Mortgages that exceeded the conforming limit came to

Info icon This preview shows pages 18–20. Sign up to view the full content.

View Full Document Right Arrow Icon
size came to be known as the “conforming loan” limit. Mortgages that exceeded the conforming limit came to be known as “jumbos”. In 1975-1977, for example, the conforming loan limit was $55,000; from 1977-1979 the conforming loan limit was $75,000. In 1980 the limit was raised to $93,750 and was subsequently linked to an index of housing prices. For comparison purposes, the median price of the sale of an existing house was $35,300 in 1975 and was $62,200 in 1980; the median price of a new house was $39,300 and $64,600 in those two years, respectively. Thus, the conforming loan limit was substantially above median prices, whether measured by sales of existing homes or new homes; this pattern has continued to prevail to the present day, explaining the reach of the GSEs in affecting housing finance of a substantial proportion of the U.S. households. The three board members of the Federal Home Loan Bank Board became the board members and de facto regulators of Freddie Mac. (Shares of Freddie Mac would be made available to the general public almost two decades later.) Freddie Mac was expected to buy mortgage loans from the S&L industry and securitize them, although it was not restricted from buying mortgage loans from other originators. Since Freddie Mac (like Fannie Mae) was the creature of Congress, it too was a GSE. What is not commonly known is the financial difficulty that was experienced by Fannie Mae in the early 1980s. Like the savings and loan industry that it resembled (since, like the S&L industry, it was borrowing from the public and holding fixed-rate mortgages in its portfolio), Fannie Mae was squeezed by the high interest rates of the late 1970s and early 1980s. Holding a portfolio of long-lived fixed-rate mortgages that had been originated at lower interest rates than were prevailing in the early 1980s, it ran net losses in the early 1980s. Although Fannie Mae remained solvent on a book-value basis, there was widespread recognition that it was insolvent
Image of page 18

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
17 on a market-value basis. It survived the experience, however, and lower interest rates after 1982 eventually provided financial relief. The savings and loan industry was not so fortunate. It was a preview of the financial storm that would crush the financial system some 25 years later. The interest rate squeeze and a poorly structured deregulation of the industry in the early 1980s led to rapid growth in non- traditional investments in the mid 1980s and the eventual insolvencies of hundreds of S&Ls by the late 1980s and early 1990s. The federal government, through yet another agency (the Federal Savings and Loan Insurance Corporation, or the FSLIC), was guaranteeing the deposit liabilities of the insolvent S&Ls. Hence, as in the financial crisis of 2007-2009, it was the federal government that bore the net losses of these insolvencies. The bill at the time came to about $150 billion. In response to the bloodbath, the “President’s Commission on Housing”, issued a report on April 29, 1982, calling for greater deregulation of mortgage banking and an increased role for capital markets in the secondary market for mortgages. It had been just over a decade earlier in
Image of page 19
Image of page 20
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern