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Essentially?
Not too long ago, when you took out a mortgage, you were lended money by a private local bank for that. The net effect was, for banks, mortgage entailed taking on huge liabilities (for their size) and consequently standards for a mortgage were high.
What Fannie Mae originally was created to do was to buy up, either bonds issued on these debts or, later, the mortgages themselves. Fannie Mae received a different, and preferential rate as compared to most banks. So they could make money off the difference in interest.
This allowed banks to off-load liabilities and continue to issue mortgages, adding liquidity to the US economy.
What happened is Wall Street eventually got the bright idea to, basically, get in the same business as Fannie Mae and Freddie Mac. They began buying up mortgages from banks and begin selling shares in the debt.
The problem is it basically took all of the liability off the individual banks. They were dumping mortgages on the market place as soon as they were issued. Banks were accuring no liability and consequently had no reason to stop issuing mortgages.
Without any sort of natural breaking mechanism on the issuing of mortgages, banks got more and more "adventurous" in terms of who they loaned too. Standards dropped and more and more marginal people got mortgages. Why not? It wasn't the banks problem, they'd sell it off to the financial and be free of it.
The net result was the so-called "Real Estate bubble". Because you had all of these new buyers flooding the market with bigger price ranges then they would have historically had, housing prices started jumping all over the country. At some point however things simply got too outrageous. At some point people stopped buying in shares to the more marginal CDO's (Collateralized Debt Obligation), which meant financials stopped buying up bank issued mortgages, which meant banks were suddenly stuck with the most marginal of mortgages.
Suddenly there was a dramatic drop in the flow of people entering the housing market, which meant prices dropped, which meant people counting on the equity of their home were suddenly in trouble.
People began to default, banks got in trouble because they had all of these marginal mortgages they could no longer sell, financials got in trouble because they had all of this acquired debt no one wanted to invest in anymore, and voila, the current crisis.
At least, that's how I understand what happened
Not too long ago, when you took out a mortgage, you were lended money by a private local bank for that. The net effect was, for banks, mortgage entailed taking on huge liabilities (for their size) and consequently standards for a mortgage were high.
What Fannie Mae originally was created to do was to buy up, either bonds issued on these debts or, later, the mortgages themselves. Fannie Mae received a different, and preferential rate as compared to most banks. So they could make money off the difference in interest.
This allowed banks to off-load liabilities and continue to issue mortgages, adding liquidity to the US economy.
What happened is Wall Street eventually got the bright idea to, basically, get in the same business as Fannie Mae and Freddie Mac. They began buying up mortgages from banks and begin selling shares in the debt.
The problem is it basically took all of the liability off the individual banks. They were dumping mortgages on the market place as soon as they were issued. Banks were accuring no liability and consequently had no reason to stop issuing mortgages.
Without any sort of natural breaking mechanism on the issuing of mortgages, banks got more and more "adventurous" in terms of who they loaned too. Standards dropped and more and more marginal people got mortgages. Why not? It wasn't the banks problem, they'd sell it off to the financial and be free of it.
The net result was the so-called "Real Estate bubble". Because you had all of these new buyers flooding the market with bigger price ranges then they would have historically had, housing prices started jumping all over the country. At some point however things simply got too outrageous. At some point people stopped buying in shares to the more marginal CDO's (Collateralized Debt Obligation), which meant financials stopped buying up bank issued mortgages, which meant banks were suddenly stuck with the most marginal of mortgages.
Suddenly there was a dramatic drop in the flow of people entering the housing market, which meant prices dropped, which meant people counting on the equity of their home were suddenly in trouble.
People began to default, banks got in trouble because they had all of these marginal mortgages they could no longer sell, financials got in trouble because they had all of this acquired debt no one wanted to invest in anymore, and voila, the current crisis.
At least, that's how I understand what happened
