fannie mae and freddie mac 1
A bank loans $200,000 and makes 1/12 of 8% of that amount, or $1333 every month. For every loan made, the bank's income goes up by $1333. hypothetically and simplistically speaking. One would think that would be enough. Its a money making machine with almost no risk for the bank since it owns the house as collateral. I imagine that a defaulted home loan has some expense for the bank because regulations prevent an immediate eviction and there is cost to find another borrower.
if i start a bank with a million dollars, lets do it on the internet and pretend there are no startup costs, i can make five house loans and make $6665/month. the start up money is not available for other investments any more.
At some point, the banks didn't like their startup money tied up in mortgages. Who could buy these mortgages? Bigger banks. What if you are already at the top of the bank ladder? In 1938, the US government created an organization called Fannie MAE to buy home mortgages from US banks. The government says this frees up the bank's money to make more loans and allow for more Americans to own homes. What I wonder is, how is selling the mortgage a good idea for the bank? Yes they get their money back but loose their revenue stream. Sallie MAE is buying at a profit i imagine but how big of a profit? Sounds like our tax dollars are being spent to enrich banks in the name of a societal good.
In 1968 Fannie MAE became a publicly-owned company with common stock. (news,chart). Freddie Mac was started in 1970.
Over the last week, Fannie MAE lost half its stock value. July 7th 2008: MAE 19.46. July 11th 2008 MAE 10.25. Freddie MAC is a similar story. Is this an overreaction? Could these be rock-bottom prices and a unique time to buy in?
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You forget to include fractional reserve, if you have 1 million you can write loans for say ten million. This is of course dated information as the federal reserve has removed the requirement to have any reserves for the time being, this is a big problem when there is a bank run. Homeowners pay interest on electronic money printed for almost free (ok they need to have reserves deposited at the fed) in the bank back office. But to be fair even that dollar bill in your pocket is being borrowed by the United States government from the rederal reserve bank, a cartel of the larger banks in the United States. Nice scam eh'? We are still feeling the pain from WW-I in our banking system.
