...reported cost of the Obama Administration’s cash payments made to Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac was $130 billion (Cover). This number has been a well-publicized figure signaling the corruption of these two mortgage giants. In fact, enormous sums of money often become the public symbol for corruption when corporate fraud is committed. By the same token, Fannie Mae’s $9 billion of overstated earnings from 2001-2003 also became a strong representation for the executive deception that was committed during this time period (Harvard Law School Case). However, the reasons for the fraud itself are often overlooked. While we can’t be certain that executive compensation practices contributed to this fraud, it undoubtedly did not strengthen the idea of producing firm value for the benefit of shareholders. Fannie Mae was created in the midst of the Great Depression (1938) to buy mortgages from lenders so that money would be freed up for other borrowers (Pickert). Although Fannie started off with just $1 billion to purchase mortgages, the organization was extremely effective and shaped American home ownership for a new class of people that once were not considered creditworthy. Essentially, low to middle income buyers were able to receive credit and become homeowners due to the success of Fannie Mae. It is important to note that Fannie Mae was established with an amazing social mission in mind: to help American homeowners realize their dreams...
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...subprime mortgages and the housing market bubble. The paper will also analyze Fannie Mae and Freddie Mac and how they are linked to the subprime mortgage crisis, including potential solutions to the crisis. References have been added to each section to show which references are being used in which section. References will be added as needed. 1) Abstract a. 120 word overview of paper 2) Introduction a. Introduction to the topic of subprime mortgages and the housing market bubble. b. Timeline of the crisis and housing market bubble burst 3) Discussion Content a. Definitions and background information on the following topics: i. Mortgages ii. Housing Market iii. Subprime Mortgages 1. Demyanyk, Y., & Van Hemert, O. (2011). Understanding the Subprime Mortgage Crisis. Review of Financial Studies, 24(6), 1848-1880. 2. Karikari, J., Voicu, I., & Fang, I. (2011). FHA vs. Subprime Mortgage Originations: Is FHA the Answer to Subprime Lending?. Journal of Real Estate Finance and Economics, 43(4), 441-458. doi.10.1007/s11146-009-9218-7. iv. Housing Market Bubble Burst b. Overview and causes of the subprime mortgage crisis i. Fixed mortgage versus floating 1. Demyanyk, Y., & Van Hemert, O. (2011). Understanding the Subprime Mortgage Crisis. Review of Financial Studies, 24(6), 1848-1880. ii. High risk mortgage loans and lending/borrowing practices 1. Peterson, C.L. (2009). Fannie Mae, Freddie Mac, and the Home Mortgage Foreclosure Crisis. Loyola Journal of Public...
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...How Did Fannie Get on the Wall in the First Place? Fannie Mae was established to facilitate the perceived social responsibility in the United States of encouraging the growth and affordability of housing, especially for disadvantaged groups. During the period in which Franklin Raines was at the helm, the company could seem to do no wrong, garnering recognition for many socially responsible accolades, being “near the top of everyone’s ‘best’ list” (Jennings, 2010, p. 268). For a company, is social responsibility the only mandate? Perhaps for Fannie Mae who was established by federal charter to meet such a mandate, this might be the case, but Milton Friedman argues that “there is one and only one social responsibility of business . . . increase its profits” (1970, para. 33). This author believes that if a company does not minimally maintain cash flow, or “real” profits, over the long term, it will be unable to meet any contrived social responsibility or survive. How an organization goes about maintaining or increasing cash flow brings into play the idea of governance, which “comprises the roles, responsibilities, and balance of power among executives, directors, and shareholders” . According to Aguilera and Cuervo-Cazurra (2004) there are two purposes of corporate governance policy; improving quality of governance (or the running of the company), and increasing accountability of the leadership. Fannie Mae’s leadership was fixated on a single indicator of company success...
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...The Risks of Preferred Stock Portfolios SLCG Working Paper 1 Abstract Preferred stocks are a hybrid of debt and equity. In this paper, we examine preferred stocks with an emphasis on the risks of holding portfolios of preferred stocks. We demonstrate that preferred stocks are similar to debt when the issuing company is financially healthy, and become more similar to equity when the company’s financial condition deteriorates. We show that issuers of preferred stocks are heavily concentrated in the financial services industry, a fact that exposes investors who hold a portfolio concentrated in preferred stocks to further risk - industry concentration risk. We illustrate the features of preferred stocks using the Fannie Mae 2008 issuance as a case study. I. Characteristics of Preferred Stocks Preferred stocks are a hybrid of debt and equity and have attributes of both securities. In an issuing company’s capital structure, they give investors a claim to income and assets before common equity investors but after debt holders. Preferred stocks pay a stream of fixed- or floating-rate payments similar to the coupon payments made on debt and provide no participation in the issuer’s residual gains or any voting rights. However, similar to dividend-paying equity, preferred stocks’ dividend payments are not a mandatory obligation of the issuer. Failure to pay preferred stock dividends does not constitute a default. Historically, most preferred stocks were cumulative, meaning that...
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...financial collapse of 2008 with the political effort to expand home ownership to those people who were not qualified under traditional market constraints (Yandle, 2010, p.346). Nevertheless, the attractiveness of the subprime loan market to brokers cannot be denied as the significant growth of that market between the years of 1994 and 2008 was accompanied by an increase in wealth for many lenders. The greatest growth occurred between 2004 and 2008 after the passage of the Community Reinvestment Act and the American Dream Downpayment Act. (Jennings, 2009, p. 434; Yandle, 2010, p. 347). First, let us discuss the ethical shortfalls of the lenders. As the standards for mortgage constraints were relaxed as a result of political pressure on Fannie Mae and Freddie...
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...1. Primary objective of the corporation Management has one basic, overriding goal – to create value for stockholders. Stockholders own the firm - it legally belongs to them. That ownership position gives stockholders the right to elect the directors, who then hire the executives who actually run the company. The directors, as representatives of the stockholders, determine managers’ compensation, presumably rewarding them if performance is superior or replacing them if performance is poor. Of course, there are some constraints on what management can do when working to create value for stockholders. Management can’t engage in illegal employment practices, create monopolies to exploit consumers, violate anti-pollution laws, or engage in prohibited activities. For most companies and at most times, managers do focus on shareholder value maximization, because in the long run stockholders do remove directors and managers who fail in their fiduciary duty. There are events that refocus managers’ attention on the interests of stockholders. First, stock ownership has become increasingly concentrated in the hands of institutional investors, and their holdings are so large they would depress a stock’s price if they simply dumped it. Therefore, institutional investors are now using proxy fights and takeovers to force changes in poorly performing companies. Second, the penalties for executives who violate their responsibility to shareholders have increased. Good managers...
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...clear preferences, models uncertainty via expected values, and always chooses to perform the action that results in the optimal outcome from all the feasible actions. Their actions depend on their preferences, their information of the current situation; which may come from past experiences, the actions, duties and obligations available and the estimated or actual benefits that the agents can get after the actions. In reality, however, agents are not always rational; people’s decision does not always correspond to the concept of economic rationality. Most people, in fact, make their decision rather intuitively. This leads to an interesting new study of behavioural finance, a study that linked psychology with finance. It provides explanations to well-known market anomalies such as: the small firms outperform; in which the case...
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...the bubble burst. Basically, the main reason that triggered the bubble and made it bigger was the policies of the Federal Reserve back in 2003. Referring to the reason, to avoid recession after the collapse of the tech bubble in 2000 and the 9/11 attacks in U.S during 2001, the Federal Reserve started to lower the interest rate from 6.5% to 1.75%. In 2003, the interest rate has been lowered to 1% and it remained there for a full year. However, the house prices were still growing up, higher than the interest rate. Even the house prices were growing at the rate of inflation, the Federal then encouraged people to buy houses. Federal has made an incentive so that people can go out and borrow at the rate of 1%. In addition, they created Fannie Mae and Freddie Mac, a privately owned, government sponsored mortgage houses to insure loans for people who couldn’t get them on the open market. Lending large sum of money into the property market has actually increased the level of personal debt. Interest has to be paid together with the loans. However, when debt rose quicker than incomes, some people became unable to keep up with repayments thus lead banks going...
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...LEADERSHIP AND ETHICAL DECISIONS PERFORMED BY KENNETH LEWIS AND THE FED DURRING THE FINANCIAL CRISIS OF 2007-2008 November 29, 2010 Introduction The robust leadership decisions of both the Fed and Kenneth Lewis, CEO of Bank of America (B of A), were not only ethical and accurate, but could have simply saved our financial system as we know it. During the weekend of September 13-14, 2008 Kenneth Lewis met with CEO of Merrill Lynch (Merrill), John Thain, in order to try and rescue Merrill from a hasty bankruptcy that lurked around the corner. Lewis was thinking that it was the perfect opportunity to add the only thing that B of A lacked after recent acquisitions, a “Wall Street investment bank that underwrote and sold securities” (Pozen and Beresford, 2010). On December 5, 2008 B of A’s shareholders voted to approve the merger between the two (Pozen and Beresford, 2010). It wasn’t until days later that Lewis became progressively more concerned about the growing fourth quarter losses on Merrill’s books, from $5.38 billion on November 12 to $12 billion on December 14, one month later. By mid December Lewis began looking for a way out of the deal before the scheduled closing date in late January. Both the Fed and the U.S. Treasury Secretary, resisting that Lewis walk away, threatened to fire Lewis and replace the board at B of A if the merger didn’t take place. Lewis, afraid of legalities from not disclosing the losses to their shareholders before the vote, and the drop in...
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...Running Head: CLEAN UP THE HOUSE 1 Clean Up the House: An Analysis of the Housing Crisis and the Endeavor to Lift the US Housing Market Neil Smith Wilmington University MBA 6400 Economic and Financial Environment of Business CLEAN UP THE HOUSE 2 ABSTRACT This is an inquiry of the Housing Crisis that culminated to the Great Recession of 2007-2009. A review of the aspects that led to the Housing Crisis will be considered. The causes that contributed to the Housing Crisis will range from the Community Reinvestment Act of 1977 to the greed and voracity that engulfed the Financial Markets. Such greed maligned the financial markets causing eventual bailouts and measures that the US Federal Government employed to avert a major financial depression. This paper will discuss definite recommendations that will improve the US Housing Market. CLEAN UP THE HOUSE 3 Clean Up the House: An Analysis of the Housing Crisis and the Endeavor to Lift the US Housing Market In today’s world it is generally accepted that a home is the most expensive thing that any American can buy. The idea of home ownership - a chance to own a home - is a dream fulfilled for many. To have a piece of property and call it your own is reflected...
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...AMERICAN UNIVERSITY OF BEIRUT COINTEGRATION BETWEEN MORTGAGE RATES AND HOUSING PRICES: CASE OF THE UNITED STATES by MOHAMAD SAMIR HAMMOUD A project submitted in partial fulfillment of the requirements for the degree of Master of Arts in Financial Economics to the Department of Economics of the Faculty of Arts and Sciences at the American University of Beirut Beirut, Lebanon March 2009 AMERICAN UNIVERSITY OF BEIRUT COINTEGRATION BETWEEN MORTGAGE RATES AND HOUSING PRICES: CASE OF THE UNITED STATES by MOHAMAD SAMIR HAMMOUD Approved by: ______________________________________________________________________ Dr. Simon Neaime, Professor Economics First Reader ______________________________________________________________________ Dr. Marcus Marktanner, Assistant Professor Economics Second Reader Date of project presentation: March 4, 2009 AMERICAN UNIVERSITY OF BEIRUT PROJECT RELEASE FORM I, Mohamad Samir Hammoud authorize the American University of Beirut to supply copies of my project to libraries or individuals upon request. do not authorize the American University of Beirut to supply copies of my project to libraries or individuals for a period of two years starting with the date of the project defense. ____________________ Signature ____________________ Date ACKNOWLEDGMENTS I would like to thank Professor Simon Neaime who directly and indirectly promoted my productivity by making me experience interesting challenges...
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...Abstract In the later part of 2008 the world observed what is being labeled the world financial crisis since the Great Depression of 1920-30. The initial indication of a severe financial melt-down appeared in October 9, 2007 when the Dow Jones Industrial Average set a record by closing at 14,047. One year later, the Dow was just above 8,000, after dropping 21% in the first nine days of October 2008. Major stock markets in other countries had plunged alongside the Dow. Credit markets were nearing paralysis. Companies began to lay off workers in droves and were forced to put off capital investments. Individual consumers were being denied loans for mortgages and college tuition. After the nine-day U.S. stock market plunge, the head of the International Monetary Fund (IMF) had some sobering words: “Intensifying solvency concerns about a number of the largest U.S.-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown.” It has been maintained that huge economy inequalities coupled with low rate of profit in the US economy contributed to an increased capital flow to the financial sector and the increasing provision of credit to US workers whose real incomes had declined. Under auspices of financial innovations, debt was sold in complex new financial products to investors. Cheap and apparently riskless lending drove the rising leverage of investments. ‘Securitization’ helped to spread the risks to global financial markets...
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...Subprime Loans - The Under-The-Radar Loans That Felled a Market The problem to be investigated is the ethical challenges for both lenders and borrowers that were the result of the exponential growth in the subprime loan market. The subprime mortgage market grew from $34 billion to $401 billion between 1994 and 2004 (Jennings, 2012, p. 434). The U.S. subprime mortgage crisis, fueled by record mortgage delinquencies and home foreclosures, and the subsequent collapse of mortgage-based securities followed by collateralized debt obligations (CDO’s), led to the financial crisis in the late 2000s. This paper will explore the impact of the subprime mortgage crisis on society and will discuss the roles government, corporations and individuals played. This paper will also offer suggestions on responsible behavior to prevent a recurrence. – Good introduction The History of Subprime Mortgages-- Good -- use one section heading for each question asked in assignments like this that have questions. The deregulation by the Federal Government of the banking industry starting in the 1980s is identified by many experts as responsible for setting in motion the events that resulted in the subprime mortgage crisis. A collision of unintended and intended consequences – regulation, greed, uninformed consumers. Subprime loans have been around for a long time. However, they were never meant for borrowers with less than stellar credit nor as primary loans – good point. ARM, balloon payment...
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...Case Study: Tapping the Ethnic Housing Market MKT 87505 – Consumer Behavior Theory & Analysis California Southern University Case Study: Tapping the Ethnic Housing Market “A subculture is a segment of a larger culture whose members share distinguishing values and patterns of behavior,” (Hawkins & Mothersbaugh, 2010, page 156). Subcultures are frequently encountered in America due to the ‘melting pot’ nature, continual immigration into the United States, and various religious and ethnic viewpoints experienced in modern day society. A collision of all these subcultures in America has led to difficult marketing approaches to address both the core values and norms of the American culture and unique market behaviors, values, and norms that may be specific to other subcultures. In the case study, “Tapping the Ethnic Housing Market,” Fannie Mae evaluated ethnic groups to determine the different perceptions associated with the home-buying process (e.g. reason to purchase a home, knowledge about the overall purchasing process, and confidence in the process). The case study will discuss the opportunities and challenges facing housing lenders and real estate agents today based in the perceptions of each ethnic group. Analysis “Ethnic subcultures are those whose members’ unique shared behaviors are based on a common racial, language, or national background,” (Hawkins & Mothersbaugh, 2010, page 158). The Fannie Mae case study analyzes the different perceptions of the home-buying...
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...Once interest rates dropped the economy was overflowing with money which lead lenders to be able to provide mortgage loans to, previously, undesirable borrowers. Now the demand for houses rose & so did the prices for the houses making these subprime loans attractive to lenders because of the high return. So the Banks & investment houses continued to invest in mortgage securities but the financial institutions did not maintain enough reserves in case the housing market crashed. Naturally, the housing market came crashing down leaving borrowers “upside down” in their loans & they were forced to foreclose. When this happened, the banks became unwilling to lend money so funds were not available for businesses. Without funds for everyday operations, businesses struggled causing layoffs & raising the unemployment rate. 2. What steps did the Federal government and the Federal Reserve take to mitigate the crisis? The Federal Reserve bailed out Bear Stearns & AIG. The U.S. Department of the Treasury seized Fannie Mae & Freddie Mac. Congress passes the economic bailout plan TARP which spent $700 billion investing in banks & bailing out the auto industry. Congress also passed an $825 billion economic stimulus package called the American Recovery & Reinvestment Act which included cutting taxes, building infrastructure, & investing in green energy. 3. Compare and contrast microeconomics and macroeconomics. How do the two approaches interrelate?...
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