their hands and in to the hands of Fannie Mae or Freddie Mac (Conners and Gwartney 64). When consumers began to default on the these loans, Freddie Mac and Fannie Mae began reviewing the loan information and when they realized that the loan was not properly screened, they filed suit against the bank that the loan was bought from. The Federal Housing Finance Agency, a

Before 1938, depository institutions made home loans with their deposits and held the liquidity risk, the market risk, and the credit risk on their portfolios. Yet, the baneful results of the Great Depression led the US government agency to intervene in the mortgage market so as to beget home mortgage lending (Dodd, 2007). A corollary of the new legislation was the creation of Fannie Mae in 1938; as a

The two -story home had the Incentive offer available stating that Fannie Mae was offering an incentive for selling agents whose buyers purchased and closed on a selected HomePath property. The agent provided images and a text into the listing.