S. economy could be staggering. Gensler went to Capitol Hill in March 2000 to testify for a bill to urge Congress to rein them in. The bill failed. The companies kept growing, the dangers posed by their scale and financial practices kept mounting, critics kept warning of the consequences. Yet across official Washington, those who might have acted repeatedly failed to do so until it was too late. The cost to taxpayers could run into the tens of billions of dollars (Appelbaum, Leonnig & Hilzenrath, 2008).
In order to get to the root of the financial crises one needs understand how and why Fannie Mae and Freddie Mac were called into life and why they have had such immense impact on the financial crisis. Arnold Kling provides an interesting insight to the U.S housing market and financial history. According to Kling the House market is viewed as critical for the health of the U.S. economy. Increased home ownership and cheap and accessible mortgage finance were major policy goals, regardless of which political party held Congress or the presidency (Kling, 2009).
The Federal National Mortgage Association functioned by purchasing home loans from independent originators known as mortgage bankers. Fannie Mae, as it was later called, acted like a giant national bank, financing mortgages from all over the country. At that time, it did not issue any mortgage securities, but funded its holdings by issuing bonds, as an agency of the federal government. To get Fannie Mae debt off its books, the government privatized it by selling shares to investors. Selling Fannie Mae, however, still left the government issuing debt to finance mortgages under loan programs of the Federal Housing Administration (FHA) and the Veterans Administration (VA). TO take these mortgage loans off the books, Johnson created the Government National Mortgage Association (GNMA), which pooled loans insured by FHA-VA into securities and sold them to investors (Kling, 2009).