What caused the Housing Bubble in the United States during the early 200s? Experts’ continuous debate on what the root of the cause is but Fannie Mae and Freddie Mac have less to do with it than you think. Fannie and Freddie backed about half of all the home-loan originations in 2002 but a new market for mortgage-backed securities were arising. Loan originators backed by Wall Street were straying away from selling the loans to Fannie and Freddie but creating their own mortgage backed securities with high-risk subprime mortgages. These would include something called a hybrid adjustable-rate mortgages with balloon payments which are nearly impossible to sustain without refinancing. It left Fannie and Freddie only backing up around 30% of the loans in 2005 and 2006.
The big players of Wall Street like Lehman Brothers and Bear Stearns would package the subprime loans into securities. The credit-rating agency would then rate them falsely-high so they can sell to investors who were unaware of the actual health of the security. Everyone saw how the housing prices were rising and didn’t see an end to it which made more investors want to jump into mortgage investments. When these securities were performing poorly, these securities weren’t backed by Fannie and Freddie so the infamous financial meltdown occurred.
The result of the financial crisis left many forced to foreclose on their home and losing their job. However, it also resulted in an increase of regulations for mortgage-backed securities. Most recently in December 2016, two government agencies created new regulations that require margins requirements for collateralized mortgage obligations (CMO). Always making new precautions will be key to avoid a similar crisis.