Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more
Download
Standard view
Full view
of .
Look up keyword
Like this
6Activity
0 of .
Results for:
No results containing your search query
P. 1
7 Things You Need to Know About Fannie Mae and Freddie Mac

7 Things You Need to Know About Fannie Mae and Freddie Mac

Ratings: (0)|Views: 328 |Likes:
John Griffith outlines the key things you need to know about the two mortgage giants.
John Griffith outlines the key things you need to know about the two mortgage giants.

More info:

Published by: Center for American Progress on Sep 05, 2012
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See more
See less

08/05/2013

pdf

text

original

 
1Center or American Progress | 7 Things You Need to Know About Fannie Mae and Freddie Mac
7 Things You Need to Know AboutFannie Mae and Freddie Mac
By John Griffith September 6, 2012
Exacly our years ago, during he early days o he nancial crisis, he ederal govern-men ook conrol o morgage nanciers Fannie Mae and Freddie Mac hrough a legalprocess called conservaorship. Since hen, he wo companies have required roughly $150 billion in axpayer suppor o say solven, while he governmen has kep hehousing marke aoa by backing more han 95 percen o all home loans made in heUnied Saes.
1
Fannie and Freddie remain wo o he larges nancial insiuions in he world, respon-sible or a combined $5 rillion in morgage asses.
2
Sill, ew Americans undersand wha Fannie and Freddie acually do or homeowners, wha par hey played in herecen housing crisis, or wha role hey’ll have in he morgage marke o he uure. Onhe ourh anniversary o heir conservaorship, here are seven hings you need o know abou he wo morgage gians.
1. What do Fannie Mae and Freddie Mac do?
Te primary uncion o Fannie Mae and Freddie Mac is o provide liquidiy o he naion’smorgage nance sysem. Fannie and Freddie purchase home loans made by privae rms(provided he loans mee sric size, credi, and underwriing sandards), package hoseloans ino morgage-backed securiies, and guaranee he imely paymen o principal andineres on hose securiies o ouside invesors. Fannie and Freddie also hold some homeloans and morgage securiies in heir own invesmen porolios.Since morgage lenders don’ have o hold hese loans on heir balance shees, hey havemore capial available o make loans o oher crediworhy borrowers. Lenders also havean added incenive o oer sae and susainable producs—namely long-erm, xed-raemorgages—because hey know Fannie and Freddie will likely purchase hem. SinceFannie and Freddie guaranee paymens in he even o a deaul—or a ee, o course—invesors don’ have o worry abou credi risk, which makes morgages a paricularly atracive invesmen.
 
2Center or American Progress | 7 Things You Need to Know About Fannie Mae and Freddie Mac
Under his sysem, morgage credi was coninuously available well ino he lae-1990sunder erms and a prices ha pu susainable homeownership wihin reach or mos American amilies. By he end o ha decade, however, Wall Sree had gured ou hoo purchase and securiize morgages wihou needing Fannie and Freddie as inermedi-aries, leading o a undamenal shi in he U.S. morgage marke.
2. What role did Fannie and Freddie play in inflating the housing bubbleof the mid- to late-2000s?
Conrary o conservaive alking poins, he answer is very litle. During he bubble,loan originaors backed by Wall Sree capial began operaing beyond he Fannie andFreddie sysem ha had been working or decades by peddling large quaniies o high-risk subprime morgages wih erms and eaures ha drasically increased he chanceo deaul. Many o hose loans were predaory producs such as hybrid adjusable-raemorgages wih balloon paymens ha required serial renancing, or negaive amoriza-ion, morgages ha increased he unpaid balance over ime.
3
 Wall Sree rms such as Lehman Brohers and Bear Searns packaged hese high-risk loans ino securiies, go he credi-raing agencies o bless hem, and hen passed hemalong o invesors, who were oen unaware or misinormed o he underlying risks.I was he poor perormance o he loans in hese “privae-label” securiies—hoseno owned or guaraneed by Fannie and Freddie—ha led o he nancial meldown,according o he biparisan Financial Crisis Inquiry Commission,
4
among oher inde-penden researchers.
5
In ac, Fannie and Freddie los marke share as he bubble grew: Te companies backedroughly hal o all home-loan originaions in 2002 bu jus 30 percen in 2005 and2006.
6
In an ill-aed eor o win back marke share, Fannie and Freddie made a ew ragic misakes. Saring in 2006 and 2007—jus as he housing bubble was reaching ispeak—Fannie and Freddie increased heir leverage and began invesing in cerain sub-prime securiies ha credi agencies incorrecly deemed low-risk. Fannie and Freddiealso lowered he underwriing sandards in heir securiizaion business, purchasing andsecuriizing so-called Al-A loans. While Al-A loans ypically wen o borrowers wihgood credi and relaively high income, hey required litle or no income documena-ion, opening he door o raud (which was oen perperaed by he morgage brokerraher han he homebuyer).
7
Tese decisions evenually conribued o he companies’ massive losses, bu all hishappened ar oo lae o be a primary cause o he housing crisis.
8
 
3Center or American Progress | 7 Things You Need to Know About Fannie Mae and Freddie Mac
3. Why did Fannie and Freddie require a taxpayer bailout?
Fannie and Freddie ailed in large par because hey made bad business decisions andheld insufcien capial. Also, unlike mos privae invesmen rms, Fannie and Freddiehad only one line o business—residenial morgage nance—and hus did no haveoher sources o income o compensae when home prices began o all.In 2008 Fannie and Freddie los a combined $47 billion in heir single-amily morgage businesses, orcing he companies o dig deep ino heir capial reserves. Nearly hal o hose losses came rom Al-A loans, despie hose loans accouning or jus 11 percen o he companies’ oal business.
9
Bu hose losses were only he beginning: Beween January 2008 and March 2012, Fannie and Freddie would lose a combined $265 billion, more han60 percen o which was atribuable o risky producs purchased in 2006 and 2007.
10
By lae summer in 2008—abou a year aer he sar o he housing crisis—Wall Sreerms had all bu abandoned he U.S. morgage marke, while pension unds and ohermajor invesors hroughou he world coninued o hold large amouns o Fannie andFreddie securiies. I Fannie and Freddie were allowed o ail, expers agreed ha hehousing marke would collapse even urher, paralyzing he enire nancial sysem. TeBush adminisraion in Sepember 2008 responded by placing Fannie Mae and FreddieMac ino governmen conservaorship, where hey remain oday.
4. Did affordable housing goals for Fannie and Freddie play any role inthe subprime crisis?
No.In 1992 Congress esablished he “aordable housing goals,” which were numericalarges or he share o Fannie- and Freddie-backed lending ha wen o low-income andminoriy borrowers. For years conservaive analyss have alsely poined o hese goalsas a caalys or he housing crisis, claiming hey pushed Fannie and Freddie o ake onunprecedened levels o risk, creaing a bubble and a bus in he subprime housing mar-ke ha sparked he nancial caasrophe.Ta’s simply no rue. A recen sudy rom he Federal Reserve Bank o S. Louis oundha he aordable housing goals had no observable impac on he volume, price, ordeaul raes o subprime loans during he crisis, even aer conrolling or he loan size,loan ype, borrower characerisics, and oher acors.
11
Federal Reserve Economis NeilBhuta reached a similar conclusion in 2009, nding ha he aordable housing goalshad a negligible eec on Fannie and Freddie lending during he housing bubble.
12

Activity (6)

You've already reviewed this. Edit your review.
David Barzaga. added this note
This is good. All you need to know about them.
1 thousand reads
1 hundred reads
zigzagsineklik added this note
good share pileli sineklik http://www.zigzagsineklik.net
hmhewell liked this

You're Reading a Free Preview

Download
scribd
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->