So what is the news getting at about fannie and freddie?

Question

is themedia trying to tell us that the mortgage rates are going down ? or sky rocketing , ? bad news seems

Answer 1

if fannie and freddie go under mortgage rates will sky rocket, so the government will step in to prevent it.  it is to keep the housing market from imploding on itself.  if they don't it will be worse for the whole economy.  the houses in foreclosure will go for even less money than they get now compounded with fear for lower markets, it would be financial suicide if they don't step in.

but stepping in may cause the s&p to downgrade the credit rating of the US.  which will cause higher borrowing costs

but they may not fail, but I think they will

Answer 2

How would the mortgage rates go down? They are poised to 'sky rocket' no matter what happens.

First both firms are technically insolvent, that is if they were following GAAP rules which they don't. But that is only a detail. Forget about what regulators are saying about how Fannie and Freddie are well capitalized, they don't have any other option but say that. The 2 firms are nowhere close to being well capitalized. Each of them is holding a capital of about 1% of the value of their mortgage holdings (that is a 99% leverage) and it means that if the price of these mortgage go down by a mere 1%, the whole capital is gone and they will soon become insolvent (which they already are because prices decreased more than 1%). They will get to the point where they will need bailout when they will become illiquid (nobody knows if they are already there or not or when they will be) or when their lenders (note holders) refuse to lend anymore or that their borrowing price sky rocket, or if none of these is enough, that the continuous slide in house prices impair their capital and make them lose even more money than they did last quarter.

I said that mortgage rates will go up no matter whether the government bails them out or not. The combined gross debt of both companies is about $5 trillions. We are not talking Bear Sterns here, not even the S&L crisis. If the Treasury takes that debt over it will DOUBLE the amount of government annual fiscal deficit. You imagine what would be the impact on bond yields. They will shoot to the moon. Then imagine what will happen to anything based on bond yields. They will shoot for Mars.

If the Government don't assume their debt, than there will be a major crisis (or many). There will be a crisis in the mortgage market, prices will collapse, mortgage rates go up, many banks that are holding this c**p will be in even more trouble. Lehman specifically will be automitically toast. And Chinese and Japenese (one of the biggest holders of GSE's debt notes) will not be very happy to know that they were lending to insolvent companies ...

Just pray there will be a miracle and that somehow these two twins will not lose their dignity (become somehow solvent), after they lost their virginity this week. Otherwise we are in big trouble.