It's All Contained

By Fester

The mortgage crisis is contained.  It can not expand much further now as there is very little of the mortgage market and value chain left. 

The New York Times reports on how containment has been achieved:

Alarmed by the growing financial stress at the nation’s two largest mortgage finance companies, senior Bush administration officials are considering a plan to have the government take over one or both of the companies and place them in a conservatorship if their problems worsen....

Together the two companies touch more than half of the nation’s $12 trillion in mortgages by either owning them or backing them....

In the last week alone, Freddie has lost 45 percent of its value, and Fannie is off 30 percent. Expectations of default at the companies have also risen; it costs three times as much today to buy insurance on a two-year Fannie bond as it did three years ago....

the markets are worried that Fannie and Freddie themselves may default on their debt.

Under a conservatorship, the shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee — which could be staggering — would be paid by taxpayers.

The government officials said that the administration had also considered calling for legislation that would offer an explicit government guarantee on the $5 trillion of debt owned or guaranteed by the companies. But that is a far less attractive option, they said, because it would effectively double the size of the public debt. [emphasis mine]

There is nowhere else for the mortgage crisis to go as it is eating up the largest and the implicitly best backed players.  The crisis is contained because there is so little food left for it to eat.  Now it is time for the beast to digest its meals...

Comments

[Steve]

Numerian has a related post, with some informed comments, over at The Agonist. Jives nicely with what you`re saying. The Dow also seems to agree.

[Kat]

The crisis is contained because there is so little food left for it to eat.

Fester, sometimes you really mystify me.

I suspect, soon, we'll be astounded by how much more 'food' this beast will find to eat.

I think this is the post Steve was talking about:

The Foundation of the Housing Market has Begun to Collapse

Excerpt:
One of the things we’ve often mentioned here is that Fannie Mae and Freddie Mac have been allowed to operate on the flimsiest amounts of capital – 2% of assets compared to 8% of assets for commercial banks. This leniency is coming home to roost. Fannie Mae has something like $30 billion in available capital to cover any losses, yet it owns hundreds of billions of mortgages on its balance sheet, and has guaranteed the performance of trillions of dollars more. This is really the point Poole is making: even a modest percentage of losses on such a huge portfolio would wipe out $30 billion in capital.

It is true that neither company has engaged extensively in buying or guaranteeing sub-prime mortgages, where over 20% of all homeowners of such mortgages are in default. But the real problem is that foreclosures are spreading rapidly up the chain to more creditworthy homeowners who can no longer meet payments on adjustable rate mortgages, or cannot cope with the high price of energy and basic food staples, or who have lost their job or suffered a personal setback like a divorce.

[fester]

I was trying to be snarky on this one, Kat in that the mortgage crisis is contained to the entire debt/financial market. Sorry if that was unclear....