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Tuesday, March 13, 2007

An explanation of the mortgage alphabet soup

Calculated Risk is one of the best bloggers around on the housing bubble and its effect on the economy. His posts are incisive, and he also has a great habit of picking up comments from his blog and hoisting them up to the main page. I consider the blog a must-read for those who wish to understand the housing market, how it works, and how it affects the economy.

The post I'm linking to here is a good explanation of what conforming loans are, and why they were created: to effectively homogenize and streamline loans that are easy for Fannie Mae and Freddie Mac to buy (both are quasi-government agencies whose goals are to subsidize housing for as many Americans as possible by buying up loans from banks so that fresh capital is injected into the housing market).

In recent years, however, non-conforming loans have become the norm, since rising housing prices made loans made to folks who couldn't handle the prior requirements "less risky." Of course, that created a moral hazard, which drove the risk up until today, when housing prices stopped rising. Now with Mortgage REITs going out of business, it will be interesting to see if housing prices drop since there won't be any new money coming into the market for awhile.

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