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What the Fanny May?

What the FM is going on?

Landlords that have been keeping up with the turbulent events on Wall Street will probably guess that FM stand for the nationalised Fannie Mae mortgage lender recently bailed out by the US Government.

Listening to Radio 4 first thing in the morning in the current financial climate can be likened to tuning into war time radio. Each announcement is proceeded with horrible feelings of dread; anticipating news of carnage, suffering and the apocalypse moving inevitably closer.

What landlords are exposed to now is a financial apocalypse of the like that I haven’t experienced in my lifetime.

Many landlords must be thinking, what has all that stuff going on in the States got to do with me. It’s over in America and just because the Yanks have got themselves into ‘a pickle’ with an over valued housing market, a house price crash, foreclosures (repossessions) and banks lending to people that are probably not going to be able to repay their debt. What’s that go to do with me and my 2 bedroom terrace house I let out in York or Guildford

The answer is quite a lot.

As I write this piece, no doubt things will have changed by the time this article is published. The uncertainty in the banking sector is already having an impact as several banks including HSBC are upping their mortgage rates and this will inevitably feed through to mortgage rates in the buy-to-let sector.

UK banks have stopped lending

The problem is that banks have stopped lending to each other, let alone landlords. The commercial money markets and the wider economy rely on inter-bank finance to keep the system moving. However, because of the ‘jitters’ in the financial markets banks will not lend to each other in the quantity that they had previously, partly because of the uncertainty about the solvency of financial institution and partly because they are holding on to capital in order to rebuild their own balance sheets.

Why does this impact on the UK

The whole reason why banks have stopped lending to each other is because they are all worried that the other bank might or is already bust. This is because so many banks and particularly US banks hold bad loans or financial instruments called mortgage backed securities (MBS). These loans were made against US property which is still falling in value. The problem for the banks are that some of these loans are never going to be paid off and are worth a lot less than the banks are admitting to.

The difficulty for the banks is transparency. No banks or analyst really knows what the other holds, and therefore whether they are solvent or not. The plan up for approval by the US congress this week would allow banks to strip out the bad loans from their balance sheet. This means that in theory banks would start to have confidence in each other once again. Once they start lending to each other, then this should start to bring down SWAP rates which have lurched upwards again in recent days. One such SWAP rate is LIBOR which for many landlords is the rate that their buy-to-let mortgage is set against. LIBOR has been falling in recent months after hitting a high in the middle of 2007 after the credit crunch first hit. Falling SWAP and LIBOR rates are an essential condition for buy-to-let mortgage rates to fall, making buy-to-let mortgages more affordable.

All this shows why what is going on over there is so important over here. Hopefully the situation will be resolved this week. Otherwise landlords will be left wondering what the Fannie Mae is going on!

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