Also known as the “House Boom and Bust”, the “bubble” referred to is the financial crisis of 2007, where the lax- lending of house mortgages led to a dire economic downturn. Banks, once lending out money and expecting that money to come back to them, decided to sell off the mortgages to investment companies as a way to generate profit: the more mortgages they sold, the more profit they would make. Banks could care less if the borrowers returned the loan, which led to banks opening up their range of borrowers; they began to accept sub-prime lenders, who had a larger risk for default. These borrowers did indeed default, causing the once steeply rising house prices to dramatically fall. The effects of the financial crisis of 2007 are stilling being felt today, even seven years later.
For a more detailed explanation of the financial crisis, see: https://www.youtube.com/watch?v=bx_LWm6_6tA
The onset of the economic downturn was also brought about by the downfall of prestigious housing companies, most famously Lehman Brothers. Of them, Fannie Mae and Freddie Mac place as one of the earlier companies to almost file bankruptcy. Yet, even after this ordeal, Fannie Mae is coming back with a quite controversial action.
As the economy is steadily getting better, the government is seeking to bring more people into the housing market. It was revealed that Fannie Mae planned to expand the availability of mortgages through easing its existing rules and means of offering mortgages with low down payments. According to the chief executive of Fannie Mae, Timothy J. Mayopoulos, Fannie Mae’s low down payment mortgages will offer the same loans to the borrower as any other program under the government. It seems like the government has no conflicts with this plan, as it has already begun moving ahead with the changes.
These recent changes have given rise to certain concerns among some housing analyst who contend that Fannie Mae’s actions will possibly lead to another financial crisis like the one in 2007. But, are they the only ones to be concerned? It’s true that the government approved these actions to stimulate the housing industry, but have they considered the possibility of this causing another housing boom and bust?
As people who will be affected by the possible crisis, it is only in our best interest to be aware of such issues. The financial crisis of 2007 was proven to be avoidable: if we were aware of the effects of low down payment mortgages and not blinded by the only rising house prices, we could have stopped the creeping financial crisis. And if we raise cautions of actions similar to those of Fannie Mae’s, we could possibly prevent another financial crisis.