[A-List] Mortgages

[Sabri Oncu <soncu@xxxxxxxxxxx>]

Anne writes:

> The sub-primes have been a major sector
> of Fannie's & Freddie's super-expansion.
> And they have discovered derivatives, also
> bigtime.

Fannie and Freddie have been dealing with derivatives from the
beginning. All US mortgages are derivatives. They are bonds with
complex put options embedded in them because of the so-called
prepayments, that is, possible payment of the full debt earlier
than scheduled, at the discretion of the borrower. They have been
playing with structured notes for quite sometime too, if I am not
wrong, since the early 1990s, and most structured notes are also
securities with strange embedded options. So their discovery of
derivatives is not new. Possibly, they expanded their derivatives
business using more complicate/exotic derivatives, did they?

By the way, do the private lenders fare any better, like GE
Capital, for example?

Sabri