Would *you* invest in mortgages? Investors don’t, either.
By Barbara E. Hernandez
Wednesday, July 9th, 2008 at 8:38 am in Mortgage Mania, The Market.
I saw this story yesterday and it made me think back to the WaMu “financial planner” in May who told me I should invest in Fannie Mae bonds. Knowing the market as I do, I hedged and said I would talk to him later. Turns out I was right.
While the stock declines of Fannie and Freddie were sharp, the biggest impact from their troubles could come in the mortgage market. If the companies fall short of capital, they would have a harder time buying and guaranteeing mortgages. That would raise home buyers’ borrowing costs and likely drive down home prices further. On Monday, investors sold off the debt of the two companies, effectively making it more expensive for them to borrow.
Congress and the White House are counting on Fannie, Freddie and the Federal Housing Administration to prop up the mortgage market as other financial institutions shun what they see as a treacherous business. Fannie and Freddie “are critical to keeping the economy going,” said Frederick Cannon, chief equity strategist at Keefe, Bruyette & Woods in San Francisco.
IndyMac, a mortgage lender that gave risky loans, also had a run on the bank with depositers trying to get all their money out. “The stock, which fetched $50 in 2006, at the height of the housing boom, plunged 38 percent to 44 cents,” writes NY Times’ Eric Dash.
So investors are leery of any kind of mortgage investment, which could mean less product out there. And with fewer options there is even less of a chance for economic recovery. It’s a scary, scary time.
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July 9th, 2008 at 9:00 am
Nice writing. You are on my RSS reader now so I can read more from you down the road.
Allen Taylor
July 12th, 2008 at 7:40 am
If Fannie and Freddie are in trouble and may fail, what about FHA? What is going to happen next for those senior citizens who are taking out the reverse mortgages that FHA guarantees? Will the reverse mortgage be the next mortgage meltdown?
July 12th, 2008 at 9:35 am
I think FHA is in a little better shape, and the reverse mortgages have built-in safety nets (only 80 LTV or even less now) but you’re right to question it. These were, until now, easy moneymakers for investors and they are tumbling like a house of cards. It makes you question a lot of it.
July 22nd, 2008 at 9:10 pm
You couldn’t be more wrong on FNMA bonds. If Paulson’s plan is approved, the government would step in and bailout FNMA and FHLMC. This would be good for bondholders (your payments are closer to being guaranteed by the government, like treasuries) for stockholders its the exact opposite. The government would pay bondholders back by buying stock from FNMA / FHLMC. More stock available? Price goes down.
When Bear Stearns went under, the bondholders did fine. They ended up being bailed out by JP Morgan Chase, the stockholders got $5 a share versus mid 50’s. Substitute JPM for the Treasury and you have the same situation.
Not trying to sell you anything, but I trade the bonds for a living and spreads on FNMA / FHLMC bonds tightened (less risky) when the plan was announced.