The Solution of New Century Financial Corporation

The mortgage crisis of 2007 marked catastrophe for millions of homeowners who suffered from foreclosure and short sales. Most of the problems involving the foreclosing of families’ homes could boil down to risky borrowing and lending. Lenders were pushed to ensure families would be eligible for a loan, when in previous years the same families would have been deemed too high-risk to obtain any kind of loan. With the increase in high-risk families obtaining loans, there was a huge increase in home buyers and subsequently a rapid increase in home prices. As a result, prices peaked and then began falling just as fast as they rose. Soon after families began to default on their mortgages forcing them either into foreclosure or short sales. Who was to blame for the risky lending and borrowing that caused the mortgage meltdown? Many might blame the company Fannie Mae and Freddie Mac, but in reality the entire system of buying and selling and free market failed home owners and the housing economy.

The Federal Government needs to make sure to enforce strict guidelines on who can and cannot be accepted for a home loan, and not allow big investors to borrow excessive money at low interest rates to inflate the investor’s financial advantage. If the government starts allowing lower standards on mortgages, we are going to end up in the same catastrophe once again. In an article written by U.S. News and World Reports entitled Should the Federal Government Provide Support to the Mortgage Market?, the Federal government and the President attempted to get involved with the housing market. The passage implicated that Obama wanted to do away with federally funded conglomerates Fannie Mae and Freddie Mac and implement another type of government assisted program ("Should the Federal Government"). The program would prevent the mistakes made by Fannie and Freddie which created the original “housing bubble burst” ("Should the Federal Government"). One of the Senate bills suggests the government create “a new agency, the Federal Mortgage Insurance Corporation to replace Fannie and Freddie” ("Should the Federal

The Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) were to central semi-public organizations that assisted buyers with qualifying for mortgages. The both the company failed during the year 2008 when they were left with no money and were bankrupt. Like every company they were unable to pay back the money and they were in the looking for the help of government via taxpayer’s money. Hence, after the bankruptcy of 2008, the government has utilized huge amount of the taxpayer’s money for not letting them to shutdown and recovering them.

An individual that played a part in the crisis include Banker Angelo Mozilo of Countrywide, his stated goal was to lower the barriers for American’s to own homes. Though intentions in such a goal are admirable, it created an environment of failures as homeowners defaulted on loans. Countywide was purchased by Bank of America in 2008. Banker James Cayne of Bear Stearns faced criticism as his institution crumbled under his leadership. He was accused of being absent as hedge funds collapsed. As an example as poor leadership during the period he stepped down, and Bear Stearns was purchased by JP Morgan in 2007. Richard Fuld Jr., Banker of Lehman Brothers Holding Inc., moved his institution in the commercial real-estate market years prior to the 2008 collapse of the market. 2008 after filing for bankruptcy Lehman’s was also sold. These are just a select few of the institutional leaders that had an impact during the crisis, but they represent how different personal and organization ethics can impact a company. Other key players involve elected officials that made key decisions to share the nation of financial depression. Henry Paulson, a policy maker with the Department of the Treasury, refused to save Lehman Brothers Holdings Inc. from bankruptcy. Paulson was involved in the Troubled Asset Relief Program that was used for the bailout of banks, auto companies, and other financial institutions. Ben Bernanke, a policy maker with the Federal Reserve, was a key player in approving the funding for J.P. Morgan to purchase Bear Sterns Co.

Federal Home Loan Mortgage Corporation (Freddie Mac) a Government-Sponsored Enterprise (GSE) was chartered by Congress in 1970 with a public mission to stabilize the nation's residential mortgage markets and expand opportunities for homeownership and affordable rental housing. Freddie Mac (and its sister institution Federal National Mortgage Association -Fannie Mae) was set up based on the idea that neither government nor private banking interests could address the nation's housing finance needs. The company's charter established a board comprising 18 members - thirteen elected by shareholders and five appointed by the President of the United States. Their main mission was to provide liquidity, stability and affordability to the U.S. housing market.

During the financial crisis of 2007-2009 the government bailed out several financial institutions two of the most notorious financial institutions the government bailed out was Fannie Mae and Freddie Mac. These two companies were one of the biggest mortgage lenders that suffered from the subprime mortgage disaster. Fannie Mae and Freddie Mac were both on the barge of bankruptcy if it weren’t for the help of the government, which granted each company $100 billion dollars in cash credit to bail them out (according to Investopedia). The government bailed them out since Freddie Mac and Fannie Mae were both considered to be two on the giant mortgage lenders at the time and they were “too big to fail”.

The day Bear Stearns fell was one of the worse financial upsets of our time. As a major American investment company, they ran out of money. Bear Stearns was definitely one of the most exposed to the subprime mortgage crisis after being hit hard in the summer of 2007 when two of its hedge funds crashed. The Federal Reserve and JP Morgan Chase orchestrated an extraordinary rescue attempt that allowed Bear Stearns to borrow emergency money to stay alive and steady. Consequently, in an effort to prevent a crisis on Wall Street.

In the lead up to the current recession, when the real estate market began to fall, there were so many investors shorting stocks and securitized mortgage packages that were already falling, that the market simply fell further. There were no buyers at the bottom, and the professional investors made millions off of the losses of others. Beyond this, there was no real federal regulation for securitized mortgages, since there was no real way to gauge the mathematical risk of any given package. This allowed the investors to take advantage of the system and to short loans on real people’s homes. Once these securities were worthless, many of the homebuyer’s defaulted on their mortgages and were left penniless. No matter from which angle this crisis is looked at, the blame rests squarely with the managers who began the entire cycle, the ones who pursued the securitization of mortgages. Their incompetence not only led to the losses of Americans who have never invested in the stock market, but to losses for their shareholders.

Fannie Mae and Freddie Mac are government sponsored enterprises (GSE) that purchase mortgages, buy and sell mortgage-backed securities (MBS), and guarantee nearly half of the mortgages in the U.S. A variety of political and competitive pressures resulted in the GSEs ramping up their purchase and guarantee of risky mortgages in 2005 and 2006, just as the housing market was peaking.[258][259] Fannie and Freddie were both under political pressure to expand purchases of higher-risk affordable housing mortgage types, and under significant competitive pressure from large investment banks and mortgage

Before 1938, depository institutions made home loans with their deposits and held the liquidity risk, the market risk, and the credit risk on their portfolios. Yet, the baneful results of the Great Depression led the US government agency to intervene in the mortgage market so as to beget home mortgage lending (Dodd, 2007). A corollary of the new legislation was the creation of Fannie Mae in 1938; as a

In 2007, the U.S. economy experienced one of the greatest downturns since the Depression era, and furthered by the collapse on a global scale. The bubble burst on the housing market and the house of cards called the mortgage industry tumbled down, no longer able to sustain charade of success. This caused the collapse of some of the largest financial institutions, once thought to be immortal. This rippled into a massive tightening of the belts of many companies, as they found themselves without lines of credit, lack of business, and the daisy-chain collapse of their support networks. Who paid the final price? Companies cut costs through pay cuts, layoffs, and closings. While this may have saved jobs for many, the feeling of loss and

The financial crisis of 2007-2008 was one of the worst economic downturns the United States has faced since the Great Depression of the 1930s. It affected the banking industry by causing banks to squander money on mortgage defaults, bringing interbank lending to halt, as well as affecting credit being provided to consumers. Another effect was that it caused certain businesses to essentially run out or come to an end. Many companies had to take advantage of bailouts, but the economic was still in disarray. The financial crisis also affected the country in the long-term by bringing about new regulatory programs such as Dodd-Frank Wall Street Reform and Consumer Protection Act (Singh, 2015).

In October of 2008 Congress, passed a $700 billion rescue bill to bail out, and possibly save, the doomed U.S. and global financial systems from collapsing. This decision was only a piece to the $1 trillion government plan to level off the stock market and unfreeze the credit which was needed after the collapses of the financial institutions of Lehman Brothers and Washington Mutual. The government also stepped in and federally took over such institutions as Fannie Mae and Freddie Mac, which together hold about $5.4 trillion in mortgage loans; 45 percent of the national total. The governmental firms were heavily burdened because of bad investments in subprime mortgages and

During the recent financial crisis, in the autumn of 2008, the Lehman Brothers bank collapsed. It was the biggest bankruptcy in history

One of the main problems that Fannie Mae faced during the financial crisis was the dramatic drop of their stock prices. An article published by CNN during the financial crisis said, “Shares of mortgage financing giants Fannie Mae and Freddie Mac both plummeted Monday after an analyst with Lehman Brothers wrote in a report that the two companies may need to raise billions of dollars if accounting rules are changed” (www.money.cnn.com). In 2007, Fannie Mae’s stock prices were at the lowest level they had seen in