Last week, someone in the industry asked me if I thought that the latest problems in the US over Fannie Mae and Freddie Mac, its state -supported mortgage institutions, would have a knock-on effect on our domestic housing market. At first, I thought they were joking, but it turned out to be a genuine question. After all that has happened, it seems that some people find it hard to understand just what a direct effect the events in the US have on the UK.
Fannie Mae and Freddie Mac are little known in the UK, probably because we have no direct counterparts. But because they guarantee or own a little under half of the US mortgage market – some £.2.7trillion, which is more than double the size of the UK economy – when they stumble, the impact is felt globally. They buy mortgage debt from hundreds of lenders across the US and sell it on as mortgage-backed securities to credit market investors.
They operate in a ‘grey’ area, as although they were set up by the state to give more people access to affordable mortgages, they are now private firms owned by shareholders, but still mandated by Congress to provide mortgage funds. Since the sub-prime crisis, there have been worries about whether they have enough capital to cover losses, despite the implicit government guarantee. The federal rescue plan for these giants has done little to allay market fears for the wider financial sector, to say nothing of the potential cost to American taxpayers.
The Fannie/Freddie meltdown adds to a litany of woes in a week that saw Federal Reserve chairman Ben Bernanke admit that the collapse in the normal functioning of the markets has increased the risk of inflation in the US, causing stock markets to plummet both there and here in the UK, with the FTSE 100 dropping to its lowest level for almost three years.
With a number of lenders in the UK currently looking at rights issues – including £4bn from HBoS, the outlook is far from rosy at the moment. The consequences for UK borrowers will be the continued lack of lender liquidity and volatile pricing for some time yet. n
