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1938: The Federal National Mortgage Association, or Fannie Mae, is established as part of Franklin D. Mozilo is extremely concerned with credit quality. 1968: Fannie Mae spins off Ginnie Mae as a separate entity. Ginnie will continue to have an explicit, written government guarantee for all its mortgage loans. 1970: Ginnie Mae creates the first mortgage-backed security, based on FHA and VA mortgages. 1971: Freddie issues its first Mortgage Participation Certificate security.
This is the first mortgage-backed security made of ordinary mortgages. 1970s: Private companies begin mortgage asset securitization with the creation of private mortgage pools in the 1970s. 1977: Community Reinvestment Act is enacted to address historical discrimination in lending, such as ‘redlining’. The Act encourages commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods. 1980 grants all thrifts, including savings and loan associations, the power to make consumer and commercial loans and to issue transaction accounts. 1981: Each of the 12 Federal Reserve banks establishes a Community Affairs Office to offer public and private guidance in accordance with the Community Reinvestment Act. 1981: Salomon Brothers transitions from a private partnership to a public corporation, the first of the Wall St.
This shifts the risk of financial loss from the partners to shareholders, arguably increasing the appetite for risk. Larry Fink’s team at First Boston. It is made from Freddie Mac mortgages. 1987: Maxwell of Fannie, fights bitterly with Wall Street and Congress about allowing GSEs to do REMICs.
Lobbying and threats fly back and forth. Late 1980s: Several groups lose big money on tranched mortgage securities, including Merrill Lynch. 1988: Guardian Savings and Loan issues the first ‘subprime’-backed mortgage security. Long Beach Mortgage begins to move towards the subprime securitization market. Its employees will later go on to lead many other subprime companies.
The RTC decides to sell the massive amount of bad real estate debt it holds to investors. 1990: Fannie gets Paul Volcker to argue it doesn’t need the same regulatory capital as banks. 1992: Jim Johnson is new CEO at Fannie. Ramps up the ‘cut them off at the knees’ strategy against political enemies. 1993: The Federal Reserve Bank of Boston published “Closing the Gap: A Guide to Equal Opportunity Lending”, which recommended a series of measures to better serve low-income and minority households, including loosening income thresholds for receiving a mortgage, influencing government policy and housing activist demands on banks thereafter. Regulations also allow community groups that market loans to collect a broker’s fee. June 1996 – Freddie Mac publishes FICO score cutoffs, intended to set the minimum standard for investment quality mortgage originations.
This was done as result of slow technology adoption for Freddie Mac’s custom credit scoring tool and a desire to gain immediate benefits of reduced credit risk. This proves to be a huge strategic mistake because it now provides a universal basis for establishing investment quality that fuels the growth of the Subprime market. 1997: Mortgage denial rate of 29 percent for conventional home purchase loans. 125,000, encouraging people to invest in second homes and investment properties. It repeals the Glass-Steagall Act of 1933.