The credit crunch faced by the financial institutions has called into a disregard for all securitized debt. In this context, we are mainly concerned about the mortgage bonds that were packed up for the resale. Over the last few years, the mortgage default rate in United States was nearly 1.5% of the total mortgage loans provided. However, it must be noted that not all mortgage debts were defaulted likewise
The mortgage default rate as seen in the case of Fannie Mae and Freddie Mac, were higher than that in the main financial institutions. The main reason for this lay in the loan type and the guarantee system of the mortgage. The reason behind the existence of Fannie Mae and Freddie Mac was the new deal of Roosevelt that intended to have a Federal Government supported and guaranteed lending, which would permit the economy of 1930's spring back to normalcy after the ‘Great Depression’. The New Deal policy supported the construction company to start up again.
However, both the two establishments have now failed, because the defaults rate on low mortgages was just too high. What about the large and main financial institutions? How did they manage to face the situation?
When the larger mortgages went out of the remitting capability of Fannie Mae or Freddie Mac, the banks had to themselves had analyze their repayment potentials and get it covered by their packaged refinance bonds.
If you carefully take a look at the overall lending and mortgage default rate, then at the time when 1.5% is the figure, and both the construction companies failed, then it becomes quite easy to determine that these had amazingly high non-payment rates, whereas another lending had a quite lower default rate.
If, supposedly, the 1.5% default rate is completely applied to the loan providers and the non-Federal guaranteed mortgage, and if we consider that the risk gets covered by the interest rates, then the mortgage bonds would be a really profitable investment.
