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. 

Housing starts are at record lows.  Building permits fell 1.3% from the previous month showing a level not seen since March 1991.  Builder confidence is at a 22 year low based on the NAHB Housing Market Index (HMI) which dropped to 18.  

The economy itself is also facing a recession according to Greenspan.  I personally feel that we were in a recession last quarter and possibly facing a long term recession or dare I say a depression.  I say this because the real estate market and Wall street are the too largest investment vehicles that investors have.  Usually when Wall street is doing well investors will pull money out of the real estate market to invest into stocks and vice versa.  Right now the Dow Jones suffering a 20% decline since October of last year when it was at 14,164 and currently closing on Friday at 11,346.  And the real estate market is showing a record number of foreclosures that may top 1,000,000.  This is forcing most investors to park their money in cash accounts or government bonds until the smoke clears.  This will only prolong the recession because of the lack of confidence and lack of cash infusion into either arena.  Now you also need to add that interest rates are heading up, qualifying for a home is harder, and inflation is on the horizon, and you get the perfect storm for the United States.  This may compare to the Great Depression of the 30’s.

The silver lining is that I see the bottom of the market to be mid or late part of 2009.  2010 and 2011 will be time to shop and look for great investment opportunities.  1-4 Family units that actually debt service themselves and even show positive cash flow.  If you buy right now make sure you bargain hunt and don’t be disappointed if you equity disappears in the first 2-3 years.  Eventually is will come back and if you are looking for long term investments then this is the market for you.  Keep a close eye on interest rates and keep a close eye for auctions and bank owned properties.

As Posted in the New York Times

"Although many Southern metropolitan areas have high percentages of subprime mortgages, homeowners in those areas have largely been able to pay their bills, so subprime foreclosure rates are low.

Not so in the Rust Belt, where subprime mortgages are less common but foreclosure rates are sky-high, mostly a result of rising unemployment.

And overbuilding in regions of Florida, California and other states with housing bubbles lured overeager residents to become speculators, buying up many homes with the expectation that their values would rise. Getting subprime loans was all too easy.

But paying the loans as housing prices fall is all too hard, and many economists believe that foreclosures will continue to rise.

“The collapse will affect other markets, like New York, Boston and D.C.,” said Dean Baker, co-director of the Center for Economic and Policy Research. “Suburban areas near those cities are already seeing prices plunge.” "

I think that this article is premature and most people are hanging on by a thread.   What has happened historically is that lower income areas are hit first and the hardest.  For example, in Southern California, Riverside and San Bernardino have already felt the impact of the foreclosures and the market in general has seen a 30-45% drop in prices.  This will gradually move into Los Angeles county  and then migrate up into the higher end market. 

Property values in South Bay are near Torrance, Redondo have already seen some 15-30% drops.  The prices will continue to drop until 2010 and then remain flat until at least 2013.

FHA raised its loan limits for single family residence to $729,750. 

What does this mean to you? 

For most of California this will have little impact.  The primary reason is that the underwriting guidelines are more strict than loans in the lower price range.  FHA is accepting larger loan amounts but the guidelines require better scores, more down and tougher appraisals.  Furthermore, FHA loans are full doc only.  The higher percentage of loans closed in California above $500,000 were done through stated income product with little or no money down.  Those same loans are currently facing reduced property values which will not meet the FHA loan to value guidelines.  

The pressure becomes two fold.  The property values are upside down and the consumer can’t qualify based on full doc programs.  The government has acted two little two late in fixing this mess.  The  fix  will come from  the  market  itself.

There will be some that have the good fortune to benefit from this change.  A few in the higher price range and most in the lower price range between $300-550K.   In addition units  will see a  nice  bust  in  needed  loan  flexibility.