Mortgage Essay Example for Free

Mortgage Essay 1. In 1932, the federal government’s intervention in the market for home ownership was desirable. Not only was it desirable, but it was needed. It has been the federal government’s desire to have every American become a part of the American dream and be a homeowner. In 1932 President Hoover signed the Federal Home Loan Bank Act to establish a series of discount banks for home mortgages. This would assist in increasing the likelihood of Americans owning a home and not feeling that they were restricted because of financial pressures. Fannie Mae, Ginnie Mae, Freddie Mac were created to help bail out banks that had a growing number of defaults in mortgages. These three enterprises made it possible for banks to offer mortgages to riskier clients who normally would not qualify. This greatly expanded homeownership. It also shaped lending practices at banks and other mortgage lending firms by creating new forms of financing and creating the market of secondary mortgages. 2. Why did the U.S. Congress enact:Â  * Community Reinvestment Act – passed in 1977 requiring banks to lend in the low income neighborhoods * Mortgage Disclosure Act – passed in 1975 to provide the public with loan data that can be used to determine whether or not financial institutions are serving the needs of their community, identify possible discriminatory lending patterns and make this data publicly available * Depository Institution Deregulation and Monetary Control Act – passed in 1980 to provide gradual elimination of limitations on the rates of interest payable on deposits and accounts; authorize interest bearing accounts * Housing and Community Development Act – amended to create section 8 housing These methods were effective in expanding homeownership by making it easier and providing greater methods to become a homeowner. The government’s promotion of subprime mortgages created more problems that assistance. It was the initial cause of the 2008 financial crisis due to the rise in delinquencies and foreclosures. Basically many people were approved for houses that were not financially stable or capable of the long term obligation of buying a home. As subprime lending expanded, so did the crisis due to the over-regulation, deregulation and failed regulation that the government brought on. 3. Subprime mortgages made a contribution to the housing bubble. Since there were several more individuals approved to purchase homes, the demand for houses increased. This demand created many financial institutions and creditors to attempt to make a profit by approving loans, selling or enforcing short term buying. Once people got caught up in homeownership, but were beyond what they could afford and interest rates as well as lending practices went bad, the demand decreased, which resulted in a surplus, reduction of prices, rise in interest rate and the bubble burst. Borrowers will struggle with financing the purchase of a house, loan originators suffer from debt , MBS will suffer since the cash flow is not know in advance, the MBS investors may not receive payment and CDO holders because of the use of reserve funds due to the lack of incoming cash flow.