For those of you who aren’t clear on the details, heres a "dumb down" explanation of the fannie mae and freddie mac takeover explanation. Its pretty straightforward, and before reading you should read up on what a bond is if you don’t already know.
Bond Definition: (read the first paragraph alone and you’ll understand.)
In a nutshell, the “real estate bubble" burst and the value of homes plummeted. This caused interest rates for loans from banks to soar, and those families that barely made payments were now facing mortgage defaults. Millions of people couldn’t afford the new mortgage payments, which *had* the cost of essential commodities not soared along with the cost of gasoline AND healthcare, millions of people would have had a few more dollars to pull out of their pockets for their homes. This rule is applied across the board to millions of homeowners. Well we all know that when you buy a home it’s a mutual risk between you and the bank. However all the risks the bank takes with millions of people is indirectly propagated to financial institutions like Freddie Mac and Fannie Mae. They in turn will go out and sell bonds to raise the money for those loans to overseas and domestic investors.
Problem is that banks took in way too much risk, which indirectly eroded fannie and freddie with concerns over its financial integrity. Can a single company take in 5 trillion dollars of debt? This makes foreign and domestic investors alike think twice about buying bonds from fannie and Freddie. These concerns together with the 5 trillion dollars in debt started to slowly affect the influx of investors buying bonds from fannie and Freddie. This in turn forced fannie and Freddie to raise interest rates on the banks loans to still be able to raise money for future loans, which then in turn forced banks to raise interest rates on homeowner’s loans to still make a profit. That means they began pinching the people whom were already suffering from financial instability caused by the rising cost of living (gas, food, healthcare to name a few). End result, fannie and Freddie would have gone down the drain and the cost of living would have soared over night even further because banks would not have had a stream of cash flow to pay for the crucial roles they fill in our economy. Could this have been avoided? Sure, if we had someone who knows how to run the economy leading us.
Heres a great CNN money article that explains how we got to where we are regarding Freddie Mac and Fannie Mae.
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