Failure of Fannie Mae and Freddie Mac – a nightmare that can come true if economy tanks and deflation skyrockets foreclosure
Peter Oberois
Mar. 6, 2007

Federal Reserve is finally realizing the risk of failure of Fannie Mae and Freddie Mac. The massive portfolio of these two institutions contains home loans that not only back affordable housing but also others. The effect can be devastating. Currently the sub prime market is affected by deflation and stealth depression in the economy. But the wild fire is spreading very fast. The foreclosures are not restricted to the sub prime markets only. Many people who took enormous second mortgage and lines of credits with a hope their salaries will rise, find stuck with payments that they cannot make.

The underemployment and the across the board deflation will affect the performance and futures of Fannie Mae and Freddie Mac. Many expect Government to borrow more and bail them out. It may not happen as Government is in debt up to the neck.

The effect on the bond market is good. But the stock market is looking more vulnerable very day as people find they cannot pay mortgages on something that is losing value every day. The consumer confidence will sink to the lowest level ever. The net effect on Fannie Mae and Freddie Mac is severe if not catastrophic.

According to media reports, Federal Reserve Chairman Ben Bernanke said mortgage giants Fannie Mae and Freddie Mac should be restricted to holding home loans that back affordable housing "almost exclusively."

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READ MORE>>

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