This is worrisome about Freddie and Fannie, the mortgage giants.
While the stock declines of Fannie and Freddie were sharp, the biggest impact from their troubles could come in the mortgage market. If the companies fall short of capital, they would have a harder time buying and guaranteeing mortgages. That would raise home buyers’ borrowing costs and likely drive down home prices further. On Monday, investors sold off the debt of the two companies, effectively making it more expensive for them to borrow.
Fannie and Freddie are government-chartered companies that provide the bulk of funding for U.S. home mortgages. They own or guarantee about $5.2 trillion of home mortgages, or roughly half of all home loans outstanding.
We had a mortgage meltdown last summer which significantly undercut housing prices since then. A crisis at Freddie and Fannie would raise the ante of another meltdown since they are considered sort of a safety net for the U.S. mortgage industry.
{ 11 comments… read them below or add one }
RE Investor 07.10.08 at 2:46 pm
John, I am baffled by two things. The first is that according to your emails (very nice thank you) that show recent sales, there does not seem to be a lack of sales. The prices stink, but the sales are brisk by comparison to what I saw in late 2007 and even the beginning of 2008, so someone is buying, yet it is all doom and gloom on Wall Street. Second, there does not seem to be any kind of leadership from Treasury or the Fed regarding Fannie and Freddie. If they let them fail, that will defeat their own goals of stabilizing the financial world currently, yet Paulson seems to talk with two mouths - on one hand he says 4 months ago that the Government will not bail out the GSE’s, thus eroding confidence, now he says they play an important part in the housing market and that they are solvent and to not worry - thus trying to build confidence. Then you have Poole from the Fed (recently left) stating that Fannie and Freddie are insolvent. It is like a 3 ring circus up there, and it seems that the economy would be much better off if these people would just keep their mouth shut until they have an actual plan and are willing to execute it in a unified and consistent way.
I still have no problem with any of my tenants, and in fact I have been able to actually raise rents in Chandler and Mesa (Augusta Ranch area) What am I missing here. I am quite confused….???
John Wake - Real Estate 07.10.08 at 2:58 pm
“… on one hand he says 4 months ago that the Government will not bail out the GSE’s, thus eroding confidence, now he says they play an important part in the housing market and that they are solvent and to not worry - thus trying to build confidence.”
That is so true! And hilarious. Reality kinda snuck up on him. They can’t let the GSEs go down.
Sales under $200,000 have been fine but above $200,000 is still slow.
And of course, those guys are looking at the national situation not just Arizona. Arizona will, I believe, be one of the first areas to emerge from the correction.
ks 07.10.08 at 9:12 pm
“…yet it is all doom and gloom on Wall Street.”
Wall street is upset about the possibility that Fannie and Freddy may need to be bailed out. If these institutions become insolvent that would be very very bad news.
Some people act as though the economic problems we face are due to bad press. The reality is that there was a lot of very bad business decisions made that no amount of any type of press can make better or worse.
The piper WILL be paid.
Accounts WILL be balanced.
No sense in getting polyannaish about what we as a country face. This is going to get nasty.
Cbass 07.11.08 at 6:47 am
All I can say is WOW! This is going to get ugly and fast.
msnbc.msn.com/id/25635292/page/2/
Brian 07.11.08 at 4:24 pm
If Fannie and Freddie go under, the under $200K market for homes is gone. It will come to a standstill since it is the GSEs that underwrite almost 100% of that market, at least for owner-occupied homes. Only the cash market for luxury homes in Scottsdale and PV will be left.
However, I am betting the Feds will come to the rescue and back up the GSEs as they are committed to do. It may happen this weekend, but then again, we are talking about our Federal government in an election years, so who really knows.
The Feds are reaping what they sowed. The bubble all was started by Greenspan, explicitly so, when he told home buyers to stop using fixed rate loans and take advantage of low interest ARMs, in 2003. This when fixed rates were at historical lows. How dumb can a Fed Chairman be??
So now, they must fix the problem. It will be fun to watch!!!
RE Investor 07.11.08 at 4:31 pm
More good news on the mortgage front - Indymac Bancorp is now under FDIC control. They just made the announcement on the AP. What is disturbing is that they said in the press release that there were 10000 borrowers whose account exceeded the 100k limits of FDIC insurance. You can probably assume some of those were retired folks that still might have used “pass book” accounts. That was probably a large part of their retirement. I think this is getting way beyond “moral hazard” and getting in to the territory of a bailout will be necessary to prevent complete meltdown in the trust of our financial system.
Cbass 07.11.08 at 5:16 pm
This is making me sick now. Why is it that the American taxpayer should be held accountable for all this??? Also why does the government think it can always just walk in and fix things? I think this will only cause more financial problems. Is our country not in enough debt with out adding this on to our plate? I mean Social Security is up in the air as it is and we are just going to keep tacking on more liabilities. When will it end. What generation will be held accountable for this mess our fathers are going to leave us! We just keep passing the buck instead of biting the bullet and taking our medicine. Arghhhh!
John Wake - Real Estate 07.11.08 at 6:01 pm
The government as gotta be concerned about the banking system. I don’t care if all the banks go under as long as there is still money being lent. That is impossible so I think the government can’t let all the banks go under.
BTW, I think there will be great opportunities for brand new lenders who don’t have tons of losing loans pulling them under.
John Wake - Real Estate 07.11.08 at 6:25 pm
Brian,
“How dumb can a Fed Chairman be??”
Apparently, very.
“It will be fun to watch!!!”
I’m feeling a little dread. Will the government do too little and screw things up or do too much and screw things up? Let’s close our eyes and hope for the best.
ks 07.11.08 at 11:35 pm
There is too much faith in what the government can do about the current situation. For some reason many people have come to beleive that the Fed somehow controls the economy. There are also those that think that the government can simply print up enough checks to keep the economy humming along: The citizens of the US just need a little more “government cheese” to get back to prosperity.
The government has already done too little. Too little regulation of the mortgage industry. We are now paying the price for the lack of government supervision. I am sure that the government will soon do too much: Too much bail out. Too much moral hazard. Too much debt assumed in a time when the government needs to be concerned about balancing the budget.
When it is all said and done, we will have houses that cost about 2.5 to 3 times the income of the purchaser. These houses will be bought with 20% down. The vast majority of mortgage “products” will be 30 year fixed rate. No magic getting everyone rich through real estate. Very boring.
Most of what the government will try to do will just prolong the inevitable. We should just take whatever medicine we need to take (like a big boy) and get this sickness over with as soon as possible.
Brian 07.12.08 at 6:24 am
KS, you are right on, affordability is the “mean” for the housing market. Whenever there is a huge deviation from that mean (’04-’07), a reversion is inevitable. You just hope that the reversion doesn’t happen all at once causing major destruction along the way.
I too hope that we can avoid the artificial elimination of “moral hazard” at the expense of our economy (through much higher taxes and inflation). But the government does have a role in softening the blow so we do not descend into a major economic depression (in this I disagree with Cbass). The government’s role is too regulate the economy, not be a guarantor of its permanent success (or is that excess?). I don’t know if we have the leadership right now to pull it off. We will see.