First time buyers will probably get confused when people start talking about Fannie Mae, Freddie Mac and Ginnie Mae. Who the heck are these people, and why do they they have a say in what house you can buy? Today’s article is a quick (and vastly oversimplified) overview of who they are and why they exist.
The story begins back in 1938, at the height of the Great Depression. FDR and his team were trying to come up with ways to encourage the money to start moving around again. They wanted to get people to buy houses, but they had several problems to solve along the way.
Problem: Government-Mandated Limits on Bank Lending
When people don’t have any cash, they need to borrow a lot of money to buy a house. Money doesn’t grow on trees, though, not even trees in the backs of banks. The amount of money a bank can lend is capped at a number that’s in ratio to the amount of money people have deposited there. The exact ratio varies depending on the economy, but there is always a limit. They cannot lend out infinite amounts of money. Back in the 1930′s, with everybody short on funds, the banks were also out of money to lend. Nothing was coming in, so nothing could go out. (more…)