Fannie Mae and Freddie Mac’s March into Subprime Mortgages

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2009
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Haverford College. Department of Economics
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Award
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eng
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Open Access
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Abstract
This study investigates the series of events that led to Fannie Mae and Freddie Mac expanding their lines of business into the risky subprime mortgage market. Faced with competition from commercial banks and pushed to expand their purchases of low income and minority mortgages in order to fulfill their affordable housing goals, in 2005 the mortgage giants began making investments in the riskiest portion of the United States housing market. The riskiest assets they guaranteed were refinance mortgages borrowed by low income Hispanics and African Americans in underserved areas. There is also some incidence of the Government Sponsored Enterprises investing in mortgages in which the borrower leveraged his income to unsafe loan levels. Faced with a falling housing market, losses on these guaranteed mortgage assets forced the United States Treasury Department to take the GSEs into conservatorship on September 7, 2008.
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