Wow...sometimes writer's have hidden gems they fail to recognize themselves. CEO of Fannie Mae Mudd is excited about the "feast" of opportunities in the housing crisis. The writer states ...
Like other financial institutions, Fannie is benefiting from the Fed's rate-cutting spree, which has created a bigger spread between the rates at which the company borrows and lends.
This is quite a statement and should make people shit their pants. Mudd is "excited" because of the exact same reasons that got us into this mess in the first place. Negative real rates benefit financial institutions because it allows them to loan money long and borrow short at a premium. This is a levered model that is destined to blow-up when interest rates start to creep up. As the margins tighten and underlying loans see default pressure, the whole model snaps. This is the EXACT reason why Fannie and Freddie will blow up in a collosal mess. Why anyone would see this as an exciting opportunity with the economic headwinds we're seeing now is beyond me. Sound business models aren't built on the basis of artificial rate spreads, they are built on proper risk analysis that looks at the borrowers ability to earn money and pay-off their loan using an adaquate "price to income" NOT "payment to income" model. Why this isn't obvious is beyond me.
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