Re: Fannie/Freddie risk

All that matters is their ability to keep buying new paper or, if they can’t, whether someone else steps in to buy it. That helps sustain aggregate demand.

The rest is just rearranging of financial assets.

On Jan 6, 2008 1:29 PM, Russell Huntley <[email protected]> wrote:
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> The Baltimore Sun is asking What will happen if Fannie and Freddie go bust?
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> In a recent Securities and Exchange Commission filing, Fannie noted that it
> backs $2.6 trillion worth of single-family home loans. Underneath this pile
> of debt, the company has only $42 billion of capital. If the value of
> mortgages backing Fannie’s debt falls a few percentage points, the company’s
> capital could be wiped out. And because of the implicit government guarantee
> backing Fannie’s debt, American taxpayers would be on the hook for whatever
> debt Fannie couldn’t cover.
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> Consider Fannie’s exposure to high-risk loans: about $300 billion of
> stated-income “liar loans,” $200 billion of interest-only mortgages, $120
> billion of subprime mortgages and $330 billion of high loan-to-value
> mortgages.
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> Some of these high-risk loans fall into multiple categories and shouldn’t be
> double-counted, but you get the picture: Fannie has significant exposure to
> high-risk loans and only a small capital cushion to protect itself.
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> Freddie Mac has a few hundred billion dollars of high-risk loans in its $2.1
> trillion book of mortgages. And Freddie’s capital cushion is a meager $40
> billion.
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