The Federal Government has stepped in to rescue two major mortgage lenders in an effort to stabilize the housing market and prevent a financial collapse. The lenders, Fannie Mae and Freddie Mac, were taken over by the government in September 2008, after years of risky lending practices and mounting losses. The move was seen as a necessary step to prevent a total collapse of the housing market, which would have had catastrophic effects on the economy as a whole.
Who are Fannie Mae and Freddie Mac?
Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that were created to provide liquidity to the mortgage market. They do this by purchasing mortgages from lenders and then packaging them into securities that are sold to investors. This frees up capital for lenders to make more loans, and allows investors to invest in the mortgage market without having to directly own individual mortgages.
Over time, Fannie Mae and Freddie Mac became major players in the mortgage market, and their actions had a profound impact on the housing market as a whole. They were able to do this because they had the implicit backing of the government, which allowed them to borrow money at lower rates than other lenders.
The Risky Lending Practices
However, this implicit backing also allowed them to engage in risky lending practices, such as issuing mortgages to people with poor credit histories, and packaging these high-risk mortgages into securities that were sold to investors. When the housing market began to decline in 2006, many of these mortgages began to default, and the value of the securities plummeted.
This put Fannie Mae and Freddie Mac in a precarious position, as they had borrowed heavily to finance their operations and were now facing mounting losses. Their collapse could have had disastrous effects on the economy, as it would have led to a credit crunch and a collapse of the housing market.
The Government’s Response
In response to this crisis, the government stepped in to rescue Fannie Mae and Freddie Mac. The Federal Housing Finance Agency (FHFA) was created to oversee their operations, and the Treasury Department injected billions of dollars into the companies to prevent their collapse.
These efforts were successful in stabilizing the housing market and preventing a financial collapse. The government’s actions also had the effect of restoring confidence in the mortgage market, as investors saw that the government was willing to step in to prevent a collapse.
The Long-Term Effects
The long-term effects of the government’s intervention in the mortgage market are still being felt. Fannie Mae and Freddie Mac are still under government control, and there is ongoing debate about the appropriate role of government in the mortgage market.
Some argue that the government should continue to provide liquidity to the market, while others believe that the government should exit the market and let private lenders compete on an equal footing. There is also ongoing debate about how to prevent the risky lending practices that led to the crisis in the first place.
Conclusion
The government’s intervention in the mortgage market was a necessary step to prevent a financial collapse and stabilize the housing market. While the long-term effects of this intervention are still being felt, it is clear that the government’s actions prevented a much worse outcome. Going forward, there will be ongoing debate about the appropriate role of government in the mortgage market, and how to prevent another crisis from occurring.