The True Cause of the Subprime Meltdown
Here is the funniest explanation I have seen:
“I … lay the blame at the feet of Fannie Mae and Freddie Mac (and their congressional cronies), whose unchecked growth into second mortgages, subprime loans and many other assets — not to mention their continued creep into the upper echelons of the home-mortgage industry through their current lending limit of $417,000 — has pushed other mortgage-market participants further out on the risk spectrum in search of a livelihood.”
Penner, Ethan. 2007. “Fannie, Freddie and the Housing Bust.” Wall Street Journal (16 August): p. A 11.
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Given that FNMA and Freddie Mac don’t purchase subprime loans, I think it is pretty funny as well.
Consumers, not Fannie/Freddie, drove the price of houses up. They are the ones that started buying not one, but multiple “investment” properties to flip and sell. This flamed housing prices to the point where once affordable homes now cost hundreds of thousands.
Fannie/Freddie are obliged by the government to sell a certain number of “afforadable loans.” That is, they need to make sure that people making $X income can borrow money and live the American dream.
However, the allowable borrowing price was too low given the sky-rocket prices which a) Allowed Countrywide to out-compete Fannie by offering riskier products (i.e. subprime) to people that wnated to get into these once affordable loans. b) Once the government increased the spending limit, then more people were able to access Fannie’s safe products (i.e. 30-year fixed, which are NOT the cause of the current recession) however they already lost lots of market share to Countrywide because people thought the subprime loans were a better deal (pay nothing up front, low monthly payments….at first). So, Fannie/Freddie did what their shareholders demanded them to do–> COMPETE, by offering subprime.
Management’s flaw (and this is why the CEOs should have been fired) was to stray from the bread & butter product known to be safe. The flaw was in trying to compete with Countrywide by offering crude products. Losses mounted and the government had to step in.
The problem isn’t increasing the spending limit…it’s the fact that financially unsavy consumers demanded a product that was terrible for the long run health of the company AND fannie/freddie obliged by providing this product.
It’s like McDonald’s….consumers want fatty foods, so they offer the double Big Mac and consumers lose, then eventually McD loses bc/ the health effects of the burgers start creeping up and people learn to stay away from the fat.
Gene Klein—fannie and freddy DID purchase subprime loans, at least for a little while, but they joined the bandwagon late and left it early.