The problem with this is that free market was never in play. HUD and FHA were backing loans that lenders would never have made if it was a free market system. But the lenders could make loans to people that shouldn't get loans, make a bunch of money, then sell them to Freddie and Fanny May. The lenders had nothing to loose. People that had no business buying homes were able to because the government was helping them. So the demand on homes was higher then the supply so the prices went up, once people started falling behind and couldn't make the payments lots of foreclosures came on the market, also credit got tighter. Then the supply was higher then the demand so prices came down.
This wasn't a free market caused problem, this was a government caused problem, but you'll never hear that on the nightly news.
At one time up to 40% of the loans that Fannie and Freddy were buying were sub-prime loans.
There was a lot more to it, but this was the biggest part.
· 1 decade ago