Mortgage bail-out rallies markets, Light at the end of the credit crunch tunnel.

MrMalkin

mewbie wrote: »

Do you want to buy some magic beans? Pound each and they will grow all the way to heaven.

Instead of posting pointless crap why don't you try to refute what I'm saying, if you think I'm wrong?

I swear to god, some people need to learn that if they don't have anything to add to the discussion they need to shut the hell up, no-one cares how many silly soundbites you can think of.

Generali

MrMalkin wrote: »

I don't think daft catchphrases really add much to the discussion.

Ultimately a lot of commentators in the States think that the bail-out will be a good thing. Sure, it's a big hit in the short term, but when all's said and done the US taxpayer is getting a nice big chunk of two massive and industry-leading companies for a pittance. The US government is perfectly able to weather this storm and when the credit crunch blows over they will stand to make a lot of money on this investment.

Remember, the huge liabilities they are assuming will in the most part be repaid with a decent profit to be had. No matter what the doomsayers may think, the vast majority of mortgages issued by Freddie and Fannie are viable and will be paid off as expected, only a small percentage are sub-prime and not all of those will default.

FMx2 don't have any sub prime mortgages on their books as they are not allowed to finance sub prime mortgages.

At present about 7% of FMx2 financed mortgages are in arrears; by comparison 25% of 'non conforming' mortgages are in arrears. Both numbers are set to rise considerably as only half of ARM resets have fed through and unemployment has only just started to rise really. (A non conforming mortgage is one which FMx2 is not allowed to finance by law such as 'jumbo loans' (too big) or sub prime (too dodgy).)

There are 2 ways I can see that FMx2 could become profitable:

1. There is a sudden and unexpected recovery in the US housing and jobs markets which allows arrears to be repaid in many instances and the value of the mortgage and arrears to be recopued by reposession in those where the are not. This seems unlikely to me but you never know.

2. The Government uses its ability to borrow at lower rates than private enterprises to make more money on performing loans. Unfortunately this won't happen as the implicit Govt guarantee that FMx2 had meant they paid little more than US Treasuries anyway.

I can see no way that the FMx2 liabilities can be discharged without one of the 2 events above happening. One is implausable and the other impossible!

MrMalkin

Generali wrote: »

FMx2 don't have any sub prime mortgages on their books as they are not allowed to finance sub prime mortgages.

At present about 7% of FMx2 financed mortgages are in arrears

I don't know where you're getting this from, but on both counts you're wrong, according to what I've read at least.

Fannie Mae owns or guarantees $51.2 billion of subprime loans, those given to borrowers with bad credit histories, a category that makes up about 2 percent of its total mortgage holdings. I got this directly from here: http://www.bloomberg.com/apps/news?pid=20601109&refer=home&sid=aMz0dl3IdwjU

Also 98% of their issued mortgages are being repaid on time and both companies technically have more assets than liabilities, though more writedowns may be forthcoming that will change that.

I'll opine in the opposite direction to you: I think that the only way these companies will not make a profit is if interest rates rise dramatically causing a large increase in mortgage defaults, but the US government now has a vested interest in not raising rates, so we'll see what happens.

Seriously though, thanks for posting a real discussion point. It's getting hard to pick out posts worth reading in this forum these days.

ManAtHome

MrMalkin wrote: »

Sure, it's a big hit in the short term, but when all's said and done the US taxpayer is getting a nice big chunk of two massive and industry-leading companies for a pittance

Still trying to get my head round this one - will the external investors carry on getting the F&F yield (a higher yield than treasuries) or will it drop close/to Fed treasury rates? If the former, presumably the US taxpayer picks up the gap. if the latter will external investors just move their money anyway (must have been after a bit more 'bang for the buck' to invest in F&F in the first place)?

Generali

MrMalkin wrote: »

I don't know where you're getting this from, but on both counts you're wrong.

Fannie Mae owns or guarantees $51.2 billion of subprime loans, those given to borrowers with bad credit histories, a category that makes up about 2 percent of its total mortgage holdings. I got this directly from here: http://www.bloomberg.com/apps/news?pid=20601109&refer=home&sid=aMz0dl3IdwjU

Also 98% of their issued mortgages are being repaid on time and both companies technically have more assets than liabilities, though more writedowns may be forthcoming that will change that.

Interesting. I always thought neither could finance sub prime mortgages. I wonder if it changed or if I'm just plain wrong.

I understood that the reason for the nationalisation was because regulatory capital thresholds were in danger of being breached. No idea if that's right either now!

MrMalkin

ManAtHome wrote: »

Still trying to get my head round this one - will the external investors carry on getting the F&F yield (a higher yield than treasuries) or will it drop close/to Fed treasury rates? If the former, presumably the US taxpayer picks up the gap. if the latter will external investors just move their money anyway (must have been after a bit more 'bang for the buck' to invest in F&F in the first place)?

If you're talking about dividends, the deal put in place suspends all dividends indefinitely. The shares the US government is buying are 'preferred senior stock', which I think means they are first in line to receive dividends and/or assets if the two companies fold. Every other investor, be it employees, investment houses or Joe Public stockholders, come a distant second.

In essence the number of available shares in Freddie and Fannie has been increased by a factor of 5, with the government buying all the new shares. This leaves all the previous stockholders with about a 20% share, whilst Uncle Sam has 80% or so.

Plenty of new investors are willing to have a punt on Fannie and Freddie at the moment, given how low the share price is. A rebound to even 10% of their previous peak values could give them a tidy profit, but of course there's always the risk that it'll all go wrong.

pickles110564

MrMalkin wrote: »

Instead of posting pointless crap why don't you try to refute what I'm saying, if you think I'm wrong?

I swear to god, some people need to learn that if they don't have anything to add to the discussion they need to shut the hell up, no-one cares how many silly soundbites you can think of.

MEWBIE never has anything to add to the discussions because he is still at school and has no life expierences yet!

ManAtHome

MrMalkin wrote: »

If you're talking about dividends

No, was thinking more about bonds - I thought external governments and banks/sovereign funds were more into these than the shares

justpurchased

MrMalkin wrote: »

Instead of posting pointless crap why don't you try to refute what I'm saying, if you think I'm wrong?

I swear to god, some people need to learn that if they don't have anything to add to the discussion they need to shut the hell up, no-one cares how many silly soundbites you can think of.

Just report it as abuse that is what I do now (I love apposing arguments and banter it what you learn from, but stupid comments really pee me off). Hopefully soon there accounts will be deleted.

mewbie_2

MrMerkin wrote: »

Instead of posting pointless crap why don't you try to refute what I'm saying, if you think I'm wrong?

I swear to god, some people need to learn that if they don't have anything to add to the discussion they need to shut the hell up, no-one cares how many silly soundbites you can think of.

I wouldn't normally bother with a reply, but this is more for Generali than you. As I respect his opinion I don't particularly want him to perceive me as always adding a zero value statement.

My statement "magic beans" was short and to the point. It was bang on topic, and in a few short words conveyed exactly the message I did not need to type out at length. I stand by it 100% as a contribution to the debate, not as a soundbite throwaway. It is the way I choose to make a point, rather than pontificating a load of second hand stuff from the internet, or some other means.

But you prefer a long and reasoned post apparently. What magic beans means is that in my opinion seeing the upside of the bailout is simply nonsense. The reason for it in my opinion was a last ditch attempt by a failing system to rescue itself. There was no choice in the matter - save it and buy more time, or let it go under and collapse the entire worldwide economic system. I am not joking.

You are of course welcome to see the upside - that is your opinion. And my opinion, equally valid, is to see the downside. That is the point of the forum.

So. To sum up. I was on topic, pithy, and made my point. If you don't agree with it fine. I wouldn't expect you to.

Enough explaining, on rare occasions I am genuinely not trolling the board, and this was / is one of those times.