Case 15
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1.Yes, I believe that the government’s 1932 home ownership intervention was desirable to both owners and lenders. Prior to the intervention banks offered individuals short-term non-amortizing loans and as a result many loans went into default. Due to these circumstances the government created the Federal Home Loan Bank and Federal Housing Act to protect institutions during economic downturns and because of this new sense of safety for lenders. It also allowed for people who did not qualify for loans in the past, to now qualify. Fannie Mae was created in 1938, which established the very first secondary market for mortgages. This allowed for mortgages issued by banks to be converted to securities and traded to investors.
Freddie Mac came next in 1970 and was very similar to Fannie Mae. Their goal was to extend these securities into the capital market. Since the government backed these securities, it gave investors a sense of comfort. All of this resulted in banks beginning to issue more and more loans. As banks issued more loans, homeownership numbers began to rise as well as the home prices. This led to home prices being seriously over-inflated.
2. The
The CRA and HDMA were created in response to mounting pressure from social activists and minorities who complained that financing was difficult to obtain. It was also done to provide money to low-income areas. The Monetary Control Act of 1980 gave financial institutions more flexibility in terms of underwriting standards and charging higher interest rates to riskier borrowers.
No one denies that the legislation helped increase home ownership or “temporary home ownership”, but at what future cost would this increase in home ownership come. It raises many questions such as “Were people that naïve that the markets could sustain this activity indefinitely?” or “Did government officials throughout the years not care because the collapse would come long after they had left office?”
The promotion of subprime mortgages by the government created minimal risk for lenders because most of the loans they issued were either insured or packaged and sold to investors. Financial institutions could also have secretly taken advantage of the fact that since everyone was issuing subprime mortgages, it was not possible to punish everyone once the system collapsed and that government would have no option but to bail them out. As a result, most of the risk gravitated towards the holders of these securities should borrowers default on payments.