Before noon on Sunday, September 7, 2008, Henry Paulson (Secretary of the United States Treasury) and James Lockhart (head of Federal Housing Finance Agency) announced that Fannie Mae and Freddie Mac have been taken over by the United States Government and will be placed in a “conservatorship”. Additionally, the U.S. government is authorized to invest up to $100 BILLION in each company to guarantee that they maintain a positive net worth.
A conservatorship is akin to bankruptcy, with a primary difference being that the conservator is given direct control of the troubled entity. The conservator in this case is the Federal Housing Finance Agency, the federal agency responsible for oversight of Fannie Mae and Freddie Mac.
I’ll share more news with you, and I have definite opinions about this action and its consequences on our economy and the real estate market…
…But before I share my opinions with you, I’d like to hear what you have to say. This is a serious matter, my friends. Speak out now and tell us if you think is a good thing or not and why.
SECURE & CONFIDENTIAL
12 Comments So Far»
I think it’s a good thing, albeit not the ideal thing. The ideal thing is for the real estate market to magically right itself but, obviously, that’s not going to happen. Absent government intervention, our entire economy would go belly up. The real estate segment of our GDP isn’t something that can stand (or fail) alone. The current crisis is similar to the S&L crisis of the 1980s and 1990s, featuring the failure of 747 savings and loan associations in the UNITED STATES. THIS crisis, however, is GLOBAL in stature and therein lies the rub. It would be extremely irresponsible for the world’s super power to allow a gargantuan mortgage bust to occur, thus taking down other economies. We essentially made this mess, and now it’s our responsibility to clean it up. Painful? Yes, but necessary, I’m afraid.
“Too big to fail” is nonsense. Split up both companies by dividing all of the paper and selling it off to banks, sovereign wealth funds, hedge funds, and reits. Let the market work off/out the bad paper and don’t use tax-payer money for bail outs. Throw the executives of both companies into jail for robbing the companies.
How to fix the mortgage meltdown:
1. Option ARMs were never meant for owner-occupied residences. They were intended for landlords to manage cash flow during vacancies. They were not intended for people to buy more house than they could afford, by barely making the minimum (negative amortizing) payment. The folks that granted those loans to owner-occupants should be held criminally responsible.
2. Lenders should qualify and appraise property the way real estate investors do. Use income valuation for the rental market on a 20-year (or less) amortizing schedule. If a buyer wants to pay more, then the difference is a cash down payment. The buyer can then afford to put a renter in the property when he can’t make the fully amortizing payments.
3. Don’t make low FICO buyers pay higher interest than high FICO buyers. Instead, make the low FICO buyers pay a large down payment. High FICO buyers, who by definition pay their bills, qualify for a low/no down payment loan. Why make it harder to pay a loan for a low FICO? Both buyers get prime (low) interest rate. The large cash down payment protects the lender in case of default by the low FICO buyer and is strong incentive for the buyer to pay the loan as agreed. (Note: It’s much easier to improve a FICO score than to raise a 25% down payment. That’s enough incentive to PAY YOUR LOANS AS AGREED.)
two cents worth. your mileage may vary.
I think that letting Fannie and Freddie fail has larger ramification than just upsetting the balance of world economy. The failure of these two organizations would also say something about the American government and our way of life. Failure would tell other countries that we will let shady practices go on in our housing and financial systems with out recourse. It would also say that our government doesn’t care that bad bankers and lenders have robbed every American of the “American Dream”. I think this would cause a much more devastating affect on the world economy.
This bail out is potentially a good thing. If taxes are going to go up anyway I would rather some of my hard earned tax dollars go to the Real Estate industry. It will stabilize things and put the industry back in the black across the nation. I think I will go buy some FNM, FRE stock!!!! hahaha…
Not the way anyone intended this to happen. I think these companies are “too big to fail.” To just let them go out of business and declare bankruptcy would throw a hell of a lot of things into disarray, on top of what was already there. Just another bubble that burst.
The only serious good news out of all this investor-wise, is that interest rates will drop a bit, possibly up to 1% on the 30-year fixed…most lending guidelines will stay intact, or get a bit tighter, (and some fees go up) but it’s a business move to try and shore up more people to get some loans so that the money can continue to flow…one if smart enough will save a bit more money on this.
It’s not over by a long shot though…besides, people will find another way to work around these loopholes soon enough…
Apparently, Jeffrey Smith is in favor of “barn door” laws; i.e., you make an action criminal AFTER it has been committed! “Doh! We forgot to make that act criminal. Here, let’s do it now. Better late than never.”
The GSE sound bites we’ve been fed since the mortgage market began its slide in 2007 have proven once again that we should not trust in anyone. “In God We Trust” is on our currency, but not on our minds and not often enough in our hearts.
The executives of the GSE’s and their regulator should be placed under house arrest and made to live with working families in foreclosure. Prison would not be enough punishment for the atrocities perpetrated on hardworking Americans who were slaughtered financially with the products made available in recent years.
Let’s play a hypothetical game of Monopoly with the current GSE situation. It might play like this:
The new oversight agency decides that in order to shore up the assets (read mortgages) they will use the discount window to borrow and lend at a markup of say 200 basis points. That’s a rate for a 30 year fixed rate mortgage of 4.0%.
This rate would be available for new loans and modifications of existing loans. A minimum equity of 10% would be required for new loans, but, existing loans could be written up to 100% of current value.
Loan limits would also be adjusted for single family homes up to $1,000,000 to allow for stronger credit borrowers at the high end of the housing market to fall into the GSE’s pool.
Playing this game when you are the rule maker is like having control of the presses that print our currency.
How soon will the banks begin to fail? Their game plan would be which path to take. They could try and compete on price and lose money and shareholder confidence or they can let their portfolios runoff to the GSE’s at an alarming rate and lose shareholder confidence.
George Soros may be inclined to short all the remaining banks in the US on September 8, 2008. He’d probably double his money on these bets within a month or so.
The effect on the real estate market would be mixed. Initially, many foreclosures could be avoided if underwriting would allow for distressed borrowers who qualify to get a modification at the new rate. This would stop the freefall in housing prices in most markets around the country. Even investors may be able to keep properties if the cash flows can be put into the black.
Purchase money mortgages would actually be hampered due to the complexities involved in bailing out the existing loan portfolios and the capital constraints on the GSE’s. This would leave the new business to the banks that would be feeling the pain of runoff of their portfolios and could only justify increasing rates as the only alternative for buyers needing a mortgage.
We are certainly living in an interesting time.
Just a mortgage industry opinion?
News Analysis: A Radical Industry Restructuring is Upon Us
Mark Sunday morning, September 7, 2008, as the day the residential mortgage business changed forever.
In the months ahead, seller/servicers that upstream their mortgages to Fannie Mae and Freddie Mac may see little change in the way they conduct business with the two but rest assured the Treasury Department under Hank Paulson has laid the groundwork for the eventual dismantling of these once politically powerful (and once highly profitable) government chartered enterprises.
Over the long haul the takeover of the two GSEs could set the stage for housing deflation the likes of which Americans have not seen since the Great Depression and then some. With less liquidity in the mortgage market that means less home buyers and less home buyers creates intense pricing pressure on the downside. And maybe that’s not such a bad thing — in a way. In can be argued that Fannie and Freddie — and Wall Street which pumped up the subprime sector from 2002 to 2007 — made it too easy for too many Americans to buy homes. Too many buyers meant home prices rose ridiculously in such once hot markets as California, Florida, Arizona and New York. The days of easy mortgage money are over. Downpayments once again will become the norm as ‘liar loans’ and 100% financing disappear.
Eventually, Treasury wants the two to whittle down their on-balance sheet portfolios to $250 billion, about one-third of where they are today. Once the two GSEs stabilize, whoever sits in the White House will move to find a long-term solution to Fannie and Freddie. They could survive as separate smaller companies with Congressional charters or they could be made into one government agency that serves only low and moderate income Americans. If that happens the mortgage business likely will shift back to portfolio lenders like savings and loans, banks, and credit unions. The loans these institutions make will be placed on their books and kept for the long haul — which is what the business was like until S&L crisis of the 1980s.
One thing is for certain: the mortgage industry of the past two decades — one where most residential loans were sold to Fannie, Freddie and Wall Street firms like Bear Stearns, Merrill Lynch and Lehman Brothers — is on the road to extinction. What lies ahead could spell opportunity or death for today’s surviving seller/servicers.
Hopefully, all of the lenders and independent mortgage companies have learned that if it looks to good to be true, it probably is. Not only has this hurt our new home buyers, but the investors that were able to finally use stated income for purchasing and selling property can no longer depend on that way of doing business. I have always been a independent business owner and investor, and it was so nice to use a stated income to purchase my homes. Now, because of the careless acts of others, I have been pushed back to the 80’s. It is really a shame that our country cannot find a happy medium.
Hurt new home buyers? Rates are STILL at historic lows and moving lower. 30 year FRM is a full 1/4 point lower (to rate, not fee) than on Friday.
Mortgage Bonds are soaring higher on yesterday’s announcement that Fannie Mae and Freddie Mac will come under control of the government. The government feels that both these institutions will no longer be able to meet their mission statement which is to provide liquidity, stability and affordability in the housing markets.
Fannie/Freddie both have issued many Bonds which over time mature, and they need to pay back the principal on the maturing Bonds. The way they raise capital to pay these maturing Bonds is to issue new Bonds. This happens every month. And as long as Fannie/Freddie can sell new Bonds this system works well. But the problems in the mortgage industry have reduced investor appetite to purchase these Bonds…and that’s where the trouble begins. Without the ability to sell new Bonds, Fannie/Freddie are less able to meet the capital requirements to pay off the maturing Bonds. And that’s the big fear. If Fannie/Freddie were to default and become insolvent, it would throw the beleaguered mortgage and housing markets even deeper into the abyss.
Additionally, the recent lack of appetite for Fannie/Freddie Bonds caused the two mortgage giants to have to do something to make their Bonds more attractive…so they offered their Bonds at higher yields to gain more investor interest. However, since they couldn’t go back and raise rates on loans that had already been closed, it sucked even more profits out of Fannie/Freddie, reducing capital even further, thereby exacerbating the problem.
That’s why the Treasury has stepped in and said they will back the payments on these Bonds. This action has given investors a lot of confidence to step in and now buy Mortgage Bonds. Think about it. For a higher rate of return, investors can now buy Mortgage Bonds with the same guarantee as lower yielding Treasury Bonds. This is causing a nice rally in pricing this morning that, combined with the [technical] break above the 200-day Moving Average, leads to attractive rates and what could be a refinance season ahead–for owners with equity, that is.
Sheri, how does the government’s action hurt new home buyers? From what I can see, new home buyers are having a field day–lower prices and even lower interest rates. One may say, “Well, new home buyers now need a down payment.” Yeah, but isn’t the lack thereof in the past the reason Rob Gorman wants GSE executives put in jail? Obviously, observers of our current situation are conflicted.
I don’t want to start an argument here. I think the top executives at Fannie/Freddie should be fined and jailed for a very long time.
Can anyone remember Enron? Top executives implementing a completely stupid business model, cooking the books, and taking (stealing) millions from the company and its shareholders. Same thing happened at FNM/FRE.
The naysayers, “Oh, you can’t take away their compensation packages. They had a contract with the company.” Well, they also had a FIDUCIARY OBLIGATION to do what’s in the best interest of the public company and its shareholders. You cannot enforce a contract that breaks the law, and a judge should decide whether they should profit from their actions or whether they spend a few decades at club fed. Cuff ‘em and stuff ‘em!
There are literally billions of dollars sitting on the sidelines looking for investment opportunies in real estate; insurance companies, real estate investment trusts, pension funds, retirement accounts, etc. Letting FNM/FRE fail would clear the way for other funding from more sensible sources that are investing THEIR OWN MONEY instead of some idiot banker looking to earn a 1% fee and sell the loan to a greater fool.
If bankers really understood real estate finance, they would not be bankers. They would be real estate investors.
‘nuf said.
two cents worth. your mileage may vary.
Uh, on what legal precedent do you think the top executives should be jailed?
Much appreciated,thanks.
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