Monday, July 7, 2008

If Fannie and Freddie goes, America's really screwed!

If anyone thought the subprime mortgage situation bottomed out, they're wrong. It's not over yet, not by any means. And the next shoes to drop today were the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac).

Contrary to popular belief, these so-called "government sponsored enterprises" are not backed by the full faith and credit of the US government; nor is it totally clear what would happen if either failed or who would have to bail out the companies in case of collapse.

However, both Fannie and Freddie tanked in share prices today by nearly 20%; over concerns that both will have to raise billions in new capital just to be able to guarantee this year's crop of mortgages should underscore just how bad the housing situation is. (Normally, the insurance is a premium of ¼ to ½% of the mortgage taken out although it could be higher depending on credit risk of a customer; about 60% of mortgages in the US are backed this way, as mortgages are paid off fresh capital is released for new mortgages and so forth -- at least it's supposed to work that way.)

This has been a timebomb waiting for years, but it's only with the subprime scandal that it's become crisis critical.

Here in Canada, the Canada Mortgage and Housing Corporation is owned 100% by the Canadian taxpayer; and while it does have a fairly good success rate dating back to World War II, it has for the last few years backed mortgages at 100% of its value with no money down. This was a change from a longstanding policy of a 90/10 split (10% down with 90% backed by a loan guarantee to cover the bank's or trust company's ass). If the subprime crisis explodes here as it did in the US and the UK, there will be a lot of blowback and certainly a lot of questions as to how this was allowed to happen.

If the GSEs go, then mortgage companies may have no choice but to go to vulture funds for support; and people should really be scared if corporate raiders like Carl Icahn or Kirk Kerkorian call the shots, let along sovereign wealth funds. If it comes to that scenario, Americans had better hope their mortgages are being held in friendly countries like Norway and Canada (presuming the subprime problem in the rest of the developed world is contained); and not evil dictatorships like Saudi Arabia or Mainland China.

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1 comment:

Carter Apps, dabbler of stuff said...

Freddy and Fanny have been losing money for years, even in the good times and they've gone to the market several times in the last decades to add liquidity. I don't think the market has any appetite for more loans, stock issues etc.

However like the Government guaranteed Bear Stearns buyout/hijacking and all the other banks that are currently being supported by massive loans at the discount window and special loan facilities I think you will see the U.S. gov step up to the plate and either bail out or nationalize both these agencies in yet another wave of monetizing the debt.

As of now the big banks have borrowed almost all of the value of treasuries at the federal reserve in exchange for reams of bad mortgage paper, the next wave of bail outs will have no choice but be funded by pure printing of money and the U.S. will sink into a hyper inflationary spiral.

The total destruction of the U.S. financial system is on the way and may take the word down with it.

266 lending institutions have imploded(sold/bankrupt or just closed)

On top of Bear stearns and Northern Rock, 7 smaller U.S banks have closed, + 4 credit unions. The banks on average have negatative non loaned reserves, meaning the only cash reserves in the system are on a credit card owned by the federal reserve, any of these banks could, after 1 rumour face a bank run and collapse.

35 major homebuilders and a couple dozens smaller ones, Kaput

82 hedge funds world wide have failed,

This is all before 1/2 of the subprime and most of the ARMs have reset.

Canada has been more careful in some ways but allowing 0 down mortgages is just stupid.