THE SUB-PRIME CRISIS AND FEDERAL RESERVE Overview Unlike the quaint picture of the home mortgage market as one in which a local or regional bank lends money to the local homeowner to buy a house, the home mortgage market is actually centered in Wall Street banks and securities firms, that are responsible for repackaging mortgages into investment tools and securities (Dodd, 2007). Many of these instruments are separated into various risk segments, then sold to other buyers, sometimes highly leveraged, including hedge funds (Dodd, 2007). The buying of these mortgage-backed securities, or MBS, actually began with the launch of the Federal National Mortgage Associate (Fannie Mae) in the late 1930s, with the intent to create a secondary market for mortgages and create more liquidity in a market beset by the Great Depression (Dodd, 2007). Some 30 years later, the Federal National Mortgage Corporation (Freddie Mac) was created to both securitize more conventional mortgages and offer competition to Fannie Mae, which had been privatized (Dodd, 2007). Over time, Fannie Mae and Freddie Mac ended up with a good chunk of the mortgage market (Dodd, 2007). The market ended up removing risk from the balance sheets of mortgage originators, while providing long-term funding for mortgage lending (Dodd, 2007). The government-sponsored market structure was so successful, it ended up creating competition from other sectors (Dodd, 2007). "Private labels" began moving into the securitization business, and by 2003, governmentsponsored enterprises ended up as the source of 76% of mortgage-backed and asset-backed issuances (Dodd, 2007). The "private labels" made up the
remaining 24$ (Dodd, 2007). By mid-2006, the private label issues had 57% of the mortgagebacked s