Taking Stock of Bonds

December 7, 2007

Dancing Around the Minefield

Investors and deal makers by now have heard about the rise in delinquencies and foreclosures recorded by industry trade group Mortgage Bankers Association. Investors that hold Fannie Mae and Freddie Mac shares or bonds now face what was once "only a subprime problem."

For some professionals this credit creep probably did not come as much of a surprise, but Thursday's third-quarter delinquency and foreclosure report was the morning alarm clock going off for anyone who bought the idea that the housing crisis is relegated to a subset of the mortgage finance world.

Asked by IDD how many of the prime loans were with Fannie and Freddie guarantees, MBA officials on Thursday said they did not have data to discern which prime mortgages were guaranteed by the agencies.

What is clear from the MBA report is that prime fixed and floating rate mortgage paper has problems, and this could pose difficulties for US housing agencies because they not only guarantee mortgage loans, they buy them and the securities backed by these mortgages.