Yeah, I said it. Somebody has to say it!
Congratulations! You (if you are a U.S. taxpayer) are now the proud
owner of about $5 trillion dollars in mortgage debt! Hey, it's
diversified - What ever could go wrong?!
By now you've heard the news about the U.S. government buying (or
bailing out) the nation's largest mortgage lenders, Fannie Mae (FNM)
and Freddie Mac (FRE). Today I'm going to talk about how to profit from
the bailout, but first - very quickly - here are the basics...
Most people who have had a mortgage end up making the monthly payment
to a different bank than the one who originally gave them the loan.
Sound familiar? A loan is a bond and when your mortgage lender changes
hands, the banks are basically trading a bond created based on your
debt.
Fannie Mae and Freddie Mac purchase home mortgage loans from banks and
repackage those loans as mortgage-backed securities by pooling a large
number of loans together, thus reducing the risk of default of any
single borrower. They either hold the loans on their books, or they
sell them to investors around the world. Together, Fannie Mae and
Freddie Mac own about $5 trillion in home loans - about half the
nation's total.
So think of it this way
What's the significance of the government's buyout/bailout?
Here's the lower half (see image above) of the equation:
When banks, which are used to selling over half of their loans to
Freddie and Fannie, suddenly don't know if either one will be able to
buy loans that the banks write, the banks will be reluctant to lend
money.
