The lending of assets such as money, property, or other valuable personal belongings is a time-honored tradition. In the old days of lending, when local banks ran out of money to lend for mortgages, community growth was halted and so was the opportunity for business expansion. The federal government recognized this problem and initiated a plan to restock bank capital by substituting as a mortgage broker.

They set up the department of Housing and Urban Development, or HUD, as it is commonly known. Many specialized agencies of HUD developed, and you can probably recognize them by their acronyms such as VA, FHA, Fannie Mae, etc.

The federal government ran detailed studies and statistical analyses to determine why loans succeeded or failed. Their studies resulted in a set of guidelines and conditions that loans would need to conform to in order for HUD to purchase them from the banks.

These specialized agencies of HUD then offered to buy loans from the banks, allowing the banks to make a profit. This process has opened doors for investors to pool their capital and form national lending institutions, selling their pools of loans to the federal government.

The government would in turn securitize large groups of these loans and sell them to Wall Street as mortgage-backed securities. Wall Street sells these loans to national and international investors, which helps explain the daily precariousness of interest rates.

Over the years, more Americans began falling out of perfect credit, which created the necessity for lenders who were not as strict as the federal government’s agencies. These lenders had the financial strength to purchase large pools of loans, securitize them and sell them directly to Wall Street for even larger profits! They translated higher-risk loans into higher interest rates and therefore higher earnings. Thus began another cycle of lending and mortgaging.