37º IAHS World Congress on Housing: - Universidad de Cantabria

XXXVII <strong>IAHS</strong><strong>World</strong> <strong>Congress</strong> on HousingOctober 26 – 29, 2010, Santander, SpainCODE: 703WHY DID THE GOVERNMENT- SPONSORSHIPENTERPRISE MODEL FAIL IN THE U.S. RESIDENTIALMORTGAGE MARKETS?Prof. Dr. Belgin AKÇAYAnkara University, Law Faculty, Department of Economics and FinanceCebeci Kampusü, 06590 Ankara, Turkeye-mail: akcay@law.ankara.edu.trKey words: Government sponsored enterprises, residential mortgage markets, sub-prime morgagecrisisAbstractEfforts to expand access to mortgage credit and to increase homeownership have dominatedU.S. federal housing policy. To support of those objectives, many programs wereimplemented and many regulations were put into the effect during about 60 years. One ofthese practices was to be established a number of organizations falling between the categoriesof private sector and governmental entities. One type of these are the “government –sponsored enterprises” (GSEs) - quasi-governmental organizations.There are three GSEs in housing sector created by the <strong>Congress</strong> in the U.S. The objective wasto improve the efficiency of mortgage markets and to overcome statutory and other marketimperfections which otherwise prevent funds from moving easily from suppliers of funds toareas of high loan demand. Two of these GSEs, Fannie Mae and Freddie Mac, are the giantsecondary-market institutions.Fannie Mae and Freddie Mac, which have many benefits from federal government, primarilyact as financial intermediaries to assist borrowers. They are involved in two principal lines ofbusiness: purchasing mortgages and issuing mortgage-backed securities. They purchaseresidential mortgages from the mortgage originators or lenders. Later, they package themortgages into mortgage-backed securities to resell to investors in the capital markets, or holdthe mortgages in their own portfolios.In terms of meeting their original congressional objective — to provide liquidity to creditmarkets on a national, rather than regional or state, basis — these GSEs have been remarkablysuccessful and become the dominant role in the U.S. mortgage markets. However, since theend of July, 2007, Fannie Mae and Freddie Mac have been dramatically affected by theexperiencing subprime mortgage-related troubles in the U.S. mortgage markets. They haveincreasingly reported large loan losses throughout 2008. As a result, Fannie Mae and FreddieMac were placed into conservatorship on September, 2008, and the conservatorship has nospecified termination date.In this paper, it will firstly be examined the GSE model in the residendial mortgage marketsand secondly, evaluated why these giant firms became failure in sub-prime mortgage crisis.37º <strong>IAHS</strong> <strong>World</strong> <strong>Congress</strong> On Housing Science 264