THE LAW OFFICE: Market hurricane largely misses Turkey

| 9/20/2008 12:00:00 AM | By GARY LACHMAN

The U.S. government's takeover of Fannie Mae and Freddie Mac, America's largest mortgage finance companies, was a shock to the financial markets around the world. This week's news that Lehman

The U.S. government's takeover of Fannie Mae and Freddie Mac, America's largest mortgage finance companies, was a shock to the financial markets around the world. This week's news that Lehman Bros. would file for Chapter 11 bankruptcy protection and then was bought by Barclay's, Bank of America buying Merrill Lynch at a bloody discount, and AIG receiving an $85 billion loan from the Fed to remain alive is adding a string of insults to an already traumatic injury.

Yet amid the debacle caused by the sub-prime credit crisis, there is a lesser known corner of the American financial system that has largely been ignored by this mudslide. And for good reason. They are healthy, wealthy, and it's “business as usual” in fact at several other government sponsored and/or linked lenders that facilitate the smooth flow of credit though the American economy and thus the world. Included among these “junior” MAEs and MACs are the Federal Agricultural Mortgage Corporation, or Farmer Mac, which has seen its shares soar 153 percent this year, and its profits are up. Farmer Mac buys mortgages on farmland from agricultural lenders and then sells instruments backed by those loans. Its success is due to the fact that the price of crops – and farmland – has been rising.

Ginnie Mae (the Government National Mortgage Association), which provides guarantees on mortgage-backed securities backed by federally insured or guaranteed loans has been rock solid. Fully owned by the federal government, Ginnie Mae's sales of new government-guaranteed debt soared to the highest point since 2003, as the market for other mortgage-linked debt collapsed. Basically, the higher quality/lower leverage loan market has always been fairly stable due to the involvement and protection of the Federal Home Loan Bank system of 12 member banks. These banks borrow money on the bond market and are run as a cooperative rather than a publicly traded company like Fannie and Freddie. Even so, there are some who worry that this system is not as risk free as we think.

Same woes averted in Turkey

Turkish banks and home lenders have not experienced the same credit woes as many U.S. and European lenders. This is due to the low market penetration and low debt to equity ratios that exist in Turkey. Freddie and Fannie routinely provided 90 percent to 95 percent loans for home purchases. Such a thing is virtually unimaginable here in Turkey where even an 80 percent mortgage loan is not an everyday occurrence.

The investment community's appetite for the relatively high yield collateralized debt securities (the main offering of Freddie and Fannie as well as the sub-prime funds) was the trough that fed the hogs before their slaughter. Such a thing did not exist in Turkey before 2007, when the law was amended to allow the collateralization and sale of shares of debt instruments or pools of mortgages in a secondary market. Ironically, not long before the sub-prime collapse there were those (myself included) who rued the fact that this opportunity did not present itself here. Fortunately progress towards securitization of debt was made only lately, just before the global sub-prime disaster. Sometimes the markets survive despite themselves. If “pride goeth before the fall”, thank God that the modesty of the Turkish financial markets and the hesitancy of Parliament saved Turkey's system from sharing the pain experienced by the more “sophisticated” economies of the world. © Gary S. Lachman 2008Note: Special counsel on foreign law to one of Turkey's major law firms and admitted to the Colorado and Florida Bars, Gary Lachman has been a homebuilder, real estate developer, university professor and government official. At the U.S. State Department, he led the process for selecting and acquiring new embassies and consulates, negotiated bilateral treaties and transacted business in over 40 countries.



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