Fannie Mae was originally chartered by the Government of the United States in 1938, this corporation became the largest seller and buyer of government issued mortgages over the next 30 years. This corporation was established as part of President Roosevelt’s New Deal strategy to re-organize the economy after the Great Depression. The goal of Fannie Mae was to be able to offer affordable housing by ensuring that bankers and lenders had the adequate reserves to offer loans at low interest rates. Fannie Mae acquired loans that were insured by the Federal Housing Administration as well as the Veterans Administration, they would then either hold the loan for their own investments or they would sell to investors in the secondary market. The profit…show more content… Freddie Mac is a federally chartered private corporation created in 1970 by the Congress of the United States. The primary goal of this corporation was to provide constant and affordable financing options for home buyers. This corporation operates primarily by acquiring mortgages from lenders and later re-packing those mortgages as mortgage-backed securities in order to be sold to investors. According to the Federal Housing Finance Agency, these corporations were able to attract to the secondary mortgage market investors who might have not considered investing if they were not guaranteed a timely payment of principal and interest on the underlying mortgages. Lenders use profit obtained from selling those mortgages and invest in future lending. This cycle allowed for a constant stable supply of funds to both- investors and individual home buyers. This also creates more liquidity for the second mortgage market which increases the investment for housing leading to lower interest rates.
The Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association are government-sponsored enterprises established in the 20th century to decrease the cost of credit in the different borrowing segments. These corporations played a crucial part in the housing market because they provided funds to financial institutions and mortgage companies for housing financing…show more content… In addition, banks were prohibited from opening branches in other areas that were financially comfortable if they didn’t meet with the previous requirements. In 1999, Fannie Mae had to also comply with the requirements mentioned in the CRA and was obligated to offer loans portfolios to lower income areas. Due to the high ratio requirements, financial institutions in the primary mortgage market wanted Fannie Mae to lower its requirement on the homes it previously purchased thus they were able to make loans to subprime home borrowers at higher than conventional interest rates. Fannie Mae served as intermediary since it never actually made loans directly to home buyers, the corporation would essentially buy properties from approved sellers in exchanged for a mortgage-backed security or even cash which ultimately compromised the loan. The lending criteria of the loan included a 97% loan-to-value mortgages along with sub-prime loans. Fannie Mae would resell most of its investment properties to investors, who are guaranteed after paying a fee to the corporation that they will receive payment even after the borrower defaults. The pressure from political aspects increased the number of high risk mortgages being
