The Financial Crisis of 2008 has been attributed to various entities or regulations. While most of these conjectures make valid points, attributing such an immense series of events to just one or two entities or regulations is benighted. Arguably, what set the precedence for the ensuing crisis is influenced by who you ask but, a case can be made for the most apparent events that did impact the crisis. The names Fannie Mae, Freddie Mac, CRA (Community Reinvestment Act 1977), and AIG are just a few among all the conceivable notions.
A Lost Beginning
Where the 2008 Financial Crisis truly begins is hard to pinpoint. The numerous agencies and regulations involved all played a key role at different times and even those not directly involved, way …show more content…
Fannie was developed by President F. Roosevelt in 1938 as part of the New Deal; Freddie came in 1970 to prevent a monopoly with just Fannie running the market. (cite TImes) Essentially, both do the same, and the process flowed well for many years, banks made loans, Freddie and Fannie bought them, securitized them into a mortgage-back securities (MBS) and investors purchased these securities. They also provided a method of diversification for both investors and banks because MBS were geographically diversified. This was a big plus because it removed the risk of owning loans in a concentrated area and an unforeseen detrimental event occurring in that market, investors would be at a huge risk and loss. At this point lending practices were pretty simple, you were given a loan if you could afford it. (cite Michael) Freddie and Fannie had been successful for the most part; Fannie had a period of …show more content…
They decided to revert back to the Community Reinvestment Act of 1977 (CRA), to help push through their agenda to expand loans to minorities and lower income families. CRA was implemented to stop redlining districts and open up opportunities for those lower income families trying to procure a loan. It can be argued and has, that lenders were not violating CRA, they simply were being cautious to who they lent to, people they believed could afford the loans. The demand for loans to be extended to people at an economic disadvantage became great, so much so it would become a requirement for banks to allocate funds specifically to these sub-prime mortgages. Sub-prime mortgages were given to those individuals with a poor credit history and came with a higher interest rate than a conventional mortgage. This opened the doors for banks to take even more risks. Some of the problems we started to see arise because of these mortgages is what led to the snowball of the crisis, along with the fact that these mortgages were not the best quality. To instigate the trend, banks started lending to lower income families, as the pressures from regulators continued, banks found themselves relaxing their lending stipulations more and more. There were multiple vast problems with this, first - the quality of loans just kept deteriorating, second – this would lead to
A Lost Beginning
Where the 2008 Financial Crisis truly begins is hard to pinpoint. The numerous agencies and regulations involved all played a key role at different times and even those not directly involved, way …show more content…
Fannie was developed by President F. Roosevelt in 1938 as part of the New Deal; Freddie came in 1970 to prevent a monopoly with just Fannie running the market. (cite TImes) Essentially, both do the same, and the process flowed well for many years, banks made loans, Freddie and Fannie bought them, securitized them into a mortgage-back securities (MBS) and investors purchased these securities. They also provided a method of diversification for both investors and banks because MBS were geographically diversified. This was a big plus because it removed the risk of owning loans in a concentrated area and an unforeseen detrimental event occurring in that market, investors would be at a huge risk and loss. At this point lending practices were pretty simple, you were given a loan if you could afford it. (cite Michael) Freddie and Fannie had been successful for the most part; Fannie had a period of …show more content…
They decided to revert back to the Community Reinvestment Act of 1977 (CRA), to help push through their agenda to expand loans to minorities and lower income families. CRA was implemented to stop redlining districts and open up opportunities for those lower income families trying to procure a loan. It can be argued and has, that lenders were not violating CRA, they simply were being cautious to who they lent to, people they believed could afford the loans. The demand for loans to be extended to people at an economic disadvantage became great, so much so it would become a requirement for banks to allocate funds specifically to these sub-prime mortgages. Sub-prime mortgages were given to those individuals with a poor credit history and came with a higher interest rate than a conventional mortgage. This opened the doors for banks to take even more risks. Some of the problems we started to see arise because of these mortgages is what led to the snowball of the crisis, along with the fact that these mortgages were not the best quality. To instigate the trend, banks started lending to lower income families, as the pressures from regulators continued, banks found themselves relaxing their lending stipulations more and more. There were multiple vast problems with this, first - the quality of loans just kept deteriorating, second – this would lead to