U.S. Central Bank Response to the Financial Crisis and Great Recession
As previously noted, the 2007–2008 financial crisis and the 2008–2009 Great Recession combined to create a “perfect financial storm.” Many government officials, politicians, financial institution executives, and business professionals felt during the midst of the financial storm that both the U.S. and world financial systems were on the verge of collapse in 2008. The Federal Reserve System (Fed), the central bank of the United States, is responsible for setting monetary policy and regulating the banking system. Direct actions and involvement by the Fed were critical in government and related institutional efforts to avoid financial collapse.
The federal government has historically played an active role in encouraging home ownership by supporting liquid markets for home mortgages. If banks and other lenders originate home mortgages and then “hold” the mortgages, new mortgage funds are not readily available. However, when banks and other lenders are able to sell their mortgages in a secondary mortgage market to other investors, the proceeds from the sales can be used to make new mortgage loans. In 1938, the president and Congress created the Federal National Mortgage Association (Fannie Mae) to support the financial markets by purchasing home mortgages from banks and, thus, freeing‐up funds that could be lent to other borrowers. Fannie Mae was converted to a government‐sponsored enterprise (GSE), or “privatized,” in 1968 by making it a public, investor‐owned company. The Government National Mortgage Association (Ginnie Mae) was created in 1968 as a government‐owned corporation. Ginnie Mae issues its own debt securities to obtain funds that are invested in mortgages made to low to moderate income home purchasers. The Federal Home Loan Mortgage Corporation (Freddie Mac)was formed in 1970, also as a government‐owned corporation to aid the mortgage markets by purchasing and holding mortgage loans. In 1989, Freddie Mac also became a GSE when it became a public, investor‐owned company.
Ginnie Mae and Fannie Mae issue mortgage‐backed securities to fund their mortgage purchases and holdings. Ginnie Mae purchases Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) federally insured mortgages, packages them into mortgage‐backed securities that are sold to investors. Ginnie Mae guarantees the payment of interest and principal on the mortgages held in the pool. Fannie Mae purchases individual mortgages or mortgage pools from financial institutions and packages or repackages them into mortgage‐backed securities as ways to aid development of the secondary mortgage markets. Freddie Mac purchases and holds mortgage loans.
Melicher, R. W., Norton, E. A. (2017). Introduction to Finance: Markets, Investments, and Financial Management, Enhanced eText, 16th Edition. [Strayer University Bookshelf]. Retrieved from strayer.vitalsource.com/#/books/97811193..
What was the major role the Fed played to the mortgage crisis of the 2008.
What are mortgage backed securities. Visit the following site and explain.