Goodbye Fannie, Freddie

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Teflor Lyorian
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Goodbye Fannie, Freddie

Postby Teflor Lyorian » Fri Feb 11, 2011 4:34 pm

My feelings on this are mixed, partly out of ignorance, but it seems that Obama wants to shutter Fannie Mae and Freddie Mac. I'm for government getting out of business, but I don't know the details well enough at this point. Thought you should know though:

http://money.cnn.com/2011/02/11/news/co ... _proposal/
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Corth
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Re: Goodbye Fannie, Freddie

Postby Corth » Fri Feb 11, 2011 6:21 pm

The end result will be higher mortgage rates once Fannie/Freddie is phased out. Fannie/Freddie basically leveraged it's implied (and subsequently explicit) government guarantee to borrow money at the same rate as the US government. Ultimately, this savings was passed along to the consumer. Sounds good in theory, but the problem is that it also created a situation where the government bore the ultimate risk of a mortgage collapse, so the players in the industry were more cavalier about lending standards. And that is part of the reason how we got to where we are.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth

Goddamned slippery mage.
kiryan
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Re: Goodbye Fannie, Freddie

Postby kiryan » Fri Feb 11, 2011 7:47 pm

similar article

http://www.politico.com/news/stories/0211/49305.html

I was impressed by the treasuries position on home ownership.

In laying out its view on the government’s future role in the housing market, Treasury concludes: “The government must also help ensure that all Americans have access to quality housing that they can afford. This does not mean our goal is for all Americans to be homeowners.”
Corth
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Re: Goodbye Fannie, Freddie

Postby Corth » Sat Feb 12, 2011 1:22 am

A little bit too little and too late on that point...
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



Goddamned slippery mage.
Teflor Lyorian
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Re: Goodbye Fannie, Freddie

Postby Teflor Lyorian » Sat Feb 12, 2011 7:57 pm

Honestly, it's an opportunity for private industry to step in where the government completely failed.

Trouble is - if the US government's not trustworthy in this market, it'll take a market miracle to produce a private solution with a better reputation.
"You see, the devil haunts a hungry man.
If you don’t wanna join him, you got to beat him."
- Kris Kristofferson (To Beat the Devil)
Corth
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Re: Goodbye Fannie, Freddie

Postby Corth » Sat Feb 12, 2011 10:52 pm

In the absense of the government do you think all of a sudden that people wouldn't be able to borrow money to buy a house?

There is no need for a 'market miracle'. If there is money to be made, loans will be written. Interest rates would be higher because they would no longer be subsidized by the government. But if Fannie and Freddie folded up tomorrow it would not cause mortgage market to collapse.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



Goddamned slippery mage.
Teflor Lyorian
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Re: Goodbye Fannie, Freddie

Postby Teflor Lyorian » Sun Feb 13, 2011 1:53 am

Corth wrote:In the absense of the government do you think all of a sudden that people wouldn't be able to borrow money to buy a house?

There is no need for a 'market miracle'. If there is money to be made, loans will be written. Interest rates would be higher because they would no longer be subsidized by the government. But if Fannie and Freddie folded up tomorrow it would not cause mortgage market to collapse.

Oh no, they'll still make money, the miracle would be if they manage to be more credible. Fannie and Freddie came with the implied warranty of the United States government - one that a Democrat president and Congress honored. The private sector will be hard pressed to follow suit now that the g-men are out of the game.
"You see, the devil haunts a hungry man.
If you don’t wanna join him, you got to beat him."
- Kris Kristofferson (To Beat the Devil)
Corth
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Re: Goodbye Fannie, Freddie

Postby Corth » Sun Feb 13, 2011 2:00 am

The implied guarantee was good for exactly one thing: lowering fannie/freddie's borrowing costs. The banks will have to pay more to borrow money, and that cost will ultimately be passed on to the retail mortgage borrower. There are plenty of AAA rated institutions that will be able to leverage it's credit rating into a decent mortgage business - but none of them are getting the same rates as the government.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



Goddamned slippery mage.
Teflor Lyorian
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Re: Goodbye Fannie, Freddie

Postby Teflor Lyorian » Sun Feb 13, 2011 5:04 pm

Did the implicit government backing not also make the products more attractive?
"You see, the devil haunts a hungry man.
If you don’t wanna join him, you got to beat him."
- Kris Kristofferson (To Beat the Devil)
Corth
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Re: Goodbye Fannie, Freddie

Postby Corth » Sun Feb 13, 2011 8:25 pm

Well yes - but again the real meaning of that government guarantee is lower borrowing costs. Fannie and Freddie buy mortgages from retail banks. In order to come up with money to buy all those mortgages it sells bonds (debt) securitized by the underlying mortgages they are buying. The bonds are essentially their product. Because of the implicit (now explicit) government guarantee, investors perceive no risk of default, so Fannie/Freddie can sell their debt at low interest rates - essentially the same rates that the US government sells treasuries at. A converse example would be a "junk bond" sold by a dodgy corporation at a high rate. Investors demand higher rates in those instances for the higher risk.

If Fannie and Freddie disappeared tomorrow, mortgage lending wouldn't cease. Private companies would do the same exact thing that Fannie and Freddie are doing now. But because of the higher risk, investors would demand a higher interest rate on their debt. This cost would be passed on to the retail mortgage consumer in the form of higher interest rates. This is ultimately where we are heading.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



Goddamned slippery mage.
Teflor Lyorian
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Re: Goodbye Fannie, Freddie

Postby Teflor Lyorian » Mon Feb 14, 2011 12:36 am

Another concern is the premium against which people would buy these products. The Chinese no longer buying it may not necessarily be a good thing.
"You see, the devil haunts a hungry man.
If you don’t wanna join him, you got to beat him."
- Kris Kristofferson (To Beat the Devil)
Corth
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Re: Goodbye Fannie, Freddie

Postby Corth » Mon Feb 14, 2011 3:05 am

It's a bond so again it's reflected in interest rates. More investor demand means that rates go down. Higher demand means rates go up. If the Chinese stop buying Fannie/Freddie paper, or worse yet, Tresuries, it means the borrowing costs of the US government have increased - a bad thing.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



Goddamned slippery mage.
kiryan
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Re: Goodbye Fannie, Freddie

Postby kiryan » Mon Feb 14, 2011 4:21 pm

I think you simplify what would happen too much Corth...

First, interest rates go up (for reasons Corth articulated)
Second, house prices go down (because higher interest rates = higher payments = the average person can borrow less).
Third, banks go bust from bad loans (because existing loans are now underwater and I assume we don't bail them out this time)
Fourth, society disintegrates into a depression where everyone loses what they don't own outright (because it becomes a feedback loop)
Fifth, new banks form (capitalism at work).
Sixth, lending resumes (because you can make money).
Seventh, a new stronger economy forms (at a much smaller than previous scale) having lost all the "froth"
Eight, rinse and repeat.
Last edited by kiryan on Mon Feb 14, 2011 8:14 pm, edited 1 time in total.
Corth
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Re: Goodbye Fannie, Freddie

Postby Corth » Mon Feb 14, 2011 5:49 pm

Well - you can extrapolate what might happen if rates are higher - and you are probably more or less on point. I was just describing the narrow and direct result of Fannie/Freddie being phased out.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



Goddamned slippery mage.

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