...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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...you are starting to look into buying a home and have been qualified by your lender for a Federal Housing Administration (FHA) mortgage due to a limited down payment, you now have an alternative. Fannie Mae has recently introduced their 3% down payment mortgage option. This program compares favorably to FHA financing. It allows 100% of the down payment to be gifted from a relative, offers low mortgage insurance rates, and requires a less restrictive appraisal as compared to the FHA's health and safety repair standards. Below is a summary of the guidelines for the Fannie Mae conventional 97% mortgage: • Past Homeownership Qualification - This mortgage program is available to all homebuyers. Both first and second time home buyers may qualify for this 3% down payment mortgage. • Down Payment - The down payment requirement for this loan program is 3% of the sales price. It allows 100% of the down payment to be a gift from a family member, dependent on the borrower's credit scores. • Owner Occupied - This program can only be used by individuals who intend to occupy the home. It does not allow for investor financing. • Property Type - The Fannie Mae 3% down mortgage can only be used for single-family dwellings and qualifying town-homes and condominiums. • Mortgage Insurance - Fannie Mae does require monthly mortgage...
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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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...community development as well as more planned, direct support programs that would assist in providing low-priced apartments and even rental vouchers to the deprived families, managed through quasi-public, local public and the private intermediaries (McCarty & Et. Al., “Overview of Federal Housing Assistance Programs and Policy”). The main objective of the paper is to analyze the housing policies adopted by the federal government related to the mortgage and funding system. With this concern, the discussion of the paper will intend to identify the strategies implemented by the federal government persuade lenders and low-income borrowers in dealing with highly risky loans and mortgages. Furthermore, the paper will analyze the role of Fannie Mae and Freddie Mac in the recent sub-prime crisis of 2008. The condition of extreme and mispriced mortgage liability is the main reason behind the current boom in the housing markets. It is not possible to understand the unusual character of this particular cycle without recognizing the parts that...
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...Programs such as Fannie Mae, Freddie Mac, FHA, and the VA Loan program are all integral parts of our nation’s main home lending programs. Each provides their own benefits to those who choose to take advantage of them. This paper will go into depth about how these programs affect the real estate market financially, ethically, legally, dynamically, and according to the valuation process. Understand that each program provides integral assistance to the normal avenues of attaining loan assistance, and it is integral that each program maintains their ability to function based off of their intended uses. First, it is important to understand what each government program is and what it provides. Homebuyers who do not qualify for prime mortgages typically obtain mortgages that require them to obtain insurance either through FHA loans guaranteed by the government or (higher-priced) subprime loans secured by private mortgage insurance” (Karikari Voicu Fang, 2011). This tells us that these programs are highly desirable for those who might not be able to afford a general home loan. Fannie Mae was originally created as the Federal National Mortgage Association in 1938. It was used to “provide a secondary market for FHA-insured mortgages, and later, VA guaranteed loans” (Archer Ling, 2013). Freddie Mac was originally created to “create an active secondary market for mortgages by savings loan associations” (Archer Ling, 2013). The difference between Fannie Mae and Freddie Mac was...
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...Paper Fannie Mae, also known as Federal National Mortgage Association was established in 1938 by amendments to the National Housing Act to provide local banks with federal money to finance home mortgages. This was an attempt to raise levels of home ownership and make affordable housing more available by creating a secondary market. Fannie Mae was authorized to buy Federal Housing Administration insured mortgages, replenishing the supply of lendable funds. In 1944 Fannie Mae was authorized to purchase loans guaranteed by the Veterans Administration, and in 1954 they become a mixed ownership corporation owned partly by private stockholders. In 1970 Fannie Mae transitioned from mixed ownership to private organization and was authorized to purchase conventional mortgages. Through the 80’s and 90’s Fannie Mae remained profitable through the use of adjustable rate mortgages and mortgage backed securities. In the late 1990’s and early 2000’s institutions in the primary mortgage market pressured Fannie Mae to ease credit requirements on the mortgages it was willing to purchase, enabling them to make loans to subprime borrowers. As housing prices dropped nationwide and foreclosures increased, Fannie Mae suffered large losses on various investments in their portfolio, such as sub-prime mortgages (loans made to borrowers with poorer-than average credit) and “private label” MBS’s (securities issued and insured by private companies without government backing). Fannie Mae also faced...
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...will explain the background of the subprime loans. How the government had to intervene with subprime loan. Lastly, the policies taken place with primes and different programs. The Subprime loans beginnings started in 1992, where Congress wanted to affordable housing, work on plan with Fannie and Freddie. Congress wanted the Department of Housing and Urban Development to look at their regulations. The chairperson for Fannie had a trillion dollar commenting to finance affordable homes. Homeownership had become an economic factor over the years in the mortgage market. Majority of home have loan through financial institutes. Yet, these subprime mortgage loans were given to individuals who barley sustained income and had failed credit. The purpose of the loan was suppose have a better opportunity of have homeownership. It was unfortunate subprime loans were aim toward minorities or low income areas. Lenders saw this qualities as a high risk offer the subprime loan, whereas prime loan. There subprime loan were offer to people who were not educated on loans. People did not know they had an adjustable fixed rate. Meaning the interest can flustered and get higher each month. Fannie and Freddie had nothing to do with whole subprime loan, but they...
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...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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...What is the information on Fannie and Freddie, and why is the change important to the housing market First of all, to fully understand the importance of the two companies and their aid, you must thank them how to help the millions of people to become the owner. Fannie Mae and Freddie Mac do not lend money directly to individuals. Rather, they are meant to establish a regular flow of funds banks actual payment of housing loans. Buy lenders from mortgage lenders - commercial banks, savings institutions and credit unions - which in turn allows these institutions to make additional home loans. Fannie mae was established in 1938 during the administration of President franklin d. Roosevelt when millions of families can't afford to buy a home. Freddie MAC in 32 years later. In 2007, the two companies announced the total loss of less than $5.2 billion, according to a report to congress. Before that, they didn't released since 1982, the total losses. In order to prevent crushing blow the real estate market, the federal government rescued company. Fannie mae and Freddie MAC, the financial problem does not pose a risk, if you do not intend to sell your home quickly or you don't want to refinance. That's because you don't have to worry about mortgage rates. And does not affect your current mortgage, so you should continue to pay agreement. My concern is that we really do not know what the market will Fannie Mae and Freddie Mac did not do. We know that...
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...MICRO-ECONOMICS ASSIGNMENT Group 24 VINEET KHANDELWAL | FT161105 | ANKIT GUPTA | FT161016 | CHANDAN | FT161030 | KUSHAL RAVEENDRA | FT161046 | Question Number 1: You run a small firm. Two management consultants are offering you advice. The consultant A says that your firm is losing money on every unit that you produce. To reduce your losses, the consultant recommends that you cut back production. The consultant B says that if your firm sells some additional units, the price will more than cover your increase in costs. In order to reduce losses, the second consultant recommends that you should increase production. 1. Explain which consultant/s is/are factually true and who is offering the correct advice? 2. Explain your answers by drawing the relevant diagram/s. On a broader view, both the consultants seem to be factually correct. The key thing is to look at the relationship between Marginal cost, average cost and the price per unit. The first consultant is in a way right in his advice because the average cost to produce is higher than the selling price .Hence factually he is right to say to cut back production. Since the price is greater than the marginal cost at Q1 the second consultant is also correct in saying that the increase in production will more than cover the costs incurred. Hence taking the advice of second consultant seems more practical as it will lead to profits once if the production is increased up to a point (Q3) where the...
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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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...What is LIBOR and how is it calculated? How has LIBOR ben used historically? London Interbank Offered Rate is an interest rate estimated by the member banks of the British Banker’s Association. It is the rate that they would charge for borrowing from other banks. Until 1984 there was no uniformity in trading activities between the banks, hence the BBA formed a rate to create uniformity to create more business and greater depth to the London Interbank market. The official definition is “The rate at which an individual Contributor Panel bank could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to 11:00 London time.” What problems with LIBOR have been identified? The major banks submitted the interest rates from major banks and took an average to calculate the LIBOR. The problem with this was that they banks inflated their interest rates in order to make them seem more profitable. The LIBOR is used worldwide hence falsifying the interest rates will manipulate the US derivative market. The traders fixed the LIBOR rate in order to make more profit. There is also an cultural problem with calculating LIBOR. The Banking industry and the regulatory agencies are very friendly and there is no healthy separation between them. Which Institutions are involved? How many have they been prosecuted? Why is there not a standard fine amount? The major institutions involved in the fixing were the Barclays Bank and the...
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...taking * Firms relied on short term funding such as commercial paper * The increased use of exotic financial instruments concentrated risk Public sector vulnerabilities: * Gaps in regulatory structure * Supervision of banks and bank holding companies (FED did not press hard enough on the issue of measuring a risk) and many banks did not have a capacity to understand the risk, they were taking, and supervisors should press them harder to develop the capacity. * There were failures in the regulation of the customer protection * Individual agencies looked at different parts of the business and nobody was really in charge in looking to see whether there was problems related to the overall financial system * Fannie Mae and Freddie mac that were operating with an inadequate capital to back their guaranties. Their balance sheets grew rapidly exposing them to additional risk. * Bad mortgage products and practices such as non-doc loans repayment of which depended on continually rising prices of houses. When house prices stopped rising borrowers could not neither refinance nor meet the payments on the exotic mortgages. * Subprime mortgage securitization that imposed loses on financial firms when...
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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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...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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