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What’s Happening with Fannie Mae and Freddie Mac

The U.S. credit crisis is well under way, and two of the biggest names in asset backed securities are Fannie Mae and Freddie Mac.

When these two institutions make the news because of their risk of insolvency, there is no question that they spark some interest and in turn, some fears. In fact, these two company’s are now being referred to as the “epicenter” of the U.S. financial crisis, and dominate the market for U.S. housing finance. Consider them a much larger company similar to that of CMHC and GE. If they did not exist, housing prices would continue to fall at a much larger rate then we’ve seen even to date.

What most are not aware of however, is the fact that Mae and Mac are no longer simply a ”too big to fail” American financial institution. Over the years, these two institutions have become central to what has turned U.S. mortgages into securities held by the world’s central banks. In fact, statistics show that these central bank’s hold up to $925 billion in these types of securities around the world.

Your Take-Away: It is impossible to predict the future of our economy considering the recent volatility we have all seen over the past 12 months. What we can say however is that although both of these institutions are definitely in a financial crisis, the fact remains that we are confident that the U.S. Goverment will be forced to inevitably step in and provide a possible solution for what has and is happening. If they don’t, they would be solely responsible for a further global economy slow down to the tune of multi billions of dollars.

Again, there is no way of predicting with absolute certainty that Fannie Mae and Freddie Mac will eventually get themselves out of their current financial situation. If they don’t however, we will be dealing with a possible global catastrophe that no one in the world would want to see. Better yet, the last country that would want to allow that to happen would be the U.S. based on the fact that they would be the primary reason for a further decline in global economies.

Until next time, have a Terrific Thursday!

P.S. For a far more in depth read of this story and the details involved, please visit http://blogs.cfr.org/setser/2008/07/12/too-chinese-and-russian-to-fail/

Chris & Elisseos

Is Your Money At Risk if Your Bank Goes for Broke?

It’s not news for most that some banks in the US are running into severe financial difficulties. What may be news however is that the CIBC may be on the brink of financial insolvency themselves.

Earlier this week, Dundee Capital Markets released a report explaining how CIBC could actually become insolvent. After all, many Canadians are taking their money out of their banks and putting it “under the mattress” where at least they know they won’t lose any money outside of their “inflation losses”.  John Aitken is an Analyst with Dundee Securities and he says “Financial services consolidation is closer than most investors would allow, and significantly closer than it was even three months ago”. It’s happened before with financial institutions, in fact 43 times before since 1969.

 Your Take-Away: The question most are asking then is what happens to my money if my bank happened to go under? In Canada, we are lucky to have the Canadian Deposit Insurance Corporation (CDIC) who will protect deposits up to $100,000 per depositor with each institution. In other words, if you have less then $100,000 with a bank that goes insolvent, you are guaranteed to get your money back. If you have more then that magic number, you will max out and lose any of the excess above and beyond the protection you are provided.

That said, it may be a bit early to start moving money from one institution to ten others in order to be free to claim with CDIC in the event of an insolvency, but I would suggest not going into this time in the market blindly. Talk to your Advisor, Bank Manager or even Accountant and determine if this is something you should consider. It’s a lot of work, and most likely for nothing considering that most realize that Canadian Financial Institutions are much further ahead then the US, but if nothing else, it doesn’t hurt to know your options.

Until next time, have a Wonderful Weekend!

Chris

40 Year Mortgages and 100% Financing No More

Earlier this week, the Department of Finance announced that they were going to put a halt on 40 year mortgages and 100% financing.

As is usually the case with a decision of this nature, many are wondering whether this will be a good or bad thing for both the end user and the economy. According to Pascal Gauthier, a TD Bank Economist, “The five-year reduction in amortizations is expected to have a minimal impact — but the 5% minimum down payment could cut into the number of first-time homebuyers in the market.” Clearly the biggest concern is will the economy suffer with fewer people being able to purchase a home who would have otherwise been forced to take advantage of the 100% financing option?

Your Take-Away: Although this decision could slow down the economy in terms of first time home buyers, I personally can’t help but agree with the direction the Department is heading. After all, the credit crisis we are seeing in the US is due in large part to the very liberal mortgage financing American banks were offering, and we all know how much of an impact that has had. We may see a slow down in new new home buyers jupming into the market and thus even new home starts, but I’d rather deal with that smaller pain now then the potentially devestating pain we could experience if we were to ever fall into the same traps that the US is currently dealing with.

The long and short, a 40 year mortgage is not tremendously more different or dangerous then a 35 year mortgage. However, I am confident that 100% financing can bring with it the potential of catastrophic results and I’m confident that this will be the right decision in the years to come.

Until next time, have a Wonderful Weekend!

Chris & Elisseos

What is Happening to our Economy?

No doubt you have read or heard that the TSX tumbled 500 points last week and started this week off tumbling yet another 300 points as of the end of day today.

There is no doubt that these times can be a little scary or overwhelming for anyone with money in the market, regardless of their knowledge or experience. According to Eric Bushell, Senior Vice President at Signature Global Advisors, “The implications of the U.S. credit shock migrating to the world are beginning to be understood.” What’s interesting however is that he goes on to say “Our expectation of a global growth scare remains intact, only now it will be accompanied by a global inflation scare. This double whammy is not to be feared, it will be a time to buy.”

Your Take-Away: You have every right to be weary of what is happening both in Canada around the world. After all, consumer spending is down which impacts manufacturing, shipping and multiple other industries. As well, with inflation on the rise, it poses yet another concern for investors. The econonmy is definitley hurting, and will most likely continue to do so for some time now.

That said, we have been here before. Depending on your age, we have all seen the rise and fall of the markets and the incredible fear that creates. As Bushell himself says, we cannot argue that we are heading into some very rocky times, but as opposed to running and hiding until the markets recover, he is planning on using this opportunity to buy and add to his position in the market rather then sell and create more cash.

In other words, things will get tough for a while, but don’t be afraid to look at ways to take advantge of the current status of the market, rather then just thrown your hands up and hope for the best.

Until next time, have a Magnificent Monday.

Chris