Fannie Mae Fannie Freddie Mortgage Finance System

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.

Ginnie Mae, Frannie Mae, and Freddie Mac were U.S. government agencies that guaranteed various types of mortgage loans. They allowed mortgage lenders to obtain a better price for their mortgage loans in the securities market. Lenders used the proceeds to make new mortgage loans available.

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 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.

Real estate finance in the modern community is changing the perspective of modern lending and purchases. It is a means to contemporary community’s ability to develop a foundation for discussing the nature and means of public spending and purchase. As a self-government sponsored agency, Federal National Mortgage Association (FNMA) also known as Fannie Mae works with the ultimate responsibility of lending and buying secondary mortgages in the market (Oesterle, 2010). It helps in the conservation of interest rates in the real estate business in the contemporary community. There is also the need for focusing on the impacts of the Fannie Mae on real estate finance. The approach of the Fannie Mae helps lenders to use the money gained from the secondary

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.

"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.

The Lehman Brothers, another investment bank, also encountered failure due to rumors and toxic investments. Due to the Federal Reserveʻs assistance to Bear Stearns, Lehman brothers expected the same treatment, which Henry Paulson denied to them. As a result, markets failed and the entire system was jeopardized. AIG, the largest insurance corporation in the nation, also needed loans to avoid bankruptcy. Ben Bernanke then lent them 85 billion dollars, which meant that the government had 80% of ownership, and essentially controlled, the largest insurance company. By the end of the crisis, Paulson and Bernanke had no other option than to spend $700 billion dollars to aid all of the major banks, which ultimately contradicted their principle of opposition to government intervention. Even after this plan had been implemented, there was still uncertainty on whether or not all of the money spent would suffice to salvage the financial

During the financial crisis of 2007-2009 the government bailed out several financial institutions two of the most notorious financial institutions the government bailed out was Fannie Mae and Freddie Mac. These two companies were one of the biggest mortgage lenders that suffered from the subprime mortgage disaster. Fannie Mae and Freddie Mac were both on the barge of bankruptcy if it weren’t for the help of the government, which granted each company $100 billion dollars in cash credit to bail them out (according to Investopedia). The government bailed them out since Freddie Mac and Fannie Mae were both considered to be two on the giant mortgage lenders at the time and they were “too big to fail”.

However, the bailout plan as of today needs some modifications. Instead of only concentrating on buying bad assets from financial institutions and banks, it should pay more attention to homeowners. The assets that the government plans on buying are mostly impaired mortgages –related assets that have fallen because of the housing sector and knocked holes in firms’ balance sheets. Therefore, if focused on homeowners, this problem can be dealt with from the beginning. It will reinstate up to 80% of the $500 billion already written off by Wall Street as toxic loans. This way, the government will put in $500 billion and instantly get back the $500 billion. It will also refinance 100% of loans, thereby giving banks 100% of value on corresponding securities instead of the 30% to 50% if securities would be sold to the government. Furthermore, refinancing homeowners will stabilize the entire real estate market and create a 30% to 70% greater monetary return since taxpayers now own these mortgages.

There has been a debate for years on what caused the Financial Crisis in 2008 and if there was one main cause, or a series of unfortunate events that led to the crisis. The crisis began when the market was no longer funding many financial entities. The Federal Reserve then lowered the federal funds rate from 5.25% to almost zero percent in December 2008. The Federal Government realized that this was not enough and decided to bail out Bear Stearns, which inhibited JP Morgan Chase to buy Bear Stearns. Unfortunately Bear Stearns was not the only financial entity that needed saving, Lehman Brothers needed help as well. Lehman Brothers was twice the size of Bear Stearns and the government could not bail them out. Lehman Brothers declared bankruptcy on September 15, 2008. Lehman Brothers bankruptcy caused the market tensions to become disastrous. The Fed then had to bail out American International Group the day after Lehman Brothers failed (Poole, 2010). Some blame poor policy making and others blame the government. The main causes of the financial crisis are the deregulation of banks and bank corruption.

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.

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

FannieMae is a company that makes capital by lending money to people who need mortgages and by borrowing money at low interest rates. FannieMae is able to make money in any kind of economy. During times of low interest rates they make money on people who bought fixed rate mortgages at a time of high interest rates. They also have a hard making money during this time because their marginal percentage is smaller and they make less of a profit. During times of high interest rates, they lose money on people who bought fixed rate mortgages at low interest rates. They also make a lot of assets during this time because they borrow from the federal reserve or banks at lower interest rates and lend