I was in a quest to find simpler elaboration on the U.S economic meltdown detail. In fact, we've heard about Fannie Mae and Freddie Mac, but do we realise that those are just nicknames? I just discovered that Tun had helped to explained this issue in simpler and understandable way.
Taken from www.chedet.com :
22. Fortunately for us we succeeded in stopping the trade in Ringgit and restoring its value. But the system is still in place. And now it is the US Dollar which is devalued.
23. But trading in currencies is only one of the abuses. The banks are lending more money than they have. They actually go to the people to persuade them to borrow.
24. Their clients can borrow 100 per cent of the money to buy a house for example.
25. They need not worry about paying or servicing the loan. The price of the house would appreciate. You may even have a second mortgage. You may even sell at a profit.
26. In the meantime the bank would register the loan and add the projected earnings from interest maybe over 20 years. That done the bank can put all the loans together and sell it to the hedge funds at a discount after adding potential interest.
27. The more risky the loan the higher would be the interest and the higher would be the profit. The hedge funds which buy the loans can basically sell the mortgages to investors in the fund or to the huge Government financed Federal National Mortgage Association, nicknamed Fannie Mae, and the Federal Home Mortgage Corporation, nicknamed Freddie Mac.
28. Now the hedge funds and the banks would feel safe and enjoy the huge profits that they have made.
29. But when hundreds of thousands of house buyers find themselves unable to pay simply because they have no money, and could not sell the houses and could not borrow from banks, Freddie Mac and Fannie Mae would not be able to pay the hedge funds. Then the hedge funds would collapse and drag down the banks with them.
I guess the explaination worth.