Question

In acting to help create a secondary mortgage market, Fannie Mae solved the standardization problem by?

1) Pooling mortgages together and creating a new financial instrument called a mortgage pass-through.
2) Functioning as the loan servicer, collecting the payments from various mortgages and creating a nice, even, steady stream of payments to the institutional investors.
3) Requiring loan originators to make sure only FHA, VA, or other government-qualified mortgages were included in mortgage pools.
4) Creating Ginnie Mae and Freddie Mac to service bundled loans for institutional investors.

Answer 1

Fannie Mae contributed to the creation of a secondary mortgage market by securitizing loans through pooling mortgages and creating mortgage pass-through securities. This process transferred the risk from lenders to investors and was a factor in the 2008-2009 financial crisis due to lenient credit ratings and a lack of regulatory oversight.

Step-by-step explanation:

In acting to help create a secondary mortgage market, Fannie Mae solved the standardization problem by pooling mortgages together and creating a new financial instrument called a mortgage pass-through. This process of securitization allowed for the sale of mortgages to financial companies, which then bundled these mortgages into larger financial securities. These securities were subsequently sold to investors, who expected a steady stream of income from the mortgage payments made by borrowers.

The creation of mortgage-backed securities also meant the lenders could off-load the risk of the mortgage loans to the investors, thereby insulating themselves from the potential defaults of borrowers. However, this decoupling of financial interest from the borrower's ability to pay would later lead to issues when credit agencies provided overly lenient ratings and the market for mortgage-backed securities escalated without adequate regulatory oversight, culminating in the financial crisis of 2008-2009.