A partial breakdown of the economic crisis

Michelle Amaral

News Editor

 

Since the 1930s, one facet of the American Dream has been the ability of a person to own a home. Due to the Great Depression, though, many people could not afford to buy a home and, moreover, numerous private banks had failed and so were unable to make loans.

 

In 1938, the Federal National Mortgage Association, now known as Fannie Mae, was created as a type of guarantee to private banks that the money they loaned to the public would in turn be ‘reimbursed’ by this new agency. In this way, private banks could make more loans with essentially nothing to lose since they simply turned around and sold these mortgage loans to Fannie Mae. Over time, however, banks became sloppy in their determination of good loan candidates.

 

At its creation, Fannie Mae was an entity controlled by the government. Today, both Fannie Mae and its identical replica, Freddie Mac, are government sponsored enterprises. Their money is made in the same manner as other privately owned companies on Wall Street, but in the event that these two go bankrupt, the federal government has previously pledged to bail them out.