Fannie Mae & Freddie Mac - the big bailout?

[spronk]

The loan selloffs have provisions such that if a certain percentage of the loans go bad, the banks or loan originators (Countrywide, etc) have to buy back the loans. Thats caused a whole series of "rewinds" if you will.

Wells Fargo or Countrywide originate a loan. Now they have $100k loaned out, and a $120k home on their books as an asset. But they want to keep loaning out money. So they sell this loan to Fannie Mae, so they can loan out another $99k.

Fannie Mae in turn bundles up a ton of loans and sells a bond to wall street or the Prince of Dubai, if they are getting on average 6.5% from the loans they have made out they can issue a bond that pays 6.25% interest per year and basically keep the .25% spread as a profit. For the investor its a good deal, can't get 6.25% in a bank and Fannie Mae has AAA credit score, meaning Moodys or S&P thinks they will never, ever default on their bonds (mostly because everyone assumes the govt will step in to bail out any defaults on bonds).

Of course now the mess is that many loans are going bad, some of them are being unwound to the originators (when possible) but others are being stuck on Fannie/Freddie. Remember, they control about $12 trillion in loans. They have thousands and thousands of investments out on this $12 trillion in "assets".

If the government stood aside and did nothing basically the bond market and Treasury Markets would collapse leading to a massive spike in mortage interest rates. Stock markets would plunge 40%+ as tons of investment firms, hedge funds, etc got margin calls on their bond investments and scramble to raise the cash.

So theres little question of the politicians bailing it out, they just have to spin it now so that Americans dont panic about how shitty the whole situation is, or how much extra billions its going to add to the debt (aka our kids).

[Soriak]

Originally Posted by Lefazz

Is this part of the reason why we're in this mess?

Pretty close. Mortgage broker (not a bank usually, they have outsourced it) sells someone a mortgage, then bundles up a lot of those mortgages into a single package. The package gets a rating from a private company and a bank (or a big institutional investor) purchases it. The idea here is that while you can't predict if someone's going to pay his mortgage, you can pretty accurately predict how many mortgages in a packet of 10,000 will default. The percentage that defaults is based on the risk of the package. Banks loved the AAA packages, which were supposed to be of excellent safety. (Also worth noting: the rating companies didn't just sell their services to banks, they also sold consultation services to the mortgage brokers.)

As the subprime crisis hit, it turned out that a lot of subprime mortgages were part of AAA packets. The rating agencies then had to lower the security - they might, for example, become Aaa instead. As companies are required to fairly assess their holdings, they had to recalculate the value of their packages, which resulted in a lot of write-downs. In an Aaa package, more defaults are expected as it means higher risk. When packages got again downgraded to say BBB, another writedown happened. It also looked bleak because the interest banks got was that of an AAA package - not nearly high enough given the new risk.

Because banks are required to have a certain reserve, that began to shrink quickly as the value of those packages dropped - the packages were the reserves. So that tied up a lot of money that couldn't be lend anymore, reducing the amount of credit available.

The purpose of the two Fs was to facilitate exactly that bundling. Because it allows a global diversification of the risk and even diversification amongst different sorts of debt, it is supposed to be far more predictable and thus bring more money into the market. (Investors from China, for example, could now easily get in - and they did. Just buy a billion dollar package and you're getting good return on a predictable asset, or so they thought) The downside, as we now see, is that if one part of a package is misjudged (in this case mortgages), it spills over to all sorts of debt - people are now far more hesitant to pick up car loans, even though they are a different class entirely.

What they seem to be doing now is just buying those packages, essentially taking the risk out of the market and handing it to the government. It does look like they're getting ready to offload it, their stock price is plummeting.

[AladainAF]

My mortgage hasn't been sold (yet). I wonder why. Maybe because it wasn't a shitty loan and I have great credit?

Seriously - I always hear about mortgage selling, but I haven't experienced it myself.

[Etoille]

ABC News: Mortgage Giants to Stay in 'Current Form'

[rinthea]

Originally Posted by Lefazz

Can anyone educated in finances explain to me why banks sell mortgages to these companies?

To make money.

Step 1 - Create product
Step 2 - Sell product to some sucker above its value
Step 3 - Profit

Welcome to investment banking.

[Sharmai]

So what happens if and when the government prints up 12 trillion dollars and throws it at freddie and fanny mae? I assume it weakens the dollar in some way but would anyone mind explaining to a lazy soul how that works exactly?

And doesn't an ever weaker dollar mean even higher gas prices? Yippie...

Originally Posted by AladainAF

My mortgage hasn't been sold (yet). I wonder why. Maybe because it wasn't a shitty loan and I have great credit?

Seriously - I always hear about mortgage selling, but I haven't experienced it myself.

Mine was just sold to midland mortage and I am seriously not happy about it. I was happy with my first company and this new one has only TWO freakin payment options.. I mean who the hell writes checks anymore...

[Arbitrary]

The Federal Reserve takes their bullshit worthless loans as collateral, prints up a ton of money, the dollar falls again, oil prices go much higher, commodities prices go higher, and the stock market tanks a bit more.

You know what happens then? These companies that got bailed out take their money (that we are paying for) and when the market hits bottom all those fucking investment firms that should have gone under buy billions and billions and billions of dollars of stock.

[Hachima]

Maybe the whole 'living in your parents basement' isn't such a bad idea after all. Everyone in the US wants their own house. How many couples that are 60+ out there have a house that could support 8+ people still. I haven't lived with my parents since graduating high school, but I've also lived within my means just fine. Apparently there are a lot of people out there that would benefit from living in a multi generation household though.

Just to throw some numbers out there I found this, its not 'recent' but I still find it pretty interesting.

A recent Korean census survey (Korean National Statistical office, 1993) indicates that nearly three out of four Koreans aged 60 and over live with children (74.7%). The most common living arrangement of the elderly in Korea is coresidence with children and their offspring in three-generation households (44.0%) or, occasionally, four-generation households (1.3%). Two-generation households (29.4%) are more frequent than living with a spouse only (13.2%) or alone (10.6%).

[Mistii]

Originally Posted by Sharmai

So what happens if and when the government prints up 12 trillion dollars and throws it at freddie and fanny mae? I assume it weakens the dollar in some way but would anyone mind explaining to a lazy soul how that works exactly?

well by printing all that money, they devalue the money thats already out there.

the money they print up gets its worth from the money in your pocket, so the dollar weakens in value causing the value of other goods (which cannot simply be printed out and are a finite resource) to go up.

the news is getting more and more depressing, what with the government coming in and throwing around colossal sums of money to try and 'fix' the economy. damn good time to buy real estate, though.

[Etoille]

Originally Posted by Mistii

well by printing all that money, they devalue the money thats already out there.

the money they print up gets its worth from the money in your pocket, so the dollar weakens in value causing the value of other goods (which cannot simply be printed out and are a finite resource) to go up.

the news is getting more and more depressing, what with the government coming in and throwing around colossal sums of money to try and 'fix' the economy. damn good time to buy real estate, though.

when theres blood in the streets....

[Darus Grey]

Maybe the whole 'living in your parents basement' isn't such a bad idea after all. Everyone in the US wants their own house. How many couples that are 60+ out there have a house that could support 8+ people still. I haven't lived with my parents since graduating high school, but I've also lived within my means just fine. Apparently there are a lot of people out there that would benefit from living in a multi generation household though.

Just to throw some numbers out there I found this, its not 'recent' but I still find it pretty interesting.

Quote:
A recent Korean census survey (Korean National Statistical office, 1993) indicates that nearly three out of four Koreans aged 60 and over live with children (74.7%). The most common living arrangement of the elderly in Korea is coresidence with children and their offspring in three-generation households (44.0%) or, occasionally, four-generation households (1.3%). Two-generation households (29.4%) are more frequent than living with a spouse only (13.2%) or alone (10.6%).

Personally I'm a big fan of extended family systems and do this myself. Live with parents(grandparents too well they were alive), my uncle and most of my siblings in one large house.

Spread across all of us our living expenses are very small and we have a huge amount of disposable income that we wouldn't if we all lived separate.

The lack of privacy is more than compensated for. I can just take friends out to a nice place often with all the money I save and still be way ahead.

[Lyrical]

Originally Posted by Lefazz

Can anyone educated in finances explain to me why banks sell mortgages to these companies?

I'm ignorant on the subject -- but it sounds like, to me, that the ability for a bank to sell a mortgage to an individual THEN off load it to another institution creates a situation where the bank itself doesn't give a shit whether or not the individual can afford it. The bank effectively removes the risk of a shitty borrower since they're immediately selling that loan to Fannie Mac, Freddie Mac, or whoever.

Is this part of the reason why we're in this mess?

I don't know about banks, but I do know of other businesses that sell off installment receivables strictly for the cash flow. Some businesses would rather have the present value of the total amount of the contract (discounted for interest and default risk) rather than wait 30 years to get the money.

[Lyrical]

Originally Posted by Etoille

when theres blood in the streets....

As a wealthy businessman once said to me, there are alot of people that become wealthy in recessions. Some people are just so afraid that they sell their stuff dirtcheap. It happens everytime there's a recession. You get these weak minded people that think the system is going to collapse and its another Great Depression. Last time I checked, the US' GDP had not even turned negative yet. And these same people in a few years from now that got so panicky will realize how much they lost by not holding firm. Economic cycles come and go - they have for thousands of years. Deal with it.

And yeah, the market started to drop right after we sold our last house, and we are renting. We relocated across country. In the market we are looking at, prices have dropped enough that a 5K square foot home is going for 250K! Its a great time to be a buyer.

We are going to let the market run down some more before we buy. Still waiting for the bottom, but it seems like houses keep dropping. Where's the floor? I am still waiting on my mansion for 250K.

[Etoille]

Originally Posted by Lyrical

As a wealthy businessman once said to me, there are alot of people that become wealthy in recessions. Some people are just so afraid that they sell their stuff dirtcheap. It happens everytime there's a recession. You get these weak minded people that think the system is going to collapse and its another Great Depression. Last time I checked, the US' GDP had not even turned negative yet. And these same people in a few years from now that got so panicky will realize how much they lost by not holding firm. Economic cycles come and go - they have for thousands of years. Deal with it.

And yeah, the market started to drop right after we sold our last house, and we are renting. We relocated across country. In the market we are looking at, prices have dropped enough that a 5K square foot home is going for 250K! Its a great time to be a buyer.

We are going to let the market run down some more before we buy. Still waiting for the bottom, but it seems like houses keep dropping. Where's the floor? I am still waiting on my mansion for 250K.

Yep. My father worked for EFHutton back in the day....when the market blew up on black (tuesday?) whatever day in the late 80's he knew people that made so much over 48 hours that their third generation of grandkids wouldn't have to ever work again.

[GrobbeeTrull2.0]

Recessions are a way for the wealthy to get more wealthy, and the poor to get more poor.

Consolidation of wealth is the natural consequence of the boom and bust cycle of Capitalism.