>>>>>Interesting article here
>>>>>
>>>>>http://newsvote.bbc.co.uk/1/hi/business/7529277.stm
>>>>>
>>>>>I didn't realise that in the US you could walk away from a debt like that and not be pursued. So people are walking away from paying for their house because it doesn't make business sense any more
>>>>>
>>>>>In the UK people who hand back their keys because they can't afford their house anymore are routinely pursued if the sale of the house by the bank fail to raise the full amount of an outstanding loan.
>>>>
>>>>
>>>>This is all very strange. Could not imagine such thing is possible at all. Especially not in US.
>>>>How about downpayment, how about guarantors ?? Don't they need to have quarantors for the loan ???
>>>
>>>No, you don't need guarantors for a mortgage here. The idea is that the house itself is your guarantee. Also, with many of the loans that are the problem, the down payment was tiny or non-existent.
>>>
>>>The rule used to be that you could only get a loan for 80% of the purchase price (except in some special cases). What happened a lot in the last few years is that the lenders set up special plans where the borrower could borrower the whole thing. That's part of why it's all collapsing.
>>>
>>>Tamar
>>
>>Banks did it because they knew that they will be able to resell the loan and it was feasible because Fannie and Freddy supported mortgage resale market, and everyone was sure that government, i.e. taxpayers, will bail out Fannie and Freddy when the pyramid breaks... and it is all was correct.
>
>What is your opinion about whether Fannie Mae and Freddie Mac are "too big to let fail"? I don't know the answer, just curious what you think. You're right that everyone has been sure the U.S. government would guarantee the funds if necessary. That's why they are such institutions. This includes not just individual homeowners and primary lenders but foreign institutional investors who are holding a ton of this paper. I have a feeling NOT standing behind them (bailing them out) would be perceived as not much different from a government default.

Obviously, they are too big, and that's exactly what, imho, is bad. 'Too big' carries some other qualities besides being warranted from failure, and these qualities actually make the failure imminent. Basically, Fannie/Freddy are created and supported to buy any mortgage without looking much what they buy. What kind of result could be expected from this brilliant business model?
In regard to government trust and credit connection, I think that fallout would be limited. Actual default would happen if government stops interest payment on treasury notes. On the other hand, Fannie/Freddy default would kill zillions of bondholders, i.e. huge amount of wealth would be evaporated. To be honest, it is a vapor anyway, but people pretend, i.e. make rules, that it is not; and if rules broken the whole game can lose sense.