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Politics : Formerly About Applied Materials

AMAT 225.36

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12:34 PM EST

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To: Duker who wrote (31803)	8/10/1999 8:17:00 PM
From: John O'Neill	Read Replies (1) of 70976

<<Perhaps you could walk me through how FRE and FNM lead to some derivative collapse based on a modest uptick in rates >> I'm not an expert..so bear with me... fannie mae..(FNMA) and Freddie Mac (FHLMC) are part of the secondary mortgage market...their function is to provide liquidity to various lenders in the primary mortgage market.... in 1970 congress allowed FNMA to buy sell and deal in mortgages NOT federally insured or guaranteed.the purpose is to buy mortgages from the primary lender, thus renewing their cash and allowing them to make more loans (primary lenders)....FNMA capital is obtained by 1) borrowing 2) selling long term notes 3) issuing/selling their own single class common stock 4) EARNINGS from their own mortgage portfolio and fees and 5)from the sale of their pass-through mortgage-backed securities (MBS)to investors who might other wise seek investments in nom mortgage backed securities.. the board of FNMA has 15 members, 5 of which are appointed by the president of usa. Freddie mac serves a similar function...providing revolving liquidity to primary lenders...ie someone the primary lender can immediately sell the loan to thus regaining it's cash. The FHLMC purpose is to increase the availability of mortgage credit for the financing of housing by developing, expanding..etc..that secondary market..for residential conventional mortgage loans. the do this by buying approved existing mortgages loans and reselling them to individual investors or financial institutions... most of these mortgage purchases by Freddie are financed through sales of 10the issuance of debt obligations which are long-term thru debentures, or by 2) short term through discount notes..and lines of credit from commercial banks.. my point is that the recent loans bought by fannie and freddie are "under water"...rates have rises and the loan are worth a lot less that they cost fannie of freddie.... we are talking hugh amounts of money here...the use of derivatives plays a part in hedging the potential staggering loss of mortgage backed securities as rates increase......it is extimated that over $50 trillion dollars of derivities are floating around...who pays that tab..to make them good should it come time to pay the piper. long term capital had $5 billion cash holding down $100 bill in speculative investments...the banks/brokerage houses loaned the extra $95 billion.....this is the mentality we are playing with...no wonder they patched that up so quick since it would have anilated those banks and the market

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