Lower Rates Make American Dreams Come True

During the first years of his administration, President Bush heralded increasing home-ownership as a symbol of success, achievement, and dreams-come-true.  He pushed federal agencies and private lenders to devise new ways of helping Americans buy homes.

The Rising Perception of Wealth

At the same time, increased demand for real estate was driving home values higher, making property owners feel richer: their investment was paying off right before their eyes, their wealth (at least on paper) was growing, their homes were becoming potential piggy banks.

Refinancing Craze Lifts Mortgage Market

Dunkleys Flip House

By 2003, millions of Americans were tempted to crack open those piggy banks by refinancing their mortgages at lower interest rates, thereby reducing their monthly payments.  Others refinanced a different way, using the increased value of their home to get a bigger mortgage at lower interest rate, allowing them to extract equity.  Then, they used that cash to remodel those homes, buy new cars, take vacations, or spend the windfall however they pleased.

Fannie Mae And Freddie Mac Play Crucial Role

Fannie Mae and Freddie Mac, the two mortgage companies known as Government Sponsored Entities (GSEs), play a huge role in the American housing market. They led the way in purchasing loans for the purpose of securitization. In buying those loans, Fannie and Freddie replenished the supply of capital that banks and non-bank lenders could use to generate new mortgages. Fannie and Freddie bought about 50% of the residential mortgages generated each year by thousands of lenders across the country.

Conforming Loan Standards Serve As Safety Net

For years, the mortgages Fannie and Freddie purchased were known as conforming loans--- they had to conform to certain lending standards and the borrowers needed to meet certain requirements. If they didn't, Fannie and Freddie would steer clear of them. Those standards served as a safety net for Fannie and Freddie, their investors, the government and consumers. By 2005, after those standards were loosened, the safety net became a lot less safe.

Housing Boom

Housing Boom

CNBC anchors and reporters talk about the surge in the U.S. housing market and how the government encouraged home ownership.

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