Country Wide Case

Was the U.S. federal government's 1932 intervention in the market for home ownership desirable? How did the creation of Fannie Mae in 1938, Ginnie Mae in 1968, and Freddie Mac in 1970 expand home ownership and shape lending practices at banks and other mortgage lending firms?

The U.S. federal government decision to intervene in the market for home owners in1932 proved to be desirable for both borrowers and lenders? Prior to the governments intervention banks offered home owners short term non-amortizing loans which required a balloon payment at the expiration of the term. As a result of of these conditions many of these loans went into default during the Great Depression. Due to these circumstances the government created several new services that would help both home owners and lenders. First the government created the Federal Home Loan Bank which offered additional funds for home mortgages. Next they established the National Housing Act which served to reimburse lenders for any loss associated with foreclosures. Through these new services individuals who were less likely to qualify for home loans were now able to attain home loans. In addition lenders were able to offer long term loans for up to 20 years.

The were several different ways the creation of Fannie Mae, Ginnie Mae, and Freddie Mac shaped lending practices at banks and other mortgage-lending firms. The major contribution of these companies brought forth was a secondary market for mortgages. This secondary market allowed lenders to pool their mortgages together which ultimately led to the creation of Mortgage Back Securities. These securites were then sold to investors in the secondary market, which made more money available to lenders and borrowers.

Why did the U.S. Congress enact the Community Reinvestment Act, the Home Mortgage Disclosure Act, the Depository Institution Deregulation and Monetary Control Act, and the Housing and Community Development Act? Was this legislation effective in expanding homeownership? Did the government's promotion of subprime mortgages and high loan-to-value (LTV) subprime mortgages create additional risks for lenders and the holders of mortgage backed securities (MBSs) or collateralized debt obligations (CDOs)?

The U.S. Congress enact the Community Reinvestment Act in 1977 because it requiring banks to lend in the low income neighborhoods. The Mortgage Disclosure Act passed in 1975 provide the public with loan data that could be used to determine whether or not financial institutions are serving the needs of their community. It also aided in identify possible discriminatory lending patterns. The Depository Institution Deregulation and Monetary Control Act passed in 1980 helped eliminate limitations on interest rates that were payable on deposits and accounts. The Housing and Community Development Act were amended which created section 8 housing. These methods were effective in expanding homeownership because it became easier to become a homeowner. The government's promotion of subprime mortgages and high loan-to-value (LTV) subprime mortgages created additional risks for lenders and the holders of mortgage backed securities. Essentially the lenders of subprime mortgages used various methods that made it appear as though buyers were qualified for these mortgages despite the fact that in most cases they were. As a result many of these subprime mortgages default.

Did subprime mortgage loans contribute to the housing bubble? Why did the bubble burst? What were the consequences of the housing bust to borrowers, loan originators, and MBS and CDO holders? Did subprime mortgages contribute to the U.S. financial crisis of 2008?

Subprime mortgage loans did contribute to the housing bubble because they enable under qualified browwers to attain home loans. In addition these loans enabled the expansion of homeownership.