History

• The U.S. government created the companies Fannie and Freddie Mac in 1938 to help U.S. citizens become homeowners. By 1968, Fannie and Freddie were private companies, but were allowed to borrow money at half the rate of the best rated companies -- enticing them to take on risky mortgages.
  
  In the early part of the 21st century, Wall Street created new types of mortgages with never-before-seen terms, such as interest-only payments, to compete with Fannie and Freddie. By 2007, as housing prices fell, many subprime loan holders could not make their payments and mortgage lenders suffered millions of defaults.
  
  

Considerations

• Analogous to predatory lending was the creation of new types of securities that allowed banks to make millions in bets with only 1/100th the value in hard assets, according to the New York Times. Wall Street companies broke up risky mortgages and put pieces from several different sub-prime mortgages into one security. These credit derivatives fell in value along with home mortgages.
  
  

Expert Insight

• Despite Wall Street's entrance into the risky, sub-prime loan market to compete with the advantage that Fannie and Freddie had on the bond market, Investopedia blames Congress for the credit crisis.