m4l2 - Accounting&Finance Lecture2:Whatwentwrong...

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David Robinson © D. Robinson, 2008 Fall 2008 Module 4   Lecture 2: What went wrong
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Lecture 2: What went wrong The GSE’s: Fannie and Freddie Easier loans led to a bubble in house  prices Once house prices fall, these mortgages  are “toxic” The response: Everything done wrong How this will affect you
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Securitization of mortgages Loans Investors Bank
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If one loan goes bad, it’s made up for  by a pretty good  interest rate  on the  other loans Loans Investors Bank
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GSE’s were set up to purchase and  “securitize” the loans “Fannie Mae” Federal National Mortgage  Association Depression era Government agency Set up to buy mortgages, so banks had money to  lend In 1968, Johnson “sold” FNMA off as a  publicly traded company “Backed by the US Government” Reason: To get rid of their debt from the Federal  Budget (!)
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More “GSEs” (Government  Sponsored Enterprises) Federal Home Loan Mortgage Corporation  (“Freddie Mac”) created 1970 to purchase  to banks) Ginnie Mae is part of HUD (not a  corporation) Manages government program mortgages, such  as Veterans loans, first-time homeowner, etc
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Fannie and Freddie grew too big 70 percent of all  mortages Public “guarantee” Private $alaries Lots of commissions to  Wall Street Banks Huge lobbying  expenditures to  congress
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Relaxing the criteria for a loan 1. Social pressures to promote  homeownership by people with less than  perfect credit 2. Fannie and Freddie were lobbying to  grow their business (more bonuses!) 3. Interest rates were very low—everyone  was looking for a “good return”—why not  mortgages
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m4l2 - Accounting&Finance Lecture2:Whatwentwrong...

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