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    The document discusses the financial crisis and the role of Fannie Mae and Freddie Mac (GSEs). It notes that by late 2007, as the housing market was collapsing, the GSEs were showing their first losses due to a risky mortgage portfolio. In 2008, both GSEs were placed into government conservatorship and received $100 billion each from the Treasury in exchange for ownership stakes. While the government support stabilized the mortgage market, the document argues the GSEs contributed to risk-taking in the private sector through a "race to the bottom" in standards.

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    The document discusses the financial crisis and the role of Fannie Mae and Freddie Mac (GSEs). It notes that by late 2007, as the housing market was collapsing, the GSEs were showing their first losses due to a risky mortgage portfolio. In 2008, both GSEs were placed into government conservatorship and received $100 billion each from the Treasury in exchange for ownership stakes. While the government support stabilized the mortgage market, the document argues the GSEs contributed to risk-taking in the private sector through a "race to the bottom" in standards.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    3 views3 pages

    Chapter 5

    Uploaded by

    swastikmalusare
    The document discusses the financial crisis and the role of Fannie Mae and Freddie Mac (GSEs). It notes that by late 2007, as the housing market was collapsing, the GSEs were showing their first losses due to a risky mortgage portfolio. In 2008, both GSEs were placed into government conservatorship and received $100 billion each from the Treasury in exchange for ownership stakes. While the government support stabilized the mortgage market, the document argues the GSEs contributed to risk-taking in the private sector through a "race to the bottom" in standards.

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    Attribution Non-Commercial (BY-NC)
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    Chapter 5: End of Days

    " In come the waves: The worldwide rise in house prices is the

    biggest bubble in history. Prepare for the economic pain when it pops " - The Economist As of December 2007, five months after the financial crisis started but nine months before the financial system collapsed, the two largest government-sponsored enterprises (GSEs),Fannie Mae and Freddie Mac, looked quite different than they did a decade earlier in 1997. Levin, Fannie Maes Chief Business Officer and Executive

    Vice President wrote in testimony to the Financial Crisis Inquiry Commission: This extraordinary upheaval in the mortgage market and the economy placed stresses on Fannie Mae that would have been difficult for the company to withstand regardless of any business decisions that preceded the crisis.

    Falling Off a Cliff


    With nationwide housing markets collapsing, a deep recession,

    and an increasingly risky mortgage portfolio, the GSEs showed their first losses in 2007. The combined $5 billion loss was due to credit-related expenses of $8 billion. The conservatorships provided Fannie and Freddie each with a commitment of $100 billion from the Treasury in return for the Treasurys receiving a 79.9% ownership stake and $1 billion of preferred stock with a 10% coupon rate.
    The Federal Home Loan Bank System proved to be a useful crisis

    management tool during the crisis

    Final Thoughts
    The massive government support for the GSEs succeeded in

    shoring up the conforming housing market in 2009. This arguably prevented an even bigger collapse of U.S. housing and mortgage markets. Some mortgage-backed securities prices rallied in 2009, and mortgage interest rates were at an all-time low in the first half of 2010. The force that led to the downfall of the GSEs is not uncommon to economic theory, which would call it a classic race to the bottom in bank risk-taking or underwriting standards. The important point is that the GSEs contributed to and were influenced by the risk-taking of private financial firms that were competing with them in the same mortgage markets.

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