Most Popular
1. THE INFLATION MONSTER is Forecasting RECESSION - Nadeem_Walayat
2.Why APPLE Could CRASH the Stock Market! - Nadeem_Walayat
3.The Stocks Stealth BEAR Market - Nadeem_Walayat
4.Inflation, Commodities and Interest Rates : Paradigm Shifts in Macrotrends - Rambus_Chartology
5.Stock Market in the Eye of the Storm, Visualising AI Tech Stocks Buying Levels - Nadeem_Walayat
6.AI Tech Stocks Earnings BloodBath Buying Opportunity - Nadeem_Walayat
7.PPT HALTS STOCK MARKET CRASH ahead of Fed May Interest Rate Hike Meeting - Nadeem_Walayat
8.50 Small Cap Growth Stocks Analysis to CAPITALISE on the Stock Market Inflation -Nadeem_Walayat
9.WE HAVE NO CHOICE BUT TO INVEST IN STOCKS AND HOUSING MARKET - Nadeem_Walayat
10.Apple and Microsoft Nuts Are About to CRACK and Send Stock Market Sharply Lower - Nadeem_Walayat
Last 7 days
The NEXT BIG EMPIRE WILL BE..... CANZUK - 25th June 22
Who (or What) Is Really in Charge of Bitcoin's Price Swings? - 25th June 22
Crude Oil Price Forecast - Trend Breaks Downward – Rejecting The $120 Level - 25th June 22
Everyone and their Grandma is Expecting a Big Stocks Bear Market Rally - 23rd June 22
The Fed’s Hawkish Bite Left Its Mark on the S&P 500 Stocks - 23rd June 22
No Dodging the Stock Market Bullet - 23rd June 22
How To Set Up A Business To Better Manage In The Free Market - 23rd June 22
Why Are Precious Metals Considered A Good Investment? Find Out Here - 23rd June 22
UK House Prices and the Inflation Mega-trend - 22nd June 22
Sportsbook Betting Reviews: How to Choose a Sportsbook- 22nd June 22
Looking to buy Cannabis Stocks? - 22nd June 22
UK House Prices Momentum Forecast - 21st June 22
The Fed is Incompetent - Beware the Dancing Market Puppet - 21st June 22
US Economy Headed for a Hard Landing - 21st June 22
How to Invest in EU - New Opportunities Uncovered - 21st June 22
How To Protect Your Assets During Inflation - 21st June 22
AI Tech Stocks Current State, Is AMAZON a Dying Tech Giant? - 20th June 22
Gold/Gold miners fundamental checkup - 20th June 22
Personal Finance Tips: How To Get Out Of A Tough Financial Situation - 20th June 22
UK House Prices Relative to GDP Growth - 19th June 22
Will Global Markets Be Pushed Deeper Into Crisis Event By The US Fed? - 19th June 22
Useful Things You Need To Know About Tweezer Top Candlestick Pattern - 19th June 22
UK House Prices Real Terms Sustainable Trend - 17th June 22
Why I’m buying the “new” value stocks… - 17th June 22
Optimize Benefits from R&D in Software Product Development with an R&D Tax Credit Software - 17th June 22
Want To Save On Your Business Energy? Here Are Some Helpful Tips - 17th June 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Fannie and Freddie Bailout Doomed, Lessons from UK Northern Rock Bust

Housing-Market / Credit Crisis 2008 Sep 10, 2008 - 01:11 AM GMT

By: Nadeem_Walayat

Housing-Market Best Financial Markets Analysis ArticleOne of the aims of the take over of the Fannie and Freddie by the US Government is to stabilize the housing market by taking over and providing liquidity to the mortgage market is doomed to fail. In the UK we have the example of the Northern Rock bank bust of Sept 07 and what subsequently transpired over the last 12 months as a possible guide of key assumptions being made now in the US that could prove to be wrong.


The Northern Rock bank failure witnessed a rise in mortgage interest rates as the bank sought to reduce its loan book to cover losses, in doing so it was forcing mortgage holders to remortgage to other banks as their fixed rates became due and the borrowers were stuck onto high variable rates. The more recent capital injection into Northern Rock bank of £3 billion i.e. a swap of loans to the bank for equity illustrates that the bank is sitting on huge losses that will now be borne by the UK tax payer over a series of such capital injections.

a. The net result will be UK tax payers look set to lose at least £10 billion, or 10% of the original mortgage loan book.

b. The net result for mortgage holders is that they were forced to pay higher interest rates as mortgage rates across the market rose, this from the fallout of a bank that controlled nearly 10% of the UK mortgage market. Additionally the bank became more eager to foreclose and hence contracted in size, as it also sought to sell of the saleable parts of its mortgage book to other banks.

Implications for the US Nationalization of Fannie Mae and Freddie Mac

a. US Tax payer losses could reach $500 billion, at the rate of 10% of the Fannie and Freddie's Mortgage book

b. The bailout will NOT help the US housing or mortgage market, as all of the money pumped into the two banks will be consumed by uncovered losses with little or nothing left over for new mortgage borrowings as the true scale of losses is far above the estimated loss of $25 billion.

c. Fannie and Freddie have exposure to 80% of US mortgages, therefore a contraction in the mortgage book will actually lead to far greater distress amongst the US housing market as the market will not be able to cope with remortgaging away from Fannie and Freddie and hence foreclosures look set to soar.

d. The huge loss of $500 billion will devalue the US treasury bond market and hence lead to higher bond yields as Fannie and Freddie bond yields converge with US treasury bonds, perhaps meeting somewhere in the middle, as both debt mountains are put at $ 5 trillion each. This implies it will become harder for the US treasury to perform future bailouts due to the risk of further loss of confidence in the US bond market, which implies deeper credit contraction.

Therefore the bailout will have failed as it will have not achieved its objectives, but rather bought time to allow the mortgage market to contract further, i.e. a slow unfolding crisis rather than a crash event, but the problem is the price paid in the loss of quality of US bonds as perceived by the market place, which will make US government debt refinancing more difficult in the future.

Meanwhile many comments have come my way that under these conditions the US dollar should weaken instead of what has transpired recently, in this regard consider the following two factors:

1. That the US dollar has been in a 7 year bear market and since making its bottom in March this year, it could easily have a corrective bull market rally for as long as a year, therefore this confirms my earlier analysis that the USD is targeting 90 by early 2009 (bottom 70, current 79).

2. That the US authorities are more competent than those elsewhere at handling and coping with the global derivatives deleveraging crisis, i.e. than the UK, Europe, China, Japan, etc. This is my conclusion from my vantage point across the pond, perhaps US analysts are too close to the epicenter to focus on the competency of other governments and their central banks. Though clearly the collective forex market place is recognizing this to be so, hence bidding the dollar higher when the consensus view is that it should be being sold.

For more on the credit crisis read yesterdays article- BANKRUPT Banks Wiped Out by Tulip Backed Securities, Is China Cheap?

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-08 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in