Fannie Mae Essay

On October 3, 2008 President George W. Bush signed the Emergency Economic Stabilization Act of 2008, otherwise known as the “bailout.” The Purpose of this act was defined as to, “Provide authority for the Federal Government to purchase and insure certain types of trouble assets for the purpose of providing stability to and preventing disruption in the economy and financial system and protecting taxpayers, to amend the Internal Revenue Code of 1986 to provide incentives for energy production and conservation, to extend certain expiring provisions, to provide individual income tax relief, and for other purposes” (Emergency Economic Stabilization Act). In my paper I will explain and show the relationship between the Emergency Economic Stabilization Act of 2008 and subprime lending, the collapse of the housing market, bundled mortgage securities, liquidity, and the Government 's efforts to bailout the nation 's banks.

The Federal Government needs to make sure to enforce strict guidelines on who can and cannot be accepted for a home loan, and not allow big investors to borrow excessive money at low interest rates to inflate the investor’s financial advantage. If the government starts allowing lower standards on mortgages, we are going to end up in the same catastrophe once again. In an article written by U.S. News and World Reports entitled Should the Federal Government Provide Support to the Mortgage Market?, the Federal government and the President attempted to get involved with the housing market. The passage implicated that Obama wanted to do away with federally funded conglomerates Fannie Mae and Freddie Mac and implement another type of government assisted program ("Should the Federal Government"). The program would prevent the mistakes made by Fannie and Freddie which created the original “housing bubble burst” ("Should the Federal Government"). One of the Senate bills suggests the government create “a new agency, the Federal Mortgage Insurance Corporation to replace Fannie and Freddie” ("Should the Federal

In 2008 America’s financial system was brought to a stand still as decades of negligence and financial decisions caused our economy to sink into the worst recession since the great depression. Cultivating a problem worse than America has seen in roughly a century points one finger not at a particular cause, but a string of events that finally gave way. Now, eight years later our economy is still recovering, and time has allowed us to look back at decades of mistakes to try and connect the dots of the perfect storm that collapsed our financial market in 2008. In 2009 Brookings Institution, one of Washington’s oldest think tanks, concluded there were three causes that resulted in the crisis. Economists Martin Baily and Douglas Elliot stated that the results of government intervention in the housing market, the influences Wall Street had on Washington, and global economic forces were the three main causes of the economic collapse. They believed that a housing bubble inflated when Fannie Mae and Freddie Mac, two government-sponsored enterprises, intervened in the housing market. The banking industry was called out to be blamed for years of manipulation of our political and financial systems. Lastly, Baily and Elliot cite the global economy and the existence of a credit boom throughout European and Asian nations. Low inflation and consistent growth throughout the world economy spiked investors’ interest in acquiring riskier investments, which encouraged

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.

Throughout the conversation, Colby never mentioned that the home was in First Look and that Fannie Mae would not accept offers from investors during this period. Colby provided limited information about the home and did not mention the neighborhood or the surrounding area. When asked, Colby paused to reference the property file and informed me that it needed work, which included carpet, paint, kitchen appliances, and ceiling work. I asked, "Are there other offers?" He paused to reference the property file and then informed me that there was not. I asked, "Is the power on?" He paused and then informed me that it was. Colby answered my questions about the home clearly.

These three agencies were designed to help encourage bank leaning to home buyers. The Federal Housing Administration issued loans that were granted this meant that financial institutes would get their money. Fannie Mae was different from FHA in which they bought loans, this helped lender by freeing up capitol and allowed them to lend more. As Fannie Mae begin to prosper Fannie Mac was establish to create completion between the government lending agencies. When there is completion involved the stress of being out preformed place a burden on people that are working for these lenders. With this type of mentality there was only a matter of time before the lending market would crash. But their can and might be other reason why the housing market crashed. You could look at supply and demand. When there is less inventory prices will rise. If this is true, as home prices rise less buyers will be able to qualify for a mortgage. With less buyers being able to qualify for loans, companies like Fannie Mae and Mac begin to take on toxic loans. Some of these loans included interest only loans and adjustable rate loans with a large principals due at the end of the agree terms. A lot of home buyers could not afford these payment causing homes to go into foreclosure. As the housing market was flooded with foreclosures and rising house prices. The market begin to become unstable, alone with America being at war in two different countries the housing market crashed. The crash sent financial institutes into turmoil, they begin to only lean money well qualified buyers. Some financial institutes merge with others and some even closed, this was due to bad lending practices and regulation. The institutes that survived asked for financial help form the

Freddie Mac Introduction The year 2007-2008 witnessed one of the most devastating economic crisis along history. Many financial institutions suffered during the crisis and even some of them completely disappeared. This paper will focus on the mortgage market meltdown, while highlighting the major downturn witnessed by Freddie Mac. Historical Background The mortgage lending industry is one of the most crucial industries in the US.

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.

In 2008 two government sponsored enterprise (GSE), Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), received the second-largest bailout in the United States, totaling $187 billion. The bailout of Fannie Mae and Freddie Mac drew attention to the problems with "too big to fail" (TBTF) entities and government guarantees. The bailout highlighted the lack of market discipline and encouraged moral hazard.

In 1970 the Federal Home Loan Mortgage Corporation was created to expand the secondary market for mortgages. Now known as Freddie Mac, this company is a public government-sponsored enterprise. A government-sponsored enterprise is a financial services corporation created by the United States Congress. Freddie Mac was chartered “with a public mission to stabilize the nation's residential mortgage markets and expand opportunities for homeownership and affordable rental housing.”

Coming from the idea that the market will right itself when free from government overreach, this set of economists would firmly hold to the idea that the market can solve its own issues. Given the issues at hand, these economists might say that if the government had never stepped in in the first place by incentivizing subprime mortgages through removing the tax credit for personal loan interest, the system wouldn’t have collapsed in the same way it did. Lenders may have split their priorities and the popularity of subprime mortgage backed securities and CDOs might not have taken off in nearly the same way. Apart from their policy of lower government intervention is better they might want to prevent the issue from happening again through

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.

According to HUD Freddie Mac and Fannie May are both GSE’s, government sponsored enterprises, and in the U.S. they are the two largest providers of home mortgages. They were created primarily to provide loans to underprivileged and lower economic areas. They are not subject to taxes. They do not fall under the jurisdiction of the Securities Exchange Commission. They have direct access to a 2.25 billion line of credit, and their rates are significantly lower than their competitors, because of their government backing, (Housing and Urban Developement, 2001).

Federal Home Loan Mortgage Corporation (Freddie Mac) a Government-Sponsored Enterprise (GSE) was chartered by Congress in 1970 with a public mission to stabilize the nation's residential mortgage markets and expand opportunities for homeownership and affordable rental housing. Freddie Mac (and its sister institution Federal National Mortgage Association -Fannie Mae) was set up based on the idea that neither government nor private banking interests could address the nation's housing finance needs. The company's charter established a board comprising 18 members - thirteen elected by shareholders and five appointed by the President of the United States. Their main mission was to provide liquidity, stability and affordability to the U.S. housing market.

One of the main problems that Fannie Mae faced during the financial crisis was the dramatic drop of their stock prices. An article published by CNN during the financial crisis said, “Shares of mortgage financing giants Fannie Mae and Freddie Mac both plummeted Monday after an analyst with Lehman Brothers wrote in a report that the two companies may need to raise billions of dollars if accounting rules are changed” (www.money.cnn.com). In 2007, Fannie Mae’s stock prices were at the lowest level they had seen in