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About A Week: Fannie Mae, Freddie Mac And Me

Peter Hinchliffe thinks houses should be regarded as homes, not “investments’’.

A hundred pounds is a very handy sum of money. At today’s exchange rate it’s equivalent to 177 American dollars.

I could buy a watch to last a lifetime for that amount, or eat out every day for a month at a nearby pub.

It’s not surprising that I should think small when I think of money. When starting out as a newspaper reporter at the age of 20 I was paid £4 a week.

Today we are burdened with news of cash losses measured in billions and trillions of pounds and dollars.

Take for example those two US financial giants Fannie Mae and Freddie Mac who loan or underwrite cash to buy houses. Fannie and Freddie have dished out $4.59 trillion of the $10.2 trillion outstanding mortgage debt in the US.

During the past year Fannie and Freddie have recorded combined losses of $14 billion.

Those who borrow money without sufficient regular income to repay their debts are labelled imprudent. The far greater imprudence has been that of Fannie and Freddie. They’ve loaned cash to folk who didn’t stand a snowball-in-hell’s chance of repaying.

Bad loans have been rolled up, given fancy names, and sold on to banks and financial institutions around the world. A massive financial crash was waiting to happen. When it inevitably came, it too was given fancy name: the credit crunch.

Those two words “credit crunch’’ represent an Everest of worry and misery for millions in the US and worldwide.

In Britain house prices have fallen by 12% in a year. New mortgage approvals are down by 71%. House sales are almost at a standstill.

Property prices in the UK have been a leading conversational topic for decades. House prices have soared. A house in UK costs around twice as much as an equivalent house in the USA.

Jon Henley has just made a TV documentary series about the price of property for Channel 4 in the UK.

Writing in The Guardian newspaper Henley says:

“In Britain today we no longer even think ‘home’. We think ‘property’. Or in other words ‘investment’. Capital gain, sure-fire winner, right-to-buy, loan-to-value, buy-to-let, remortgage, equity release, rental yield, profit. Lots of it. (Or, just at the moment, not.)

What we have done over the past 30 years or so, encouraged by governments only too happy for us to feel fat and contented and eager to vote for them, and by lenders engaged in an utterly irresponsible feeding frenzy, is commoditise what should be a basic right - a roof over our heads.

As soon as that happens, in come the speculators, profit-seekers and moneymen. And suddenly everyone - government, banks, estate agents, builders, TV producers, and the 70% of us who now own our homes - finds themselves with a strong vested interest in seeing prices continue to spiral upwards.’’

Wife Joyce and I lived in rented apartments and houses for the first five years of our married lives: the upper floor of an old wooden house in Indianapolis, where we awoke every morning to the sound of squirrels holding their version of Olympics on the veranda; a cold flat in Newcastle-upon-Tyne in which we had to wrap ourselves in blankets long before bedtime.

We bought our first house for £4,000 ($7,000), and our second for £7,500 ($13,275). Thirty-six years on, we are still living in the second house, which, even in a depressed property market, is worth more than 30 times what we paid for it.

Not that we have any intention of selling the house. It’s our home, the setting of countless happy memories, the place where our sons grew up and are always happy to return to from the far side of the world.

I live not far from where I grew up, a 30 minute walk through woods and fields from the house where my mother was born, a 40 minute walk from my father’s former home, and a 42 minute walk from the house in which I grew up. I’m at home in my surroundings, happy in my own modest brick box.

My father built his house. He was no architect, yet he drew out a design for the house on graph paper. He then sawed wood and laid bricks. We moved into that house in 1939. It cost £900. If that house came on the market today I couldn’t afford to buy it.

The United States Government stepped in to in effect nationalise Fannie Mae and Freddie Mac, the biggest financial bail-out in history.

The rescue plan was put in place by US Treasury Secretary Hank Paulson and Federal Housing Finance Agency (FHFA) head Jim Lockhart, with the support of Federal Reserve chairman Ben Bernanke.

Costs to the American taxpayers have not been quantified. Fannie and Freddie will be placed under the direction of the FHFA through a mechanism known as a "conservatorship", with the US Treasury buying each firm's senior preferred shares.

Mr Paulson said Fannie and Freddie are "critical to turning the corner on housing".

He added, "FHFA and the Treasury have acted on the responsibilities we have to protect the stability of the financial markets, including the mortgage market, and to protect the taxpayer to the maximum extent possible."

I live in Yorkshire, an English county which gave birth to some of the best-known building societies – financial institutions dedicated to drawing in cash from small savers, then lending it out to home buyers.

Way back then Yorkshire folk bought a house with the intention of living in it for the rest of their lives. And building societies only advanced money after carrying out intensive checks into a would-be borrower’s income and spending habits.

What a pity old-time Yorkshire prudence was not applied by those two peculiarly-named American mortgage institutions.

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