Dark clouds over Fannie and Freddie

Now that the sub-prime mortgage crisis is spilling over into the US prime mortgage market, it seems the current financial and mortgage crisis in the US is far from over and heading towards international capital market turmoil. Integrated with the global financial system, Thailand cannot escape from this crisis. 

The Stock Exchange of Thailand, which has already been suppressed by domestic political uncertainties and rising inflation, plunged to below 670 last week on renewed concern over the US economy triggered by the two ailing mortgage giants, and there is no sign of a bottom yet. While feeling the pain of the spreading impact of the US mortgage crisis, this is also a good opportunity for us to learn from the US lessons.

In addition to the boom and bust cycle in house prices which is the primary factor creating the crisis, reckless lending practices, limited financial knowledge of home loan borrowers, and insufficient information disclosure are cited as factors aggravating the situation. Careful analyses of these issues are critical for policymakers to design efficient policies to reduce the likelihood and costs of similar future events in our country.

In particular, consumer protection regulations are needed to protect uninformed consumers from predatory lending practices.

Another concern is the role and efficiency of credit rating agencies.

With a triple-A credit rating and a US$2.5 billion (Bt83.5 billion) credit line with the US Treasury, many investors have long considered Fannie and Freddie the safest of the safe. 

However, the current problems have led many to wonder about the timeliness and predictive accuracy of the ratings process.

This article has been contributed by the Thai Bond Market Association.