Understanding The 2008 Financial Crisis Through The Housing System And Why The Conservatorship3/1/2017 Primary Roles Of Fannie Mae and Freddie Mac Before Financial Crisis:
As per the FHFA, the agencies’ missions were to ultimately help ensure the “safety and soundness” of capitalization through: (1) Providing stability for housing market by raising and maintaining capital and (2) providing liquidity to the housing market. As per the FHFA, the responsibilities of Fannie Mae and Freddie Mac now are: (1) Support stable funding for the housing and mortgage markets and (2) Expand opportunities for homeownership and affordable rental housing. Reasons Behind Conservatorship and Takeover: 1. The decrease of house prices, earnings, and capital had deteriorated the agencies' capacity of capital, to “absorb losses, while supporting new business activity”. 2. The agencies pervasive weaknesses of the FHFA’s rating system called “GSE Enterprise Risk”, which stands for Governance, Solvency, Earnings, and Enterprise Risk. This rating system measures the credit, market, and operational risk. 3. Market Conditions exasperated the progress of the agencies to rectify their accounting, systems, controls, and risk management issues. 4. Reviews of stress tests, projections, and forecasts show alarming valuations from the continual effects of falling prices. Takeaway: Before the Crisis: The Government Sponsored Enterprises (GSE) Fannie Mae and Freddie Mac acted as intermediaries between investors and lenders of mortgages. The agencies would collect funds from the investors and transfer it to the lenders. The lenders would then loan out the money to the investor, while simultaneously sending the mortgage back to Fannie Mae and Freddie Mac. Both agencies would bundle and securitize the pool of loans through Mortgage Back Securities (MBS), which means that if an investor invests in this security, they were ultimately lending money to a home buyer or business. As a result, the market was providing capital, while the bank served as the “middleman”. Therefore, the agencies helped redirect the principal and interest payments from the pool of mortgages back to the shareholder. After the Crisis: The FHFA needed to reestablish the “balance between safety and soundness”, to effectively stabilize operations. As a result, they needed to “restore confidence, enhance capacity to fulfill the agencies’ (Fannie Mae’s and Freddie Mac’s) missions, and mitigate the systematic risk”, which had been a direct result from the previous credit market conditions. Ultimately, the fundamentals of investors’ credit worthiness were calculated incorrectly, leading to poor principle execution.
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