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the one thing that gets these guys is interest rate risk. Not manypeople that put 20% down on a home ever lose the property and until theentire portfolio goes under water, the surface looks pretty good. Theymight be the front on $4 trillion, but they hold the paper on somethinglike 20 million homes. They could end up owning 20 million homes.
Theinsurers are in a more perilous position. I think the bailout would bethere a long time before it hit the GSE's. Houston we have a problemthough. If the MI companies went out of business, the sale of realestate would be in turmoil without easy downpayments. The first timehome market would go down the sewer and take the GSE's and the countrywith it. Government would probably fill this breach with the FHA systemand cover FNM through taking up any missing MI slack.
Thebigger risk is interest rate risk. I cannot believe we are going tocontinue to see inflation at current levels and interest rates atcurrent levels for very much longer. The GSE's have to have hedged muchof their portfolio against interest rate risks. Interest rates candecimate the market value of a portfolio by 25% if the change ininterest is large. They can also, in my belief, change the value ofhousing in a nominal sense significantly as well. It wouldn't take muchto knock over the housing market in this matter and hit the GSE's witha double whammy of diminishing collateral values and diminishing marketworth of their portfolios. A 25% change in market value of $4 trillionis $1 trillion. They don't need any defaults.
Theinsurers are in a more perilous position. I think the bailout would bethere a long time before it hit the GSE's. Houston we have a problemthough. If the MI companies went out of business, the sale of realestate would be in turmoil without easy downpayments. The first timehome market would go down the sewer and take the GSE's and the countrywith it. Government would probably fill this breach with the FHA systemand cover FNM through taking up any missing MI slack.
Thebigger risk is interest rate risk. I cannot believe we are going tocontinue to see inflation at current levels and interest rates atcurrent levels for very much longer. The GSE's have to have hedged muchof their portfolio against interest rate risks. Interest rates candecimate the market value of a portfolio by 25% if the change ininterest is large. They can also, in my belief, change the value ofhousing in a nominal sense significantly as well. It wouldn't take muchto knock over the housing market in this matter and hit the GSE's witha double whammy of diminishing collateral values and diminishing marketworth of their portfolios. A 25% change in market value of $4 trillionis $1 trillion. They don't need any defaults.
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