...are the similarities and differences of the problems encountered by the S&L industry and the more recent problems of the mortgage / housing industry? The Savings & Loan crisis also known as the thrifts was existing since 1800s. They served as the community based institutions for the mortgages and savings initially. The principal role of the S&Ls was to take in retail deposits (providing a riskless, liquid, short-term savings vehicle for large numbers of small savers) and originate long-term fixed-rate mortgage financing for residential homeowners. S&Ls were originally voluntary associations. People pooled their money to make it possible for members of the association to get mortgages on their homes without having to resort to loan sharks or to other forms of usury. The first documented mortgage transaction occurred in 1831, when Isaac Shallcross, as secretary of the first S&L made a $381 mortgage loan to lamp-lighter Comly Rich. Rich bought a house that still stands in the Frankford suburb of Philadelphia. The problems faced by the S & L industry can be listed as the following: * S & L were community based and local in nature. This was majorly due to tradition and to prohibitions against the out of state lending. I was also due to mortgage origination being a local business. * The second problem was the capital structure. The...
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...and its collapse in the U.S. to everyone from home buyers, Wall Street, mortgage brokers, mortgage underwriters, investment banks, rating agencies, investors, low mortgage interest rates, low short-term interest rates, and relaxed standards for mortgage loans. Predatory lending was just one of many factors along this transaction chain. Predatory lending consists of loaning money to consumers in the hope and expectation that they will default and the lender will be able to take the collateral (homes.) We will discuss if the government failed to protect its citizens thru public policy and what role (if any) investments in mortgage backed securities played in the market crash of 2008 as well. While economist continue to debate who or what is at fault. The market crash clearly devastated the U.S. economy. We will also discuss how such devastation is considered to be one of the worst market failures in history. The events leading up to the crash are easier to identify after a crash, the signs were in the forefront and ignored by most people, firms, banks, and the government. Together we will embark on a journey to discover what role predatory lending, mortgage backed securities, and relaxed regulations played in the housing market crash of 2008 and to clarify if one or more of these events or a combination of them all can be considered Market Failure. Keywords: Market Failure, Predatory Lending; Mortgage Backed Securities; Housing Crisis; Public Policy ABSTRACT Six...
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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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...balloon payments and short maturities. The pricing for mortgage loans varied widely due to no nationwide housing market. The main funding for these loans was provided by life insurers, thrifts, and commercial banks. By 1932, a housing crisis was wreaking havoc on home loans. The estimated defaulted loans were rising to twenty –five percent. In response to this crisis, the FHL Bank System was designed to provide relief to lending institutions and homeowners. In 1933, President Roosevelt birthed two Acts regarding the housing market. The first was the Home Owners Loan Act. This act established the HOLC, which was designed to slow down the quickly rising foreclosure rate. Under this act, long-term self-amortizing fixed rate mortgages became the new norm. The second act in the New Deal was the National Housing Act. The FHA was created in this act. This protective measurement was used to help the lenders maintain foreclosed homes by adding automatic insurance payments to active loans. The FHA also expanded the use of a fixed rate long-term home loan. In 1938, the American government formed Fanny Mae to provide a secondary market for home mortgages. This secondary market gave lenders the opportunity to sell mortgage notes to fanny when the bank needed funds for new mortgages. Up to 1938, all mortgages were privately owned. With the addition of the secondary market, both private and government agencies bought bundled bank mortgage packages. This secondary market also provided lenders...
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...making things worse. The Fed pushed off all financial problems, which made the blowup worse when it happened. The Housing Bubble began at the end of 2006. The prices of houses inflated quickly and then dropped just as fast. This was because the banks wanted more people to buy homes, so they gave mortgages to people without a credit check. This resulted in people buying houses despite the fact that they were unable to payout their mortgages. Since so many people were buying houses the prices shot up which ended up leading to foreclosure. ***This caused the bank to lose money and own a lot of homes and nothing to do with them***. Therefore, to get rid of these houses, they had to sell them for very low prices....
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...Angelica Olivarez 430 ethics Fannie Mae Accounting Scandal 2001 Ethics is based on how people should act through well-based standards. Ethics on the other hand, does not describe the way people actually act. Ethics is a prescriptive term in which people should always aim to make the right decision. Those who act on ethics do not rationalize their actions founded own perceived self-interest. The accounting profession has its own understanding and framework of ethics. Accounting applications of ethical reasoning can become a common dilemma faced by auditors, internal auditors and all others who work in the business field. For example, The American Institute of Public Accountants (AICPA) Code requires CPAs to place the interest of the public first. To place the interest of the public first means that CPAs should not place themselves, their client or their employer’s interest above the public. Many business dilemmas involve managers, CPAs, and/or top management who have placed their interest above the public’s interest. An example of an accounting and business dilemma where the public interest was not placed first is Fannie Mae accounting scandal in 2001. Fannie Mae is the Federal National Mortgage Association, a government supported entity that assist lower and middle income Americans to buy homes. The Federal Home Loan Mortgage Corporation (Freddie Mac) also assists lower and Middle Americans to buy homes. Both supported entities gain special treatment and “aimed to increase...
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...______________________________________________ Comments: ______________________________________________ ______________________________________________ _______________________________________________ _______________________________________________ Abstract The need to encourage house or homeownership has been in the government’s strategic plan since 1934, however, the current financial policies and practices in the housing finance and the mortgage market has characterized by minimum flow of capital in the secondary mortgage market, confusion on the main control authority and various ill practices. This fact has necessitated various changes in the house and homeownership financial. This study collected both primary and secondary data, and found out that the government must set the right policies that will empower house and home consumers to circumvent biased practices and practice informed decision making, these sentiments. There must be improvement in the foreclosure processing and mortgage servicing, notably, from the beginning of the last financial crisis, foreclosures and NAR tried to work with administrators and regulators to formulate criteria for decreasing the risk of foreclosure. There should be increased...
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...Government Mortgage Programs RES301 Real Estate Principles Government Mortgage 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...
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...to buy other bonds that don't pay as well. Longer maturity bonds can fall in value with fluctuating interest rates. This lowers the sale price of the bonds when it comes time to sell them. The bank should restricted to sale the amount of bond due to the customers income level to avoid default happen. Besides that, Risk Disadvantage is a disadvantage to bonds is that you cannot always trust the ratings systems. The most prominent example of this is the home mortgage crisis of 2008. For years preceding the crisis, bonds and bond mutual funds containing mortgage loan debt were highly rated and considered safe. At the time, they provided consistently good returns and rarely lost money. When it became evident that there would be wide scale mortgage defaults, agencies like the Federal National Mortgage Association, known as Fannie Mae, and the Federal Home Loan Mortgage Corporation, known as Freddie Mac, were on the verge of collapse. In September 2008, the Federal Housing Finance Agency seized control of Fannie Mae and Freddie Mac to prevent the entire economy from collapsing under the weight of so much unpaid debt. The bonds containing the...
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...This was accomplished by legislated changes to the Community Reinvestment Act which was part of the original Housing and Community Development Act of 1977. These legislated changes, gradually led to a lowering of housing lending standards. The process involved constantly increasing the subprime lending goal through Fannie and Freddie. Increasing low-income home ownership might have been one of the original stated goals, but another major goal was securing increased Democratic party popularity with the various low-income groups. The latter goal was achieved. Initially, the goal of increasing low-income home ownership was also achieved. It would not last. The government housing intervention soon led to a massive increase in borrowers who could not even make the first monthly mortgage payment. Initially, it was not commercial banks or investment banks but the shadow banking firms that dramatically increased this inappropriate lending. The actual marketplace behavior of: “… you have no money, no job, no downpayment, no problem, here’s your house loan …” led to a steady and obvious increase in financial risks. It was only a matter of time before a housing crash occurred. Deregulation and various new innovations only made the situation...
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...of mortgage loans. This chapter focuses on the creation, development, and performance of this program. Overview Mortgage loans were the largest single category of assets in the RTC’s inventory. In August 1990, the total volume of those loans held in RTC-controlled institutions was estimated to be more than $34 billion. The size of this portfolio led the RTC to explore the concept of securitization as a method for broadening the potential range of mortgage loan purchasers because the market for mortgage-backed securities was large and well developed. Securitization is the process by which assets with generally predictable cash flows and similar features are packaged into interest-bearing securities with marketable investment characteristics. Securitized assets have been created using diverse types of collateral, including home mortgages, commercial mortgages, mobile home loans, leases, and installment contracts on personal property. The most common securitized product is the mortgage-backed security (MBS). The following types of mortgage loans are most suitable for securitization. 406 M A N A GI N G T H E C R I S I S Conforming Residential Loans Conforming residential loans are single-family, performing (one-to-four family) mortgage loans that conform to Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) guidelines and/or standards. In 1997, these agencies had more than $3 trillion of outstanding mortgage securities...
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...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 in the US Constitution, “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights...
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...Spencer Crane Fin 3351 December 5, 2013 The House of Cards Crisis The political and economic environment described in the House of Cards video is characterized by events leading up to the financial crisis the United States experienced in in the early 2000s. The crisis is credited to events such as, the burst of the Dot Com Bubble, which lead to a market crash that put the American economy in a recession; and the controversy that surrounded Government Sponsored Enterprises, which lead the American people to lose trust in it’s government’s financial institutes. However, people such as, Ben Bernanke and Alan Greenspan have helped the United States recover from this crisis by implementing new guidelines for the financial market. According to Cashzilla.com, the Internet bubble described in summary was “a rapid rise in equity markets fueled by investments in Internet-based companies. During the dot com bubble of the late 1990s, the value of equity markets grew exponentially, with the technology-dominated Nasdaq index rising from under 1,000 to 5,000 between 1995 and 2000.” Basically, investors started inserting a vast amount of their money into these internet-based companies, which in turn caused the stock market to rise dramatically. “The approach of rapidly growing customer bases before making any real profit was the first mistake”(Dot-Com Bubble: Explained). These Internet companies were running their businesses off of investor’s money and not from real profit, consequently...
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...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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...FI 398 Paper on Liar’s Poker The History of the Secondary Mortgage Market The secondary mortgage market is one of the richest asset classes in the world today. This market is formed by the trading of securities that are backed by commercial and residential mortgages. There are two main assets that are traded. These are Mortgage Backed Securities (MBS), and Collateralized Mortgage Obligations (CMOs). These two distinct asset classes make the market a very profitable one for many large investment corporations. Thanks to legislative action, most notably when Michael Lewis said, “From the early 1930s legislators had created a portfolio of incentives for Americans to borrow money to buy their homes”(121). These legislative policies made owning your own home something more attractive, because borrowing for it went on to benefit you for tax purposes. In the 1970s, the nation’s mortgage portfolio was booming in growth. As Lewis noted, “the volume of outstanding mortgage loans swelled from $55 billion in 1950 to $700 billion in 1976. In January 1980 that figure became $1.2 trillion, and the mortgage market surpassed the combined United States stock markets as the largest capital market in the world”(122). These are truly shocking numbers. The growth in the industry was completely unforeseen. While there are several similarities between mortgages and bonds, particularly after the development of MBS and CMOs, they are also different. The main difference is that bonds...
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