UK lenders were given a massive helping hand last week by the US government when it effectively nationalised what everyone knows as Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corp).

The American government guaranteed almost £3 trillion worth of mortgage assets issued by the two companies between them.  Why does it matter to us?  It's important for two reasons.

Firstly, a number of UK banks, including mortgage lenders, had bought mortgages from both companies.  Evidence that growing numbers of US borrowers were defaulting on their mortgages lead banks to assume that some of the mortgages they had bought might be worth less than they thought.  As a result, they had ‘written down' the value of these assets.  Indeed, almost all the recent bank losses have been the result of downgrading the value of assets that they hold rather than operating losses.  Now that the mortgages sold by Fannie Mae and Freddie Mac are guaranteed, banks can be sure that these assets are worth what they paid for them.  That could enable some banks to recalculate the value of their mortgage backed investments upwards (a process known as ‘write back'), giving them more capital than they thought they had.

Secondly, the massive intervention by the US government could put a floor under the American property market.  That is by no means certain, but a number of US commentators were suggesting that the move could signal that the worst is over for American homeowners.  If so, UK lenders that have been hit by lending in the USA or buying mortgages on American properties (so called Mortgage Backed Assets) could find that their situation improves in tandem with the property market stateside.