Question

During the financial crisis the Federal Reserve bought mortgage backed securities. Why did they do this? How much money were they mandated to purchase these securities – how far off were they?

Answer 1

Federal Government supported mortgage lending during early period using different kind of policies, programmes and other measures. This type of measures helps the middle class family. With some aspects housing policy caused financial crisis, which restrict government programs. During this crisis there is lack of government intervention in consumer protection, private label mortgage securitization, bank capitalisation etc. This low level intervention leads to global crisis. When the economy crashed, banks were not willing to lend t all. How owners make investment in children’s education, financial support for small business, or handling financial emergency. In the 2008 crisis, there was a dramatic expansion of mortgage lending, where large portion is subprime loans. Most of the home owners took the loan at low interest rate. The spread of danger of risky mortgage affect the whole global financial system.
After the crisis, the share of market by FHA’s became its highest level leads to the failure of private mortgage insurers. From empirical study, the FHA is not available to fill the liquidity gap in the economy. The actual cause of the financial crisis was the predatory lending of private mortgages and unregulated market system. Many of the mortgages were structures, which used by the borrowers to refinance another loan in future make a trap among the borrowers. There is a high level rise in the subprime loans. The credit rating agencies and the banks failed to examine the parties behind securitizing the mortgages.