Countrywide Financial Corporation

Countrywide Financial Corporation

Tarek Hassan

MGMT 499

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 homeownership and shape lending practices at banks and other mortgage lending firms?

In 1932, the U.S. government intervened in the housing market with the creation of the Federal Home Loan Bank (FHLB). The FHLB provided short-term lendings (mostly savings and loans) to financial institutions to create additional funds for home mortgages. Congress passed the National Housing Act of 1934 to promote homeownership by providing a system of insured loans that protected lenders against default by borrowers. This act federally insured 80% of the appraised value of the property associated with foreclosure making it desirable for Countrywide Financial (CFC) because it increased the amount of potential borrowers and in return provided a reduced risk for CFC. In 1938, the Federal National Mortgage Association (FNMA) as a government corporation to facilitate a secondary market for mortgages issued under FHA program guidelines. FNMA allowed private lenders to make a greater number of FHA loans since loans could be sold in the secondary market and did not have to be held for the duration of the loan term which means CFC didn't have to hold loans to terms, and in return they could sell loans and then originate new loans. In 1968 FNMA was reconstituted as Fannie Mae and became a publicly traded government sponsored enterprise (GSE). This allowed the financial activity of Fannie Mae to be excluded from the U.S. federal budget. In 1970, the Federal Home Loan Mortgage Corporation (Freddie Mac) operated in a similar fashion as Fannie Mae. Freddie Mac pooled confirmed loans and created mortgage-backed securities that were sold as shared of the pooled loans to investors. These all expanded home ownership because it supported loans to low income borrowers who were less likely to be pay back the loans. The Depository Institution Deregulation and Monetary Control Act of 1980 addressed these concerns by eliminating interest rate caps and allowing lenders like CFC to charge higher, or subprime, rates to higher risk borrowers. CFC took full advantage of these conditions and made it the company's strategic goal to write, sell, and then move as many loans as possible to a secondary market.

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)?

Did subprime mortgage loans contribute to the housing bubble? Why did the bubble burst? What were the