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Prudent Bear ^ | September 3, 2007 | Martin Hutchinson

[Blue_Ridge_Mtn_Geek]

The 45% drop in earnings at Freddie Mac, for a quarter that ended in June, predating August’s intensification of the mortgage market crisis, indicates an uncomfortable reality. President George W. Bush may attempt to hold back the tide of foreclosures by handing out yet more federal guarantees to subprime borrowers, but that will only delay the inevitable. Far from being able to assist the mortgage market by purchasing yet more mortgage backed securities, Fannie Mae and Freddie Mac are about to fight for their lives. The more interesting question is what should be done about it if they perish.

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Averaging each pair of observations, a typical yield premium over long dated Treasuries for 30 year home mortgages was 112 basis points in the 1970s and 164 basis points today. Effectively, government guarantees, securitization, fantastic modern analytic technology and the combined genius of Wall Street have made home mortgages 52 basis points, just over ½% per annum, more expensive.

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Alert readers will at this point ask: if the new system is so much less efficient in delivering value to the ultimate customer, how did it drive out the old?

[Blue_Ridge_Mtn_Geek]

Some interesting historical perspective on mortgage rates, along with some fairly radical suggestions for replacing failed lending mechanisms (if they indeed fail).

[Iconoclast2]

A beautiful example of how unconstitutional legislation, as part and parcel of relentless, federally-driven centralization of everything, is counterproductive.

[elkfersupper]

FNMA and FHLMC were necessary liquidity instrumentalities with excellent credit and collateral guidelines until they started responding to political pressure to provide “affordable” housing as if they were direct lenders.