It Was Fannie and Freddie! (Part-1)

An argument often made about the financial crisis of 2008 is that due to Fannie Mae and Freddie Mac lending out copious amounts of subprime mortgage loans and those people defaulting on said loans, the entire financial system collapsed. Considering that these companies were bailed out by the government and were Government Sponsored Enterprises, advocates of the free market had an instantaneous scapegoat in the form of the government. Couple that with the Community Reinvestment Act, (even though this Act was instituted in the 70's) which told banking/financial institutions that they needed to service moderate and low income families as well, and you have a full fledged laissez faire proponents dream.

For Part-1 of this series I will tackle on how Fannie and Freddie distributed loans, and how private mortgage lenders, commercial banks, and investment banks did the bulk of the distributing. To begin, Fannie and Freddie do not actually give loans. Rather they purchased them from lending institutions so that those institutions could then buy more mortgages; this naturally helped with the pricing of the mortgage loans. This immediately takes them out of the category of now infamous mortgage lenders like Countrywide.

Naturally people who took these loans are not completely innocent, but considering that most people are not business majors, the people who distributed these loans and knew that these loans were not what would traditionally be known as "safe," and still chose to distribute them, should share the bulk of the blame. The top 25 subprime mortgage lenders lent out almost 1 TRILLION dollars worth of these loans. Lenders that include Countrywide, Merrill Lynch, JP Morgan Chase, Bank of America, Wells Fargo, Morgan Stanley, and Lehman Brothers among many others.

These were the major players that were involved in the 2008 crisis. In Part-2, I will discuss why there was a severe lack of responsibility between all of the financial firms and how this lack of responsibility allowed the crisis to manifest.