National Mortgage Association

National Mortgage Association

America put in place an elaborate institutional framework of government sponsored enterprises (GSE) to champion the cause of the housing. Fannie Mae was created to issue bonds and use the funds to buy mortgages from savings and loans. In 1968, Fannie Mae was split into Government National Mortgage Association (Ginni Mae) to serve poor borrowers, as war veterans and redefined Fannie Mae, which act as private property, government sponsored enterprise can be purchased conventional and government guaranteed mortgages. Several years later, the Federal Home Loan Corporation Mortgage ("Freddie Mac") is formed. The Community Reinvestment Act of 1977, U.S. banks have come under government pressure to lend to poor minority communities. By the 1980s, relatively high inflation prevails, has provided a really good time for borrowers. Even as the real value of loans falling, property prices nearly tripled between 1963 and 1979. When the Fed began to tighten under Paul Volcker, in an attempt to reduce inflation, S & ls were at the receiving end. They were losing money in the long term fixed mortgages due to inflation and at the same time loss of fixed deposits to higher interest paying money market funds. S & LS are given freedom to invest in various instruments. At the same time, their deposits are insured. This gave rise to the moral hazard problem. Many S & ls failed because of reckless lending. The final price of the S & L crisis between 1986 and 1995 was $ 153.000.000.000 or 3% of GDP to which taxpayers had to foot $ 124.000.000.000. This is the most expensive financial crisis since the Depression.