Mortgage interest rates fell all the way to below 6 percent in 2003. This happened because Federal Reserve chairman Alan Greenspan cut the federal funds rate from 6.25 and eventually to 1 percent from 2002-2003. “Even though the Federal Reserve does not have the ability to directly set mortgage rates, it does create the monetary policies that indirectly affect these rates.” (Lewis, page 27) Rates were also falling because there was a lot of money entering the U.S. economy from countries like Japan, the UK, and China. Foreign investors invested in our mortgage-backed securities because they were under the impression that if Government Sponsored Enterprises (GSEs) were to fail, the US government would simply bailout the GSEs (Lewis, page 87). Investors in these countries saw mortgage-backed securities as investments that had relatively low risk and good returns. Investing in our GSEs such as Fannie Mae and Freddie Mac fit this build. “Foreign money entering into the U.S. increased from about 1.5 percent of GDP in 1995 to about 6 percent in 2006” (Holt, page 3). Even though these Mortage rates were low, the prices of homes continued to rise. As you can see on the graph on (attached), Housing prices grew almost exponentially in the 2002-2006 range. In of 2006, housing prices were 132 percent higher than they had been in 1997. …show more content…
The monopolization of Credit agencies amplified the effects of the housing market collapse and mistakes the US government made. The three biggest credit rating agencies are Standard and Poor's (S&P), Moody's, and Fitch Ratings. Collectively these three agencies make up 95 percent of the market share, this created a very uncompetitive environment. The role of credit agencies are to provide investors with reliable information on what they are investing in. These credit agencies, however, misinformed investors of the risk they were taking on by giving subprime companies overly generous evaluations. The risk of investing in Government bonds, corporate bonds, municipal bonds, and of course mortgage-backed securities is determined by the probability that the person/organization/government who take on debt will fail to pay the interest on that debt on time. The problem with credit agencies are as Thomas Straubhaar, the director of the Hamburg Institute of International Economics said, “We can't have private companies, whose primary goal is maximizing profit, behaving like sovereign judges passing down opinions that are binding for disinterested third parties” ( Rönsberg, page 1). In the period of 2000 to 2007, Moody's gave triple-A ratings (highest possible) on 42,625 mortgage-backed securities. For reference, only four US companies held this prestigious triple-A rating. But once these “trojan horse” ratings began to fail, Moody's had to