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Home » Mortgage Crisis Explained: Finance System, Fannie Mae, Freddie Mac, Global Markets (2015) financial crisis 2008 explained

Mortgage Crisis Explained: Finance System, Fannie Mae, Freddie Mac, Global Markets (2015) financial crisis 2008 explained



A mortgage-backed security (MBS) is a type of asset-backed security that is secured by a mortgage or collection of mortgages. About the book:

The mortgages are sold to a group of individuals (a government agency or investment bank) that securitizes, or packages, the loans together into a security that investors can buy. The mortgages of an MBS may be residential or commercial, depending on whether it is an Agency MBS or a Non-Agency MBS; in the United States they may be issued by structures set up by government-sponsored enterprises like Fannie Mae or Freddie Mac, or they can be “private-label”, issued by structures set up by investment banks. The structure of the MBS may be known as “pass-through”, where the interest and principal payments from the borrower or homebuyer pass through it to the MBS holder, or it may be more complex, made up of a pool of other MBSs. Other types of MBS include collateralized mortgage obligations (CMOs, often structured as real estate mortgage investment conduits) and collateralized debt obligations (CDOs).[1]

The shares of subprime MBSs issued by various structures, such as CMOs, are not identical but rather issued as tranches (French for “slices”), each with a different level of priority in the debt repayment stream, giving them different levels of risk and reward. Tranches—especially the lower-priority, higher-interest tranches—of an MBS are/were often further repackaged and resold as collaterized debt obligations.[2] These subprime MBSs issued by investment banks were a major issue in the subprime mortgage crisis of 2006–8.

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The total face value of an MBS decreases over time, because like mortgages, and unlike bonds, and most other fixed-income securities, the principal in an MBS is not paid back as a single payment to the bond holder at maturity but rather is paid along with the interest in each periodic payment (monthly, quarterly, etc.). This decrease in face value is measured by the MBS’s “factor”, the percentage of the original “face” that remains to be repaid.

The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, was founded in 1938 during the Great Depression as part of the New Deal. It is a government-sponsored enterprise (GSE) and has been a publicly traded company since 1968.[2] The corporation’s purpose is to expand the secondary mortgage market by securitizing mortgages in the form of mortgage-backed securities (MBS),[3] allowing lenders to reinvest their assets into more lending and in effect increasing the number of lenders in the mortgage market by reducing the reliance on locally based savings and loan associations (aka “thrifts”).[4]

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The Federal Home Loan Mortgage Corporation (FHLMC), known as Freddie Mac, is a public government-sponsored enterprise (GSE), headquartered in the Tyson’s Corner CDP in unincorporated Fairfax County, Virginia.[2][3]

The FHLMC was created in 1970 to expand the secondary market for mortgages in the US. Along with Fannie Mae, Freddie Mac buys mortgages on the secondary market, pools them, and sells them as a mortgage-backed security to investors on the open market. This secondary mortgage market increases the supply of money available for mortgage lending and increases the money available for new home purchases. The name, “Freddie Mac”, is a variant of the initialism of the company’s full name that had been adopted officially for ease of identification.

On September 7, 2008, Federal Housing Finance Agency (FHFA) director James B. Lockhart III announced he had put Fannie Mae and Freddie Mac under the conservatorship of the FHFA (see Federal takeover of Fannie Mae and Freddie Mac). The action has been described as “one of the most sweeping government interventions in private financial markets in decades”.[4][5][6]

Moody’s gave Freddie Mac’s preferred stock an investment grade rating of A1 until August 22, 2008, when Warren Buffett said publicly that both Freddie Mac and Fannie Mae had tried to attract him and others. Moody’s changed the credit rating on that day to Baa3, the lowest investment grade credit rating. Freddie’s senior debt credit rating remains Aaa/AAA from each of the major ratings agencies Moody’s, S&P, and Fitch.[7]

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As of the start of the conservatorship, the United States Department of the Treasury had contracted to acquire US$1 billion in Freddie Mac senior preferred stock, paying at a rate of 10% per year, and the total investment may subsequently rise to as much as US$100 billion.

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Mortgage Crisis Explained: Finance System, Fannie Mae, Freddie Mac, Global Markets (2015)

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Mortgage Crisis Explained: Finance System, Fannie Mae, Freddie Mac, Global Markets (2015)
financial crisis 2008 explained
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21 thoughts on “Mortgage Crisis Explained: Finance System, Fannie Mae, Freddie Mac, Global Markets (2015) financial crisis 2008 explained”

  1. VIRTUALLY ALL THE MORTGAGES ARE FRAUDULENT. SO HARDLY ANYONES GOT ANY STANDING. UNLESS YOU HAVE CARETAKER RIGHTS AND YOUVE LOOKED AFTER A PROPERTY IN REAL LIFE. UP KEEP ETC. OR IF YOUVE GOT A MORTGAGE WRITTEN IN CORRECT SENTENCE STRUCTURE. (EXETRMELY RARE)

  2. Just watched this, not sure what the current situation is. the lawsuits are a calculation by the Hedge Fund Managers that they will make more money from getting Fannie and Freddy to share it's profits than the legal costs of that court fight will be.

  3. In a vacuum, I agree that the cult of home ownership is a problem, and leads people to make decisions that may not be what is best for them.

    However, outside of the housing bubble popping, the general trend is for the cost of homes to always increase. And when the cost of homes increase, so does rent. I have never known a time when rent in most metropolitan areas are not consistently increasing (with occasional downturns, of course). Home ownership provides stability, and is often the only way many working class and middle class Americans can avoid being priced out of where they live.

    Increasing housing prices, in general, is a largely unavoidable economic force. As an individual, there isn't anything you can do about it. You can only control how you react to it and whether you get some benefit from it (by owning a home) or not.

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