Fannie Mae - Freddie Mac - Forex Market

Fannie Mae and Freddie Mac in Death Spiral

Fears that mortgage backers Fannie Mae and Freddie Mac may collapse and have to be taken over by the US government caused a wild day in the US stock market and the forex markets on Friday. The growing fear is that the two mortgage guarantee firms may have entered a death spiral state of decline.

Fannie Mae and Freddie Mac shares have been hammered this year as the mortgage and US housing crisis have deepened. Fannie Mae and Freddie Mac together insure about 50% of the mortgages in American which runs into the trillions of dollars. Both companies have had their shares prices slammed over the past year, having lost over 75% of their value.

Should the government have to intervene, either by taking over the companies or by providing massive amounts of additional funding the implications for the US dollar are profound. A taste of what to expect was served up Friday as the Euro rose to above 1.5925 to the dollar and is in easy striking distance of making all time highs just above 160.00

The amount of money involved with any US government “bail out” of Fannie Mae and Freddie Mac is just so enormous and the financial impact of losing the home mortgage loan guarantees so profound that the AAA credit rating of the US government itself could be called into question.

In any event, additional massive dollar creation in an inflationary environment would likely create panic selling of US dollars against every other currency in the forex market. If you are a forex trader keep your eyes on Freddie Mac and Fannie Mae. Events could quickly spin out of control over the next few weeks.

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