Mortgage Market Basics

Fannie and Freddie are down again this morning…

Fed’s Discount Window Said Open to Fannie and Freddie
By Romain Bostick – Bloomberg News (11 Jul 2008)

In 1997, in my attempt to persuade US leadership to address real opportunities to reengineer our economy for success, I had dinner with Richard Ravitch at the Jockey Club in Washington. Unimpressed by arguments, Ravitch who had developed several affordable housing projects in New York and was the Chair of the AFL-CIO housing trust, said to me: “As long as I can get government subsidies, what do I care if people have education or jobs?”

Indeed, people need education and jobs to generate value that will generate employment or income. The resulting compensation and income is needed to make mortgage payments. Those mortgage payments are what generates the cash flows on mortgage pools. Those mortgage pool cash flows are what is needed to continue the valuations and cash flows on mortgage backed securities issued or guaranteed by Fannie or Freddie or held on their balance sheet. And all of those cash flows are needed to prop up the value of the derivatives that have been piled up on top and in which Fannie and Freddie made a market.

What this means if we want to increase the price of Fannie and Freddie stock, you have to increase the cash flows of the people who live in the homes that their mortgage business and assets finance, which means Americans need to get back to generating income doing productive things.

While a government bailout sounds good, the only way the Fed and the US Treasury can afford to bail out Fannie and Freddie is if the US government use nucleur bombs and other forms of weaponry and force to continue to implement a global taxation system by forcing people around the world to hold currency falling in value, buy government bonds falling in value, to buy things they don’t need and hire companies with whom they don’t want to do business.

Recent headlines would indicate that the US career military, a group of people that I have enormous respect for, know that more force as a response to fund ever more corruption and falling productivity is not an effective strategy.

Hence, the time has come for all Americans to care whether all Americans have education and jobs and to reflect such caring in all aspects of our daily lives.

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