Fannie Mae and The Credit Crisis of 2008

Emergence of Mortgage Markets

• 1900 AD - Banks, thrifts , credit unions & Fixed Rate

Mortgages

• 1938 – Creation of Fannie Mae

• 1968 – New Aeon of Mortgage Enterprise Charters -

an attempt to raise levels of home ownership

The Privileges of GSE Status

• Implicit guarantee

• Market Perception

• Government sponsored monopoly

• Maintaining Monopolies through lobbying

Fannie mae’s growth

• Creation of liquid secondary market for

mortgages

• Aggressive investments in mortgages and

mortgage backed securities

Mortgagebroker

MBS’s issuer

Mortgage lending with Securitization

Bank Homeowner

Servicer

Investor

Mortgage Pool(MBS)

MortgageMortgage

broker

Bond payments

MBS

Monthly payments

Monthly payments

Link to S14

Financial innovation• Financial innovation by rival wall street

firmso ARMo Subprime Lending

• Rise in demand for sophisticated financial

products

• Fannie Mae follows the league

Mortgage Market Funda

Housing bubble burst

Fannie Mae’s road to insolvency

Fannie mae’s FNMA crashes and gets delisted

The Party Ends When Home Prices Stagnate and Fall

Mortgage security

meltdown

General credit crisis-

worldwide financial crisis

United States Congress held

responsible

Housing bubble burst

Link to S6

Conclusion: The U.S. Congress is Largely to Blame