How Fannie Mae and Freddie Mac Helped Create the U.S. Housing Market Bubble

By: Money_Morning

Shah Gilani writes: Fannie Mae (NYSE: FNM), originally designated as a "government-sponsored enterprise" (GSE), was born in 1938 as a child of U.S. President Franklin Delano Roosevelt's Great-Depression-fighting "New Deal," and was designed to stimulate mortgage lending.

Fast-forward 30 years. In 1968, Fannie Mae shares were sold to the public to help finance the Vietnam War.

Freddie Mac (NYSE: FRE), also a GSE, was created by Congress in 1970 to compete with the growing - but monopolistic - Fannie Mae.

Both firms were successful, profitable and made steady money by charging a fee to guarantee mortgage-originators against homeowner defaults. Their combined guarantees totaled almost $3.7 trillion at the end of 2008.

They also developed high standards for loans that they themselves would buy and then package into mortgage-backed securities (MBS). They sold these pools of "conforming" loans to institutional investors and made even bigger profits as the MBS business exploded.

It all changed in the 1990s for Fannie and Freddie. Intensely competitive banks and investment banks aggressively rounded up their own pools of mortgage loans to package and sell to eager investors. Non-bank originators - the largest and most aggressive of which was Countrywide Financial Corp. (NYSE: BAC) - were eager to supply the growing demand for mortgages to be pooled and sold to investors

The resulting "velocity" of mortgage money meant that competition for good borrowers became tremendous as easy and cheap money flooded the economy. To keep mortgage origination pipelines full, standards began to fall. New products were created to entice new borrowers. Subprime, Alt-A, Pick-A-Pay, adjustable rate mortgages (ARMS), and a host of other offerings brought in lower quality borrowers who eagerly bet the farm their homes and their futures on the rising real estate bubble's ascent to investment and speculative heaven.

 In the end, however, real estate was merely the latest financial bubble, which burst like all of its predecessors.

[Editor's Note: For additional insights on how Fannie Mae and Freddie Mac will short-circuit Fed Chairman Ben S. Bernanke's so-called "exit strategy," please click here to check out an additional story, which appears elsewhere in today's issue of Money Morning.

A new offer from Money Morning seeks to eradicate some of the economic uncertainty that's emanating from the ongoing climb in U.S. unemployment, and actually represents a two-part bargain for investors. The reason: It offers the new best-selling investment book penned by acclaimed financial commentator Peter D. Schiff and a subscription to The Money Map Report newsletter, a sister publication to Money Morning. Schiff's new book - "The Little Book of Bull Moves in Bear Markets" - shows investors how to profit no matter which way the market moves, while our monthly newsletter, The Money Map Report, provides ongoing analysis of the global financial markets and some of the best profit plays you'll find anywhere. To find out how to get both, check out our newest offer.]

Money Morning/The Money Map Report

©2009 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.