What Is The Cause Of Fannie Mae's Financial Crisis

When the Financial Crisis hit in 2008, Fannie Mae encountered many financial problems because they held about $47 billion in subprime mortgages which were not backed by the federal government. When the subprime mortgages defaulted, they were left with property that held a low value and they were unable to issue bonds to. By the second half on 2007, Fannie Mae and Freddie Mac combined a net loss of $8.7 billion (Frame, Scott W., et al, 32). As you can imagine, investors became concerned with the amount of money they had in Fannie Mae. The government urgently proposed a plan which included passing the Housing and Economic Recovery Act. This gave the US treasury temporary unlimited investment in Fannie Mae. Eventually, the government took

When home prices fell, Fannie Mae had no other sources of income to compensate for the bad economic market. Their financial performance needed to improve to support the housing market, however they were unable to do so. Additionally, Fannie Mae created a natural monopoly and this created a problem for the company during the crisis (Reiss, David. 913). In a journal published by David Reiss he says, “Fannie and Freddie share a key characteristic in common with government-granted monopolies: a legally created and overwhelming competitive advantage in a particular market, which translates into higher prices for consumers than would exist if Fannie and Freddie did not retain a portion of their economic rent for themselves.” Fannie Mae sponsored an enormous amount of the mortgage market, which increased their risk to fail during the crisis (Reiss, David.

The goal was the underlying cause of Fannie Mae’s monopolization. HUD wanted to establish affordable housing in each separate area which would require at least 42% of the mortgages be issued to borrowers whose household income was below the median for that area (www.stat.unc.edu, pg.13). One published article says, “This target was increased to 50% in 2000 and 52% in 2005. By 2008, Fannie Mae and Freddie Mac owned, either directly or through mortgage pools they sponsored, $5.1 trillion in residential mortgages, about half the total U.S. mortgage market” (www.stat.unc.edu, pg.13). Although it is good to set goals and these numbers may look good, in hindsight, HUD was turning Fannie Mae into a monopoly, and put them at a greater risk when the housing market crashed. Combined, Fannie Mae and Freddie Mac dropped from $175 billion in purchases of subprime securities to $90 billion per year (www.stat.unc.edu,