Refund or Bail Out; Freddie and Fannie Has To Go

            On the 10th of August 2013 President Obama conducted a weekly addresses titled, "A Better Bargain for Responsible, Middle Class Homeowners."  In his address, he spoke of progress and improvements being made in the housing market which in the long run will aid in strengthening the U.S. economy.  A key point that was made but not expanded upon was winding down on companies like Fannie Mae and Freddie Mac.  In order to strengthen the housing market, Fannie Mae and Freddie Mac must be eliminated.

            Fannie Mae and Freddie Mac showed little responsibility when gambling with American taxpayers' money through subprime loan lending practices.  A subprime mortgage is a type of mortgage that is normally made out to borrowers with low or poor credit ratings who do not qualify for a regular conventional mortgage.  The borrower would be seen as a high risk of defaulting on the loan and given a different criteria to qualify.  High risk individuals are those individuals with a high debt to income ratio, individuals with poor credit, or unstable fluctuating incomes.  In order to compensate for the risk, these individuals were subjected to higher interest rates and additional fees tacked on to their loan.  Fannie Mae and Freddie Mac made these loans possible for individuals seen as high risk borrowers by providing local banks with federal money to finance home mortgages in an attempt to raise levels of home ownership and the availability of affordable housing.  Essentially they made it easier to purchase a house.  This does not sound that bad but the truth is, not everyone can afford the house he or she desires.  In an interview on BBC at 2100 BST on September 10, 17, and 24, (2009, rebroadcasted) Alan Greenspan, Chairman of the Federal Reserve of the United States from 1987 to 2006, stated:

            I have changed my mind about deregulation.  The crisis on the financial 
            industry’s inability to monitor  itself was ‘‘speculative excesses’’ and a normal function 
            of capitalism. I contributed  much  of the problem to human nature: ‘‘It’s human nature, 
            unless somebody can find a way to change human nature, we will have more crises and 
            none of them will look like this because no two crises have anything in common, 
            except human nature. 

The human nature element is what drove both lender and borrower to act in the way which they did.  The borrower saw a opportunity to get something he or she wanted and the lender saw an opportunity to make a profit.   At first glance this did not seems to be a poor plan, assuming borrowers would make good on their loans, but this created more of a demand for housing which ultimately led to inflated home prices.  In addition, lenders began to ignore the high risk and felt safe because they were using government funds instead of their own to cover bad mortgages.  As a result, they lessened some qualification requirements and waived other criteria because they knew Fannie Mae and Freddie Mac assumed the greatest risk.  This became the norm.  Lender approved more high risk loans and even solicited individuals to purchase new homes or refinancing his or her current loan to gain access to the home's escrow or equity. Lenders were guaranteed more money and still assumed no additional risk.  

            Fannie Mae and Freddie Mac assumed all risk associated with subprime lending practices.  They bought mortgages on the secondary market, pooled the loans together,  and sold them as a mortgage backed securities to investors on the open market.  The secondary mortgage market increases the supply of money available for mortgage lending and increases the money available for new home purchases.  Ordinarily this provided Fannie Mae, Freddie Mac, and other investors with a great return on their investment but as borrowers began to default on their loans, Fannie Mae and Freddie Mac were obligated to cover the losses even if it meant a government bailout at the cost of U.S. taxpayers.  The question we all now have to ask is do we want another bailout?

                                                        Works Cited

Hansen, Laura L., and Siamak Movahedi. "Wall Street Scandals: The Myth Of Individual  

            Greed." Sociological Forum 25.2 (2010): 367-374.