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Your Money > Mortgages Articles > Fannie & Freddie - big deal?
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By Sarah Modlock
You know that something serious is up when the London Stock Exchange computer crashes due to frantic trading. The embarrassing IT failure - the largest in eight years - was blamed on overloading caused in part by news that America's two biggest mortgage lenders were becoming the object of the largest state intervention in financial history. Apart from widespread hair loss in the LSE, however, what does the move mean for the stricken UK property market? If today's rise in the FTSE of almost 4 per cent in less than two hours is anything to go by, it could signal the start of better times. But why do the fortunes of what sounds like a doddery couple in an old folks' home matter to us? Fannie Mae (short for Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) between them guarantee or own around half the $12 trillion US mortgage market. To put this into context, that's twice the size of the UK economy. The pairs' obligations are 25 times greater than those of Northern Rock. Although they don't lend money directly to homebuyers, the two companies are relied on by almost all US mortgage lenders to provide funds. Sounds serious - but what about us? We may not have anything similar to Fannie Mae and Freddie Mac but when America sneezes, Britain usually gets a cold. We are already seeing tougher times for our economy and mortgage market. Last week the UK banking sector lost more than 8% of its value as the threat of recession prompted fresh jitters. The subsequent dip in confidence wiped more than £94billion off the FTSE 100 in five trading sessions. Britain's biggest lender HBOS and LloydsTSB, which is most exposed to recession, were all affected. By contrast today's events, with both banks surging over 11 per cent, indicates that Fannie and Freddie are a vital cog in both the banking and mortgage machines in the UK. "This is effectively the US doing a Northern Rock - nationalising part of its mortgage market," says Ray Boulger, of mortgage broker John Charcol. "If the US government is guaranteeing the bonds, it should allow companies, including UK investors, to feel more confident. "The problems in the US won't go away, but the US government might have stopped them getting worse." Will the rescue be good news for the UK? It can't do any harm. Before the Stock Exchange suffered its computer gremlin, leading shares rallied by nearly 190 points on the news. "I think 'God help us' it if this rescue deal had not happened. The US economy would have entered a five-year downward cycle," says respected industry commentator David Buik, analyst at BGC Partners, the City spread betters. "It's the biggest insurance policy the stock market has ever been given and I expect there will be a strong reaction - perhaps too much." But given the prevailing climate, can any reaction be too strong? Away from the stock market, the mortgage market will also be hoping for a boost following the news. But homeowners, buyers and lenders may have to wait some time to feel any positive impact. The development should help put the brakes on plummeting house prices, but whether they will create a bottom is uncertain. But a word of caution before we start talking of turning points. At the weekend, Andy Hornby, the chief executive of HBOS, said that he believed the global financial turmoil would continue for at least another 18 months. Confidence on both sides of the Atlantic, he said, would only return when the American housing market starts to recover. Until then, American investors will put their money back into British banks. As about two-thirds of wholesale funding received by UK banks comes from overseas, this means there will be less money for mortgage lending. Hornby also implied that there was little the government could do to rectify the crisis. Closer to home, another development - the much-anticipated base rate cuts by the Bank of England - are likely to provide a greater benefit in the short to mid-term.
Until then, this latest twist in the housing market tale is a further demonstration of the depth of the ongoing financial crisis, and the unprecedented steps to which government and business are prepared to go to stop the rot. In brief: Fannie and Freddie - what's gone wrong? If ordinary homeowners cannot pay back their mortgages, Fannie and Freddie must pay up. In the wake of the collapse of the sub-prime mortgage sector, this is proving a huge drain on their finances. The latest figures show a record four million Americans have fallen behind on mortgage repayments and face repossession. The two firms lost more than $3bn alone between April and June this year, resulting in a sharp fall in their share values. They have tried to raise funds to cover the losses but investors fear it may be too little, too late. Also, the Asian banks who invested in Fannie and Freddie have started to pull out their money. What next? Allowing these firms to fail is not an option. It would have a terrible impact not just on the US economy but on the global economy, as banks all over the world have money invested in them. Plans were announced on Sunday to bring the firms under tighter government control as the US housing market struggles, property prices sink and repossessions soar. The US Treasury said in July it would shore up their finances if they needed help in what would be the biggest state rescue in history. Now it is pledging trillions in financial guarantees for the two firms over the next 16 months. The rescue could cost the Federal government over £100bn as it invests fresh capital to keep them solvent. New management will be installed and the lenders will be given access to fresh sources of funds, which should allow them to offer lower loan rates. Useful links: |
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