On August 8, 2008 I wrote about the eminent takeover of Fannie and Freddie Mac by the Government. Well it seems like it is finally here. It seems that something major will be released before the weekend. New information being released just after both companies experience a major drop in their stock suggests that the plan is all but complete. Once the Government takes the companies over they will have unlimited supplies of cash to originate new loans. This will come courtesy of you the "Tax Payer".
This creates a major shift in how our loans function. When the Government takes both companies over it will be the Tax Payer who will carry the gain or lose from all mortgage loans serviced by the two companies. The immediate future will be very bleak. Foreclosure are still scheduled to rise regardless what the industry tell you. We will not see the bottom till 3rd Quarter of 2009 or as late as 2nd Quarter of 2010. After 2010 we will return to normal real estate growth of 5.9%, which was typical prior to the recent boom.
What really worries me is that for the next two to three years the Government will incur losses from both companies that will be in the hundreds of billions. Where will that money come from. It will probably be added to the ever growing deficit. We are deferring a problem that our kids and grandkids will have to deal with. The Government of today is operating much like the typical American consumer. Imagine the Government Deficit as a credit card or Mortgage which they keep using or refinancing until at some point there is no more credit available.
Our next President whether Republican or Democrat will enter a no win situation. The history of the next office will be marred by the financial crisis we face for the next 3-7 years.
For some more information see news.yahoo.com/s/ap/20080906/ap_on_bi_ge/mortgage_giants_crisis
Fannie Mae and Freddie Mac have both shown dramatic losses. Combined they control $5 Trillion dollars of the US mortgage market. In comparison the US deficit is 9.5 Trillion. Now keep in mind that it would be impossible for all 5 Trillion dollars worth of loans to go bad at the same time. However, when you consider that this week Fannie Mae showed a 2.3 Billion dollar loss which is a large impact on their cash reserves it give you a better picture of what is going on. Fannie Mae and Freddie Mac where both given more lenient cash reserve requirements as a part of the recent changes that Congress and the President gave both companies in an effort to help control the Sub-Prime mess. This reduction in the cash reserves is a formula for disaster. Imagine Bears and Sterns just prior to the Fed take over. You have a company who could not withstand any demands on its liquidity and yet you allow them to lower their cash requirements? If you want another example then look at what just happened to IndyMac.
Paulson got a blank check from Congress and instead of investing it he literally told Fannie and Freddie to go spend. He will feel the repercussions of this action in the near future when the next wave of foreclosure makes the impact during 2009 and 2010. He will need to pull out that check book and empty the bank account and then turn to the Tax Payer again for more money. When all said and done I think that the true mess of the current bank crisis will cost around 500 Billion.
Filed Under (Mortgage New) by jorge on 30-04-2008
The Federal Reserve cut the rate by 1/4 much in line with what was expected. It was less aggressive than their positions late in 2007, but it helped calm the market. Wall street showed a positive response and is currently in positive territory only two hours before the closing bell.
In addition the Federal Reserve issues a positive note that it expects inflation to improve. That however remains to be seen. Their actions today shows a conservative stance but they did say the they are ready to "act as needed to promote sustainable economic growth and stability."
"Financial markets remain under considerable stress and tight credit conditions and deepening housing contractions are likely to weigh on economic growth over the next few quarters," the Fed officials said.
While saying the central bank expected inflation to moderate in coming months, the Fed statement said that "uncertainty about the inflation outlook remains high," adding that it would be necessary to "continue to monitor inflation developments carefully."
Current Mortgage rates are showing a different picture and are heading slightly upward over the past two weeks. Fears of inflation have reflected on the Bonds and thus producing a higher interest rate for Mortgages. Currently levels are just under 6.0% for a 30 year fix loan. Consumers are not getting the benefit of the Feds actions. So where is the benefit? It is in the pockets of the lenders. They are hedging their portfolios against losses.
Filed Under (Mortgage New) by jorge on 20-04-2008
Since the news on February 13 that the President signed into law the Economic Stimulus Act of 2008 which included a "temporary" increase in the conforming loan limits of Fannie and Freddie everyone has hoped that it would be a major boost to the Real Estate market. So far it seems to be the big disappointment that I expected.
I have spoken to 5 wholesale representatives of major lenders and they say volume is not there. The main reason is that rates start around 7.25% and nobody is buying. Most of the loans that were originated with the old Wall Street programs were priced just around .25 to .375 above the conforming loan programs. Based on todays market that should give you a jumbo loan rate of about 6 to 6.25% as of 4/17/08. Currently the difference in rates between a conforming loan and a Jumbo loan are over one full percent or more. Who wants to buy in this market when the rate is high and prices are dropping.
I think that they need to bring back stated programs for the self employed at a rate that is only .25 to .375 above the conforming rate. Keep the stringent credit score requirements and lower the down payment required to around 10%. Most lenders now require 20% for stated income loans and this creates a hardship on the most buyers in todays market with the prices of homes were they are. I am not saying that they should go back to the way things were but the new model is not going to work. What is more likely to happen based on the current programs available to consumers in the higher price range is that they will just sit out and wait till the market drops some more. This will eventually lead to the Economic Stimulus Act of 2008 being nothing more that a paper weight on the "desk" of our economy. The word "temporary" will definitely have been appropriate.
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