According to the Fannie Mae webpage, the Federal National Mortgage Association was chartered in 1938 “at a time when millions of families could not become homeowners, or risked losing their homes, for lack of a consistent supply of mortgage funds across America.” Sounds like today, huh? And it is.
Creditworthy borrowers, both in the mortgage and small business markets, are not able to obtain credit today due to a “lack of liquidity.” Specifically, banks are hoarding what reserves they have in anticipation of having to realize billions of dollars of losses associated with mortgage-related assets.
The resulting credit crisis has seen banks collapse, mortgage banks collapse and consolidate, insurance companies go under and the overall global credit market and interbank loan market evaporate. So what is the best approach to addressing the credit crisis? Why not restore liquidity to the markets directly?
Since the current bailout bill has failed in the House of Representatives, leading to a very scary market day today, why not look at another model. The bailout approach planned to buy the worthless and risky mortgage-backed securities held by investors and banks. This in turn is hoped to (1) provide the now almost worthless securities with a positive value and (2) make banks would feel better about the world and thus cause them to start lending again.