Expert Feels Financial Illiteracy Was One of the Main Reasons for the Foreclosure Crisis

Consumers trying to understand the bailout of Fannie Mae and Freddie Mac involving billions of dollars are confused. Even those with a minimum amount of knowledge about the matter know that the dollars have come from the pockets of the tax payers. But why this happened continues to remain a mystery.

Nicole Middendorf of Strategic Financial is an expert in finances. He has called this lack of knowledge on the part of most Americans as “financial illiteracy.” This was one of the main reasons for the foreclosure crisis. He said, “The two big camps that are at fault are the consumer — for not being educated or understanding what they’re doing to themselves financially and also the mortgage companies for loaning out money and selling products to borrowers who really couldn’t afford homes.”

The granting of sub-prime mortgages like peanuts has led to the financial collapse and the housing crisis that is continuing. According to the Mortgage Bankers Association one tenth of all the house owners were defaulting during the second quarter of 2008 – it being a record figure since the last 39 years that the association has been keeping track of figures.

To understand the present one needs to peep back into the start of Fannie Mae and Freddie Mac. After the Great Depression of the 30’s when the banks began to recover, President Roosevelt was keen to see house ownership increase but there were very few banks granting loans to potential buyers. To rectify this shortcoming the Roosevelt administration created Fannie Mae in 1938 to guarantee mortgages made by private banks.

After three decades the government freed Fannie Mae from its control and made the company private. It now became similar to any other bank but instead of directly offering mortgage loans to the public it began to generate income by buying mortgages from other private banks.

In the late 60’s the economy went on a growing spree as incomes increased causing ownership of houses also to skyrocket. To prevent Fannie Mae from becoming unmanageably big the government created another firm along similar lines – Freddie Mac.

Till 7th September 2008 both Fannie Mae and Freddie Mac continued to be private entities. In September Henry Paulson, the Treasury Secretary announced plans of the government to seize the firms. $200 billion was infused into the firms by the Treasury. In return the government took over 80% controls of both the companies.

It meant that since both owned over $5 trillion in mortgages nearly half of these would never be repaid. Thus in reality both are bankrupt. But even small talk and rumours about their demise could cause a panic at home and abroad.

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