Subprime Lending Essay

1818 Words Jan 13th, 2014 8 Pages
Subprime Lending

Discuss in detail the event, the people involved, and its background and impact of America.
Before 1930, features of Housing loans presented significant challenges. To obtain a home loan a down payment of half the value the house was required. Further issues with these loans were large balloon payments and short maturities. The pricing for mortgage loans varied widely due to no nationwide housing market. The main funding for these loans was provided by life insurers, thrifts, and commercial banks.
By 1932, a housing crisis was wreaking havoc on home loans. The estimated defaulted loans were rising to twenty –five percent. In response to this crisis, the FHL Bank System was designed to provide relief to lending
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Freddie Mac was formed to keep Fannie Mae from functioning as a monopoly by purchasing private mortgages. Freddie Mac mirrored Ginnie Mae in the fact that mortgages were bundled as mortgage-backed securities to investors. This was done to generate funds back to the secondary market. Freddie Mac focused on decreasing the interest rate risk by passing it to the investor, while Fannie Mae was responsible for ballooning the risk. In 1974, the Equal Opportunity Credit Act was created to enforce lenders to not discriminate against things like race, religion, sex, age and more. Another act was passed in 1977 to further encourage lenders to approve loan to minority groups. This was called the Community Reinvestment Act.
In the late1970’s and early 1980’s, there were many inflations, recessions and rises interest rates. These events affected Fannie Mae more than Freddie Mac because of their differences in lending practices. A large financial strain was put on Fannie Mae. During this period, they received assistance from the federal government through tax benefits and regulatory forbearance.
Over the next twenty years, many changes took the lending system down to new lows until the economy-hit rock bottom in 2007. The serious subprime crisis began in June of 2007 when two Bear Stearns hedge funds collapsed. This had a rapid effect on other parts of the financial markets worldwide, which reached the crisis level and the number of foreclosures for sale in

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