Global shock waves as US mortgages giants bailed out

Jul 16 2008 by Tony McDonough, Liverpool Daily Post

THIS week, the US Federal Reserve agreed to provide emergency funds for Fannie Mae and Freddie Mac, which together hold or back around half of US mortgage debt.

When the troubles of the two companies was revealed at the end of last week, it sent shock waves through stock markets across the world, including London.

In a move designed to calm increasing panic on Wall Street the Fed issued a joint statement in which they pledged to spend billions of dollars of taxpayers’ money to bail out the two American mortgage giants.

The statement said it would offer cheap financing to the companies through its so-called discount window. The two groups together account for more than half of America’s $12,000bn of outstanding mortgages.

Their collapse could have a catastrophic domino effect across the credit market in the US. But how are the effects of the crisis being felt here in the UK?

Paul Williams, head of research at Liverpool stockbrokers Blankstone Sington, warned that there could be a “sizeable” impact on this side of the Atlantic.

He said: “Fannie Mae and Freddie Mac are government-sponsored enterprises and are the largest buyers and insurers of mortgages in the US.

“Between them, they either hold or back about half of the $10 trillion of outstanding mortgage debt in the US.

“Both have suffered heavy losses during the credit crunch and the share prices of both en- tities have fallen substantially.”

Early this week, the US Federal Reserve announced a plan to support these institutions, lending directly to them if necessary. “They are both very important cogs in the US housing/mortgage market because the funding they provide to banks to lend to people is supposed to give low and middle income Americans the chance to buy homes at a reasonable interest rate.

“Hopefully, the Fed’s move will introduce some stability to the situation surrounding Fannie Mae and Freddie Mac.

“This could be an important bedrock for stability in the financial sector as a whole – a sector which has suffered greatly due to the credit crunch. The implications for the UK are sizeable, because stability for US financial institutions will inevitably help to stabilise the situation in Europe.

“If confidence is gradually restored and institutions start to lend to each other and to individuals more willingly, then we will not only start to see the beginnings of a recovery in share prices of banks, but also housing transactions and general lending will start to pick up again, and recession may be avoided.”

tonymcdonough