Investors Nervous About Subprime Mortgages

After a jittery couple of weeks, the world markets have stabilized and, in the US the weak housing market has once again affected the wider economy. This time, risky home loans are making investors nervous.

Federal Reserve Chairman Ben Bernanke urged Congress on Tuesday to improve regulation of mortgage giants Fannie Mae and Freddie Mac. He suggests a limit on their level of debt as a protection against any danger this level poses to the general economy.

The main concern is over sub prime borrowers who have poor or bad credit histories. The weak housing market has made it increasingly difficult for these borrowers to keep up with their mortgage payments. If these borrowers default on their payments on masse, lenders are going to be in trouble. Foreclosures are increasing in the subprime mortgage market are increasing and more lenders are experiencing problems..

Last week, Freddie Mac announced that it would no longer buy certain high risk mortages. Fannie Mae is the No. 1 U.S. buyer of home mortgages and its rival, Freddie Mac, ranks as the second-largest buyer.

Both these lenders are sponsored by the government and were created to pump money into the mortgage market by buying bad credit mortgages and other types of mortgages from lenders. These mortgages are then bundled into securities and sold on the financial markets.

Bernanke is keen to lessen the risk these mortgage giants pose to the economy and also to encourage them to be involved in activities which have social benefits like affordable housing.

Yet, less than 30 percent of their current portfolio holdings are oriented toward affordable housing, Bernanke said. “A straightforward means of anchoring the GSE portfolios to a clear public mission would be to require Fannie and Freddie to focus their portfolios almost exclusively on holdings of mortgages or mortgage-backed securities that support affordable housing,” he said.