Subscribe to Print Edition | Tue., July 22, 2008 Tamuz 19, 5768 | | Israel Time: 11:14 (EST+7) web haaretz.com   Back to Homepage Rosner's Domain Diplomacy Defense Jewish World Opinion National Print Edition Car Rental Books Haaretz Magazine Business Real Estate Easy Start Travel Week's End Anglo File

Last update - 23:07 21/07/2008 Fannie and Freddie run home to Mom By Guy Rolnik Tags: israel, U.S. economy Meet Fannie and Freddie. Sister and brother, not young: One is celebrating a 70th birthday, the younger one, its 40th. No matter what you do in life, you?ve read a lot about these siblings in the last week. If you follow events in the American marketplace then you knew them well beforehand, too. Actually, ?Fannie? and ?Freddie? are merely nicknames for two institutions with far longer appellations: Fannie Mae, which in itself is short for The Federal National Mortgage Association; and Freddie Mac, the Federal Home Loan Mortgage Corporation. Advertisement As the market closed last week, rumors flew that Fannie Mae and Freddie Mac were on the verge of collapse. Their stocks sank 40% to 50%, and they became the talk of the town worldwide - even more than Google and Apple, because of the trouble looming on their horizons. What does the world care about these two old companies? Because together they own or guarantee about half the American mortgages market, the biggest in the world. Directly and indirectly, they own about $6 trillion worth of mortgage-backed securities. That?s 50 times Israel?s GDP. As their stocks crashed, capital markets in the world wide reeled with shock. But as you read, the fears have been allayed because Washington stepped in to bail the two companies out. We can read any number of articles about their downfall, about how the market failed to price risk properly, about how the whole system is a mess. But let?s start our explanation with the story of two homes recently sold in the United States, as reported in The Wall Street Journal. The first, in Scottsdale, Arizona, is a gorgeous four-room house by a park, which was sold for $855,000 in March. Its owners had bought it for $1.65 million the year before. The second one, in Cape Coral, Florida, went for $267,000, whereas the sellers had paid $535,000 for it in March, 2006. In both cases, to buy the homes, the families had borrowed 100% of the money. Freddie and Fannie had been granting a growing proportion of mortgages of this type, directly and indirectly. And these were not so-called subprime loans, which involve lending money to dubious characters at high interest rates. No. These were solid loans to good borrowers. Freddie and Fannie made solid loans, and also bought mortgage portfolios from other banks. Now that the Fed has nationalized Freddie and Fannie, even skeptics can no longer deny that the media haven?t just been pumping up the story: The American real estate and credit bubbles are the macroeconomic story of the decade. Though Freddie and Fannie were private companies, they?d been set up by the government way back when, and people figured the Fed wouldn?t let them fail. Both naturally played a big part in inflating the real estate bubble. And if you had any doubt that the federal government was responsible for inflating the bubbles, via sins of commission and omission - through towering budget deficits, low interest rates and sheer waste of money - the fact that the Fed is bailing out Fannie and Freddie says it all. Americans evaded recessions in 2003 to 2007 by borrowing money and spending it wildly, urged by the government, the Fed and companies like Freddie and Fannie. They scattered money: Americans bought property, prices rose, the rise in prices justified more credit, and so on. But last year the cycle reversed. Borrowers couldn?t meet payments, banks foreclosed on homes and put them on the block, prices plunged, banks got stressed and tried to shed the mortgages, prices fell more, and so on. The chart that appears here shows that housing prices have plunged in parts of the U.S. It also indicates that in some areas, prices are likely to fall a lot more until reaching their pre-boom levels. Why is the Fed rushing to rescue mortgage banks, and investment banks like Bear Stearns, but not the millions of Americans who can?t finance their mortgages? Simple. The woes of the millions who move from houses to smaller apartments will weigh down the economy, but not crush it. However, the collapse of a major bank could bring down the whole thing within days. Fannie and Freddie are too big to be allowed to fall, and Bear Stearns was too connected to too many hundreds of financial institutions. Its fall was too risky. Is everybody doomed to return to square one? Not at all. The mortgage mediators, the investment banks, the brokers, the real estate agents, the credit-rating agency managers and managers of mortgage banks made pots of money that they spend on fancy housing, cars and yachts. Homebuyers are losing whatever gains they had on paper and in some cases are going bankrupt, while the bankers get to keep the money, cars and yachts. One shouldn?t expect them to give the money back: They?re there to cut their coupons. But the rating agencies could have been expected to do better. Some made the age-old mistake of relying on the history of rising property prices, and some knew it would end, but were distracted by the poor weather conditions for sailing their yachts. Or as one credit-rating agency analyst wrote two years ago in an e-mail - which the U.S. Securities and Exchange Commission revealed last week: ?Let?s hope we are all wealthy and retired by the time this house of cards falters.? By the way, the man who founded Fannie, which later gave birth to Freddie, was none other than Franklin Delano Roosevelt, who wanted to inject liquidity into the mortgage market in the framework of his New Deal to save the American economy. Seventy years after the New Deal, Americans are in the same boat, which is no yacht, with Fannie: The market is wobbling, the economy is in trouble − and the government is being forced to step in Bookmark to del.icio.us   Brown's ultimatum British PM to Knesset: Iran must suspend nuclear bid or face global isolation. One giant leap VIDEO: Israeli-developed device allows paraplegics to walk again.   1.   The American economy is down the well 08:11  |  Natallie Durson 22/07/08

Read & React Fearing Haredi ire, Knesset choir bans women singers at Brown session Responses: 62 Israeli officials: U.S. intervention in minor Palestinian issues may damage ties Responses: 54 Prosecution leans toward charging Katsav with rape Responses: 23 Moshe Arens: Israel's margin of error is disappearing Responses: 10 More Headlines 11:14 'Olmert vowed to keep Jerusalem whole, but that's not why I helped' 10:07 Police: Olmert travel expenses probe likely to yield indictment 09:10 Israel fears scathing U.S. report on its West Bank policies 10:33 Shalit's unit to be discharged Tuesday, but without their comrade 08:50 Peres to host Abbas in 'historic' visit to President's Residence 10:28 There's only one Katie Couric and now she's in Israel 10:18 Jury convicts man tried for accosting Nobel winner Elie Wiesel 10:46 Well-known singer held after gun battle outside gambling club 07:45 Prosecution leans toward charging Katsav with rape 09:19 Israeli official: U.S. intervention in minor Palestinian issues could damage ties 07:25 Olmert's attorneys: Talansky issued money transfers in own handwriting 07:57 Month after report, ex-panel head says Olmert ignoring pledge to Holocaust survivors 07:41 Cop convicted for assaulting protester at 2006 Amona evacuation Previous Editions Select Day 21 jul 20 jul 18 jul 17 jul 16 jul 15 jul 14 jul 13 jul 11 jul 10 jul 09 jul 08 jul

Special Offers Advertisement Fattal Hotel Chain Perfectly located hotels on best resorts of Israel. Israel's Premier Real Estate Website www. israel-property.com Dan Hotels Israel Live the Legend & experience an Unforgettable Summer Vacation Yossi Avrahami Presents: New Luxurious Projects in North Tel Aviv & Eilat Holyland Park Jerusalem Apartment Tower World Class Luxury Your vacation starts here Israel Travel Center Guaranteed Lowest Rates Hebrew Summer courses From $39.95 ISRAEL BONDS Build Israel Israel bonds - a multi-purpose way to celebrate Israel's 60th Eldan Rent a Car Israel's leading car rental company offers you a 20% discount on all online reservations Junkyard Junk a car - get free towing nationwide and a tax-deductible receipt

Home | TV | Print Edition | Diplomacy | Opinion | Arts & Leisure | Sports | Jewish World | Underground | Site rules |

Real Estate in Israel | Travel to Israel with Haaretz | Hotels Israel | Restaurants Israel | Tourist attractions Israel | Shops Israel

birthright Israel | Search engine marketing

Haaretz.com, the online edition of Haaretz Newspaper in Israel, offers real-time breaking news, opinions and analysis from Israel and the Middle East. Haaretz.com provides extensive and in-depth coverage of Israel, the Jewish World and the Middle East, including defense, diplomacy, the Arab-Israeli conflict, the peace process, Israeli politics, Jerusalem affairs, international relations, Iran, Iraq, Syria, Lebanon, the Palestinian Authority, the West Bank and the Gaza Strip, the Israeli business world and Jewish life in Israel and the Diaspora.

© Copyright  Haaretz. All rights reserved