The US mortgage crisis explained
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by: david field
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Word Count: 420
There are worries within the UK that a recession may be on its way, with house prices crashing and taxes increasing year-on-year. One of the main reasons this slump in the economy has come about is due to the poor economic climate in the US and the knock-on effect it has had on the world markets. One of the largest mortgage lenders in the US, the California-based IndyMac Bank collapsed on July 14th, on the same day that Freddie Mac and Fannie Mae - the two biggest loan institutions in the country – saw a 50% drop in shares.
IndyMac Bank had been struggling to stay in business due to the recent housing slump in the US, with California being one of the worst-hit states. With regards to Freddie Mac and Fannie Mae, their importance to the country’s economy is paramount. Together they own roughly $5.3 trillion (£2.7 trillion) worth of home loans – which equals half of the outstanding mortgages in the US. To put things in perspective, this is about twice the size of the whole UK economy. The way these two firms operate is by buying mortgage debt from institutions such as banks and then selling them onto investors, rather than lending the money out themselves. For this reason, they are relied upon by pretty much all mortgage lenders in the US and their collapse would shatter the market.
The government has promised to help keep Freddie Mac and Fannie Mae afloat by propping them up with taxpayers’ money – obviously at great cost to the US population. However, considering the importance that the company has not just to the housing market but the economy as a whole, the cost of not intervening would be far worse in the long-term.
Since the initial slump in share value, the company has seen fluctuating fortunes and it is unclear whether the firm is going to be able to move forward or not. The US House of Representatives has also passed a bill that should help home-owners get cheaper loans and pay off the mortgages on repossessed homes, of which there have been about a million so far. There will be a total of $3.9bn (£1.95bn) in community grants provided to certain home-owners and this should be the first step towards solving the mortgage crisis.
Some home-owners have taken to using companies that allow you to sell and rent back your home, with seller’s receiving a substantial percentage of the market price and then remaining in the house at tenants.
About the Author
This author would recommend Swift Capital if you want to sell and rent back your home or even if you are a landlord and are selling with a sitting tenant.
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