Fannie and Freddie

[Peebo]

I know this move was predicted. However it is still an almighty massive event. I don't think anyone could really 'price' something like this in already...

 

Nope, I am sure that the actuality of it happening was not priced in, but I think that the high probability of it will have been. Stock prices etc. are based on forward looking sentiment, after all.

[blairdin]

I'm sure you know anyway. One is a liability that exists already and one is a liability that you might have. It is contingent on something happening so may well not become an actual liability at all.

 

And that's without the use of a tightrope....

 

Fascinating thread - I'm a novice who doesn't fully understand alot of the economics of this. Can you answer this for me Dave.

 

A liability they might have?

 

So if everyone who owes F & F money (for the dumb like me, yanks with mortgages) pays them back, there is no liability. Or if property values don't fall and F & F can recoup their money by selling assets (mortgaged property), there is no liability.

 

So is this a short term move by the Republicans to keep property values high - be that artificially high or otherwise?

[coppercrutch]

I'm sure you know anyway. One is a liability that exists already and one is a liability that you might have. It is contingent on something happening so may well not become an actual liability at all.

 

And that's without the use of a tightrope....

 

Nah have never really thought about that before. Cheers !!

 

Either way they have left themselves open to massive risk. Only other option was to let them go bust that probably would have brought down the entire World's mortgage market. Ouch !!

 

Interesting nugget from Bloomberg on one of the main conditions of this deal:

 

"As a condition for the assistance, Fannie and Freddie will have to reduce their holdings of mortgages and securities backed by home loans. The portfolios ``shall not exceed $850 billion as of December 31, 2009, and shall decline by 10 percent per year until it reaches $250 billion,"

 

So it looks like there is going to be a massive contraction of credit in the US mortgage market - that will of course feed into the UK market as it's all interconnected.

 

What this will do for the housing market here ? Well let's just say I may have to revise my predictions upwards.

 

Also have a look at what the Irish are doing about their similar situation.

 

http://www.timesonline.co.uk/tol/news/world/ireland/article4693076.ece

 

Lenihan to let house prices fall

"The finance minister will not cut stamp duty because the government has no wish to halt house price correction"

 

This is interesting. Seems to be a growing consensus that just letting things sort themselves out is the way forward. I wonder if Brown would come to the same conclusion. I am wondering if this has actually already been discussed behind closed doors with all the countries facing the same situation. Their credit markets are all exposed to the same things - so it would make sense for them to have discussed an agreed plan of action.

 

If so then house prices here will be falling by 50% easy.

 

Either that or Broon goes and does a mental one by throwing piles of taxpayers cash at something he can't really control.

[coppercrutch]

Nope, I am sure that the actuality of it happening was not priced in, but I think that the high probability of it will have been. Stock prices etc. are based on forward looking sentiment, after all.

 

Will be interesting to see what happens.

[Rab]

So is this a short term move by the Republicans to keep property values high - be that artificially high or otherwise?

 

It's a move by the government to stop the mortgage industry from collapsing as FM and FM guarantee all mortgages to give banks more freedom.

 

If the Democrats were in power, they would have done the same thing, it was a total no-brainer.

[Rab]

So it looks like there is going to be a massive contraction of credit in the US mortgage market - that will of course feed into the UK market as it's all interconnected.

 

The contraction has already happened/is happening. ie this deal is part of the effect of the contraction, not a cause of it.

[elvisisgod]

Hopefully before April when I visit there. I could do with the dollar weakening by then

 

Any idea what the exchange rate is just now? off across the pond in about 2 weeks

[Deodato]

The contraction has already happened/is happening. ie this deal is part of the effect of the contraction, not a cause of it.

 

Correct, Rab - important point for those reading through.

 

The only addition I would add is that Germany has a similar banking mechanism, known as the Landesbanks, where they get preferential credit ratings hence relativley cheaper money to do lots of 'common good' things.

 

However, a similar 'Moral Hazard' problem is created there - in that once you have preferential treatment to the market, your incentive is not to do 'public good' works, but exploit the market for all its worth.

 

West LB has (or did have, when I worked on this problem) operations in SE Asia that would make Standard Chartered impressed - but the reason they were set up was to finance roads and trains back home.

 

So, with Fannie and Freddie, similar story - given a preferntial pair of boots and fast got too big for them.

 

Deodato

[coppercrutch]

The contraction has already happened/is happening. ie this deal is part of the effect of the contraction, not a cause of it.

 

I know it has already happened.

 

However it looks like this deal will simply accelerate it. Although the devil will be in the detail.

 

The cause of this entire problem it is lending too much to people that can't actually afford it. The sensible solution clearly does not involved doing exactly the same again....

 

Well unless you are an idiot like Broon...

[coppercrutch]

Correct, Rab - important point for those reading through.

 

The only addition I would add is that Germany has a similar banking mechanism, known as the Landesbanks, where they get preferential credit ratings hence relativley cheaper money to do lots of 'common good' things.

 

However, a similar 'Moral Hazard' problem is created there - in that once you have preferential treatment to the market, your incentive is not to do 'public good' works, but exploit the market for all its worth.

 

West LB has (or did have, when I worked on this problem) operations in SE Asia that would make Standard Chartered impressed - but the reason they were set up was to finance roads and trains back home.

 

So, with Fannie and Freddie, similar story - given a preferntial pair of boots and fast got too big for them.

 

Deodato

 

I was reading today how/why F & F were originally set up. It was following the Great Depression of the 30's and they were designed to give working class people access to mortgage lending...

 

Sound familiar..

[Deodato]

Any idea what the exchange rate is just now? off across the pond in about 2 weeks

 

1.77626 USD and falling fast - a stable trading range would be just north of 1.65, so expect the slide to continue.

 

The Big Mac index had us +28 against the dollar in July, which further stregthens the ? weakening point above.

[coppercrutch]

1.77626 USD and falling fast - a stable trading range would be just north of 1.65, so expect the slide to continue.

 

The Big Mac index had us +28 against the dollar in July, which further stregthens the ? weakening point above.

 

You have to consider today's announcement though. Even though this was expected and all it is still ****ing huge.

 

The US has just taken on another massive amount of debt. That usually does not strengthen the position of the currency in question. I think..

 

The pound is **** and the Dollar is ****. The question is which ones is the ****test.....

[david mcgee]

I know it has already happened.

 

However it looks like this deal will simply accelerate it. Although the devil will be in the detail.

 

The cause of this entire problem it is lending too much to people that can't actually afford it. The sensible solution clearly does not involved doing exactly the same again....

 

Well unless you are an idiot like Broon...

 

And giving everyone in America a wad of cash and telling them to go out and have one last harrah is hardly as Broon would say " prudent".

 

This spend, spend, spend culture caused this problem but the US continues to feed the fire.

[coppercrutch]

And giving everyone in America a wad of cash and telling them to go out and have one last harrah is hardly as Broon would say " prudent".

 

This spend, spend, spend culture caused this problem but the US continues to feed the fire.

 

Indeed. It still amazes me how many people talk about 'freeing up' the mortgage markets again. The reason this has all happened is because they were too 'free'. Seriously a 12 year old could work that out...

 

Excessive lending is the cause of these problems - not the solution.

[Rab]

Indeed. It still amazes me how many people talk about 'freeing up' the mortgage markets again. The reason this has all happened is because they were too 'free'. Seriously a 12 year old could work that out...

 

Excessive lending is the cause of these problems - not the solution.

 

Of course it was.

 

However, its not hard to believe the market may have over corrected itself. If this is the case, it does indeed need 'freed up'.

[coppercrutch]

Of course it was.

 

However, its not hard to believe the market may have over corrected itself. If this is the case, it does indeed need 'freed up'.

 

I don't think that is the case.

 

Anyone with a decent income, good credit history and a decent deposit can get a mortgage tomorrow for a reasonably priced house.

 

There is only one part of the above that needs 'freed up'....

 

The last 5 years have been abnormal. What is happening just now is simply a return to normality (Or closer to it anyway)

 

Of course it may 'over-correct' as you say. I don't think that has happened yet.

[Peebo]

The pound is **** and the Dollar is ****. The question is which ones is the ****test.....

 

Tell me aboot it. I'm in Brazil at the moment, and the prices here are extortionate when one converts them to pounds via the mighty dollar. I can barely afford a fake Flamengo strip.

[david mcgee]

If the dollar falls next week as a result of this, oil prices will begin to rise again.

Add to that hurricane Ike looks likely to head into the gulf as a category 3 or 4 .

Half of the World appears to be under water at the moment. ( increases in food prices)

 

Hardly a reason for a sharp downturn in inflationary pressures, and consequently any rapid relaxation in interest rates.

[coppercrutch]

Tell me aboot it. I'm in Brazil at the moment, and the prices here are extortionate when one converts them to pounds via the mighty dollar. I can barely afford a fake Flamengo strip.

 

The Real is one currency that I have been hearing a lot about recently as a good bet. Not getting into currency speculating though. Very high risk..

 

Where abouts are you out of interest ?

[Peebo]

The Real is one currency that I have been hearing a lot about recently as a good bet. Not getting into currency speculating though. Very high risk..

 

Where abouts are you out of interest ?

 

The Brazilian economy is absolutely exploding at the moment, as they are well stocked for things the rest of the world needs.

 

I'm based in Rio.

[coppercrutch]

The Brazilian economy is absolutely exploding at the moment, as they are well stocked for things the rest of the world needs.

 

I'm based in Rio.

 

Nice, although I was a little disappointed with the birds when I was there. Great bods but faces not too great. Maybe I went to the wrong places..

[david mcgee]

The Brazilian economy is absolutely exploding at the moment, as they are well stocked for things the rest of the world needs.

 

I'm based in Rio.

 

Exploding is a very dangerous word.

[Peebo]

Nice, although I was a little disappointed with the birds when I was there. Great bods but faces not too great. Maybe I went to the wrong places..

 

A very mixed bag, in my opinion. There are some absolute stunners, and even more with the proverbial BOBFOC. However, the amount of saggy, leathery chebs parading up and down the Copacabana (and that's just the old men), kind of ruins it all. In any case, it's amazing how quickly one becomes desensitised to women walking around with nothing on bar a couple of tiny bits of string covering their paps and snatch.

 

For a quality selection of Brazilian women, I suggest you check out office receptionists and air hostesses - they definitely are of a supreme standard.

[Peebo]

Exploding is a very dangerous word.

 

I would agree, when it's used in the context of bombs, etc.

[david mcgee]

I would agree, when it's used in the context of bombs, etc.

 

Or in the context of economies.

[coppercrutch]

Or in the context of economies.

 

Indeed. An exploding economy is simply getting closer and closer to a mighty bust. Steady increases are a far more sensible approach.

 

However that is not what the big boys who run this World want. They want boom and bust so they can give people credit when they wish and remove it when they wish - thus buying up assets when they force the prices down.

 

Sounds a little conspiracy like - however when you read up about it the evidence is startling. 'Money Masters' on google is an excellent watch.

[davemclaren]

Nah have never really thought about that before. Cheers !!

 

Either way they have left themselves open to massive risk. Only other option was to let them go bust that probably would have brought down the entire World's mortgage market. Ouch !!

 

Interesting nugget from Bloomberg on one of the main conditions of this deal:

 

"As a condition for the assistance, Fannie and Freddie will have to reduce their holdings of mortgages and securities backed by home loans. The portfolios ``shall not exceed $850 billion as of December 31, 2009, and shall decline by 10 percent per year until it reaches $250 billion,"

 

So it looks like there is going to be a massive contraction of credit in the US mortgage market - that will of course feed into the UK market as it's all interconnected.

 

What this will do for the housing market here ? Well let's just say I may have to revise my predictions upwards.

 

Also have a look at what the Irish are doing about their similar situation.

 

http://www.timesonline.co.uk/tol/news/world/ireland/article4693076.ece

 

Lenihan to let house prices fall

"The finance minister will not cut stamp duty because the government has no wish to halt house price correction"

 

This is interesting. Seems to be a growing consensus that just letting things sort themselves out is the way forward. I wonder if Brown would come to the same conclusion. I am wondering if this has actually already been discussed behind closed doors with all the countries facing the same situation. Their credit markets are all exposed to the same things - so it would make sense for them to have discussed an agreed plan of action.

 

If so then house prices here will be falling by 50% easy.

 

Either that or Broon goes and does a mental one by throwing piles of taxpayers cash at something he can't really control.

 

There's little that governments can do as markets will correct themselves, one way or other. The govt will make token gestures in order to give the impression of 'doing something' but things will fix themselves over a period of time. It's the period of time that is uncertain at present.

 

Time for strong nerves on the markets....

[coppercrutch]

There's little that governments can do as markets will correct themselves, one way or other. The govt will make token gestures in order to give the impression of 'doing something' but things will fix themselves over a period of time. It's the period of time that is uncertain at present.

 

Time for strong nerves on the markets....

 

That is what I hope to happen. However this has been tried before by certain countries - Japan being the best example.

 

That resulted in a 20 year deflationary spiral. If Broon tries the same he will send us down the swanny.

 

Let's hope he is not as stupid as he looks.

 

Giving the impression of 'doing something' is the best thing he can do. Fingers crossed.

[david mcgee]

Please correct me if i am wrong.

 

My understanding is that in the US, if you can no longer afford to pay your mortgage and have negative equity you can hand over your keys, walk away from your property debt and effectively start again.

 

The American government could effectively be left holding the keys of tens of thousands of homes and on the other hand have an obligation to rehouse these same defaulters.

 

How will the tax payers who work hard to continue paying mortgages on properties in negative equity feel about that, and how many may feel if you cant beat them join them?

[coppercrutch]

Please correct me if i am wrong.

 

My understanding is that in the US, if you can no longer afford to pay your mortgage and have negative equity you can hand over your keys, walk away from your property debt and effectively start again.

 

The American government could effectively be left holding the keys of tens of thousands of homes and on the other hand have an obligation to rehouse these same defaulters.

 

How will the tax payers who work hard to continue paying mortgages on properties in negative equity feel about that, and how many may feel if you cant beat them join them?

 

Think they call it 'jingle mail' - as in you post your keys and that's it done.

 

They have just taken on massive risk. Of course the other option was to let them fold and watch the entire World Financial system collapse. What a choice to make. All a result of greed.

 

The following vid is pretty good in explaining the mess of the Fed in the US:

 

http://video.google.com/videoplay?docid=5232639329002339531

[Deodato]

For a quality selection of Brazilian women, I suggest you check out office receptionists and air hostesses - they definitely are of a supreme standard.

 

Their air hostessses are exploding, if you pardon the expression.

[david mcgee]

Markets look likely to act favourably in light of the Fannie and Freddie bail out.

 

Absolutely mistifying!

 

Tomorrow stocks will be up.

 

Once the dim wit bankers, financial experts, Eton and Cambridge bum boys have had time to digest what this means.

 

Stocks will be down.

 

Probably take the retards about a week. ( at least)

[Rab]

Please correct me if i am wrong.

 

My understanding is that in the US, if you can no longer afford to pay your mortgage and have negative equity you can hand over your keys, walk away from your property debt and effectively start again.

 

Almost exactly right. It's not true in every state, you don't need negative equity, and the mortgage must be secured on your primary residence. Apart from that you are absolutely right.

 

The American government could effectively be left holding the keys of tens of thousands of homes and on the other hand have an obligation to rehouse these same defaulters.

 

Again, not quite right, but almost. Their nationalisation of FM and FM does technically leave them liable for the difference between the value of foreclosed homes and the mortgages secured on them. But I don't know where you get the idea that the government has to rehouse the defaulters.

 

How will the tax payers who work hard to continue paying mortgages on properties in negative equity feel about that, and how many may feel if you cant beat them join them?

 

Because if you do default, your credit rating will be annihilated for 5 years. Not a big deal in the current market where renting is economical, but when the market swings back around you won't get a mortgage for love nor money. Heck, you won't even get a credit card, and Americans love their credit cards.

 

You are right to an extent tho, there are many people for whom the credit hit is worth it. And, yes, that leaves the government to carry the can.

[coppercrutch]

Markets look likely to act favourably in light of the Fannie and Freddie bail out.

 

Absolutely mistifying!

 

Tomorrow stocks will be up.

 

Once the dim wit bankers, financial experts, Eton and Cambridge bum boys have had time to digest what this means.

 

Stocks will be down.

 

Probably take the retards about a week. ( at least)

 

It is mental isn't it !!!

 

This seems to have happened a lot in the past year. Something shocking comes out - but it is not quite as bad as it could have been - so stocks soar for a short while. Then everyone realises that the underlying problem is still there - so they go down sharply a short while after. Trying to guess exactly how and when this will happen is not quite so easy otherwise you could make a fortune.

 

You have to remember that these 2 organisations have survided quite comfortably for almost 80 years. Through the Depression, the 2nd World War, the 70's crisis, the cold war and the dot.com bubble. Now they have had to be rescued as they are basically bankrupt. You can therefore conclude from this that the financial system is less stable today than it was during any of the above periods...

 

How anyone can class that news as good is beyond me. The finanical system's overall stabiilty is pretty scary just now.

[david mcgee]

It is mental isn't it !!!

 

This seems to have happened a lot in the past year. Something shocking comes out - but it is not quite as bad as it could have been - so stocks soar for a short while. Then everyone realises that the underlying problem is still there - so they go down sharply a short while after. Trying to guess exactly how and when this will happen is not quite so easy otherwise you could make a fortune.

 

You have to remember that these 2 organisations have survided quite comfortably for almost 80 years. Through the Depression, the 2nd World War, the 70's crisis, the cold war and the dot.com bubble. Now they have had to be rescued as they are basically bankrupt. You can therefore conclude from this that the financial system is less stable today than it was during any of the above periods...

 

How anyone can class that news as good is beyond me. The finanical system's overall stabiilty is pretty scary just now.

 

Looks like the dollar may be on its way down again, which will mean higher oil prices, higher inflation and throw the Bank of Englands plans right out of the window.

[Geoff Kilpatrick]

Looks like the dollar may be on its way down again, which will mean higher oil prices, higher inflation and throw the Bank of Englands plans right out of the window.

 

It shouldn't fall that far. What would really make the dollar tank would be the Chinese or Russians dumping the dollars they hold.

[Rab]

It is mental isn't it !!!

 

This seems to have happened a lot in the past year. Something shocking comes out - but it is not quite as bad as it could have been - so stocks soar for a short while. Then everyone realises that the underlying problem is still there - so they go down sharply a short while after. Trying to guess exactly how and when this will happen is not quite so easy otherwise you could make a fortune.

 

You have to remember that these 2 organisations have survided quite comfortably for almost 80 years. Through the Depression, the 2nd World War, the 70's crisis, the cold war and the dot.com bubble. Now they have had to be rescued as they are basically bankrupt. You can therefore conclude from this that the financial system is less stable today than it was during any of the above periods...

 

How anyone can class that news as good is beyond me. The finanical system's overall stabiilty is pretty scary just now.

 

Dude, a lot of what you are saying is true, but you keep throwing mentalist nonsense like this into the middle of it.

 

Freddie Mac was created in 1970 (http://en.wikipedia.org/wiki/Freddie_mac) and ***** Mae was created in 1938 (http://en.wikipedia.org/wiki/*****_mae) .

[coppercrutch]

Dude, a lot of what you are saying is true, but you keep throwing mentalist nonsense like this into the middle of it.

 

Freddie Mac was created in 1970 (http://en.wikipedia.org/wiki/Freddie_mac) and ***** Mae was created in 1938 (http://en.wikipedia.org/wiki/*****_mae) .

 

Ok so one is almost 80 years old and the other only about 40. The general drift remains however !! See that will teach me to listen to news reports. They were all using the 30's date I should have checked the detail. Anyway no big deal !!

 

Fact still remains they have been through some seriously tough times and always been ok.

[david mcgee]

Almost exactly right. It's not true in every state, you don't need negative equity, and the mortgage must be secured on your primary residence. Apart from that you are absolutely right.

 

 

 

Again, not quite right, but almost. Their nationalisation of FM and FM does technically leave them liable for the difference between the value of foreclosed homes and the mortgages secured on them. But I don't know where you get the idea that the government has to rehouse the defaulters.

 

 

 

Because if you do default, your credit rating will be annihilated for 5 years. Not a big deal in the current market where renting is economical, but when the market swings back around you won't get a mortgage for love nor money. Heck, you won't even get a credit card, and Americans love their credit cards.

 

You are right to an extent tho, there are many people for whom the credit hit is worth it. And, yes, that leaves the government to carry the can.

 

How many homeless families do you see sleeping rough?

In the UK if people lose their jobs and then their home, they are found alternative accomodation.

Local authorities end up footing the bill for temporary accomodation, be it hotels, bed and breakfasts or rent cheques.

I am quite sure it will be something similar in the States.

Whichever way the tax payer will end up picking up the tab.

[Rab]

How many homeless families do you see sleeping rough?

In the UK if people lose their jobs and then their home, they are found alternative accomodation.

Local authorities end up footing the bill for temporary accomodation, be it hotels, bed and breakfasts or rent cheques.

I am quite sure it will be something similar in the States.

Whichever way the tax payer will end up picking up the tab.

 

I assure you there is not. At least nothing even remotely close to the level of support there is in the UK.

 

Local authorities are absolutely, definitely, not responsible for housing people who have lost their homes. It just isn't like that here, there has never been the socialist ethos that Britain had for decades.

 

Remember what you originally said; people are not responsible for repayments on defaulted loans. This also makes the situation entirely different from the UK. You just can't compare the UK and the US when you're talking about individual situations like this, they're completely different.

[david mcgee]

I assure you there is not. At least nothing even remotely close to the level of support there is in the UK.

 

Local authorities are absolutely, definitely, not responsible for housing people who have lost their homes. It just isn't like that here, there has never been the socialist ethos that Britain had for decades.

 

Remember what you originally said; people are not responsible for repayments on defaulted loans. This also makes the situation entirely different from the UK. You just can't compare the UK and the US when you're talking about individual situations like this, they're completely different.

 

I dont know, ive never been to the States.

Where do the people that hand back their keys go then?

[Rab]

I dont know, ive never been to the States.

Where do the people that hand back their keys go then?

 

I don't know mate. I'd imagine most go into rented accommodation, some might move in with family or friends, but I'd be surprised if there weren't some who end up homeless.