Fannie Mae and Freddie Mac
The mortgage market starts when a bank issues a lone to the borrower. But that loan is a liability, so the banks often sell the mortgage at a profit.
“That’s just basic practice,” said Rob Hamm, a former commercial real-estate broker working during the housing bubble.
Fannie Mae and Freddy Mac were established by Congress to insure those resold loans.
“All loans have a rating, double-A, triple-A – B, C. It goes way down,” Hamm said. “What happened were the loans that Fanny and Freddy were insuring were B loans.”
Investors often buy “pools” of B and C loans, assuming that some would default, but that others would survive. A pool of B loans are seen a s AAA loan in the mortgage market.
“Then, Fanny and Freddy would insure those loans, and what happens when those loans start defaulting, the people who were the investors of that loan started going to Fannie and Freddy saying ‘hey. Give us the money,’” Hamm said.
During the Clinton administration, Fannie Mae and Freddy Mac were told to ease restrictions on what loans they would insure, Hamm said.
“They wanted people in these homes who couldn’t afford it,” he said.
When the housing bubble popped, all the B loans started defaulting at once.
In 2008, as these two institutions were in danger of sinking beneath the flood of insurance claims, the federal government placed them under its control and backing.