Marc's Mortgage Matter's

July 16th, 2008 10:17 AM

Fannie Mae and Freddie Mac are the largest buyers of home loans in the U.S. They buy home loans from lenders, and then either hold them in their portfolios or repackage them into bonds.

Freddie & Fannie guarantee all the loans that they sell to investors, and for this service they collect a “guarantee” or “guarantor” fee from lenders. So if a homeowner defaults on a mortgage, Fannie and Freddie will step in and make good on the loan. The law that created Fannie and Freddie explicitly says the government does not guarantee the loans, but it is agreed that Fannie and Freddie are too important to allow them to fail. As mentioned above, together they hold or guarantee about $5 trillion worth of mortgages. Already they've posted combined losses of $11 billion, and investors are worried there's much more to come. If the government takes them over, as some have suggested, shareholders are likely to get nothing, and that is one of the reasons their share prices are down 80% from a year ago.

“Daddy, what is ‘short selling’?”

“Well darling, short selling is when you sell something, usually a stock, without owning it. The SEC issued an emergency order to stop the short selling of mortgage financiers Fannie Mae and Freddie Mac, beginning next week. In this case, the SEC said it will require traders to borrow Fannie and Freddie stocks before selling them short, and they will be required to deliver the stocks at settlement. Darling, Fannie and Freddie own or back $5 trillion worth of mortgage debt, or half the U.S. market, so they are very important. Not only can folks not sell short Fannie & Freddie, but the SEC order prevents the short selling of BNP Paribas, BofA, Barclays, Citigroup, CSFB, Daiwa Securities, Deutsche Bank, Allianz, Goldman Sachs, Royal Bank, HSBC, J.P. Morgan Chase, Lehman Brothers, Merrill Lynch, Mizuho Financial, Morgan Stanley, and UBS.”

“Thanks. What channel is Sponge Bob on?”

 

When I got home last night, my wife demanded that I take her someplace expensive. So I took her to a gas station.

 

 

 

Posted by Marc (Moshe) Preger on July 16th, 2008 10:17 AMPost a Comment (0)
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