Sunday, July 13, 2008

Fannie and Freddie

As you know, Fannie and Freddie's status is currently in question (notwithstanding efforts to prop them up). Briefly, they hold or have insured about $5 trillion (yes, trillion) in mortgages. Combined, their capital is a little more than $50 billion. And about 1% of their loans are currently delinquent (about $50 billion). If their portfolio's don't get any worse (highly unlikely IMO), their capital is already at risk of being erased.

As you also know, our gubmint is working on homeowner "rescue" legislation that would, among other things, permanently increased the Fannie and Freddie loan limits from $417k to $729,750. So if Fannie and Freddie are soon to be (if not already) insolvent, what impact will doubling the loan limits have on them?

And if you haven't read the fine print in the legislation regarding the tax credit for new home buyers, according to the WSJ, the buyer must repay that tax credit over 15 years. In other words, an unsecured, no interest, mortgage on top of a mortgage. As if that isn't what is getting so many people in trouble now!

Paul

9 comments:

sacramentia said...

I expect that they will be bailed out with some rule change that makes the capital requirement not necessary for the government entities. If it is explicitly backed by the taxpayers, the need for a capital cushion disappears.

HOUSE2008 said...

WOW. Overnite, the U.S. debt doubled to $5 trillion. Mind bending-ly surrell.Were making history folks!

Patient Renter said...

if Fannie and Freddie are soon to be (if not already) insolvent, what impact will doubling the loan limits have on them?

Larger loans mean larger losses when owners walk away, so the higher limits mean existing problems are made worse.

Sippn said...

Already bailed out.


Speaking of rule changes, what showed Fannie and Freddie exposed WAS an accounting rule change that went into effect around 2000, FASB 140 I think.

Makes them (and all other financials) show weakness is they have to revalue their loan assets downward to reflect the market if they were going to sell the loans (like Countrywide and Indy Mac).

The OFHEO regulator pointed out that it was a rule change that made them reflect the problem, they do not have a liquidity problem. They don't sell the loans, just collect and insure. They are not saddled with subprime, alt A and teaser rate loans per their charter.

One of the big problems with the $500K+ market is that wall street investors stopped investing and the GSE's were not able to go above $417K...

erin@erinattardi.com said...

A little off topic for the post, but I am curious to hear reactions of the other readers of this blog (since it has a larger readership than my own blog, I'm sure):

I attended a real estate forum last week, and the guest speaker (who shall remain nameless) stated that our Sacramento market actually NEEDS the NOD's that will turn into foreclosures over the next 6-12 months. He said the current demand for low priced homes will be best sustained by that additional inventory, and if foreclosures suddenly dried up it would have a more negative impact.

Thoughts? Before anyone comments, please keep in mind these are not my words...

Deflationary Jane said...

Actually I agree, sort of.

The idea is that you need first time buyers so that the move-up cycle can start again. The problem is that with foreclosures, you don't get that move up buyer. You just get a sigh of relief from the servicer and the agents in the transaction. Any benefit from those entering the market in terms of sparking the move up cycle will be at least half a decade away.

Jacob said...

Foreclosures help, cause the person that paid $400k for a home that will sell for $150k cant sell it, he cant short sell it either.

Same goes for the dumb ass that refinanced the home he bought for $100k and took out $300k and blew it all away.

Foreclosures will allow the home to be sold.

These new buyers will be able to sell if they want since their cost is closer to what they could sell for. So eventually they might sell and move up.

If the foreclosures dried up completely then you would have no sales practically. Cause the bottom line is that people cant afford to buy at the inflated prices. So they need to come down.

Now banks are starting to fail, which among other things, will lead to more job losses. Was also reading over at calculated risk that the FDIC froze credit lines for IndyMac. So now my question is, how many businesses that depend on a credit line to stay in business will go belly up because of even more tightening of credit?

But as far as foreclosures go, I dont think we have to worry about them drying up, or slowing down, anytime soon.

G Spot1 said...

Erin,

I think what the speaker is saying (or should be saying) is that the foreclosures are speeding the downward pressure on prices, helping the region reach equilibrium faster.

I'm sure you are well aware (and I know 99% of the readers of this blog are aware) that prices in the mid-decade outpaced what people could realistically afford. Exotic financing covered up that gap for awhile by stretching what people could pay, but that was obviously unsustainable (See the companies f/k/a Countrywide and Indymac) and won't be coming back. Econ 101 tells us prices need to drop for supply and demand to reach an equilibrium, and foreclosures are making that happen faster.

However, I think the statement is a little foolish because even if foreclosures dried up, prices would still come down, it just may take longer because banks are more ruthless cutting prices than individuals. Also, and most problemmatic, is that the market won't stablize and rebound until all the excess inventory due to foreclosures is cleared. And, to make matters worse, further declines in prices are likely to lead to more foreclosures as more homeowners have negative equity. So I think the speaker is missing a big part of the story there when he is discussing possible advantages of foreclosures. Lipstick on a pig.

Having said all that, considering that the speaker was at a forum for real estate professionals, I suspect he wasn't talking about foreclosures being good for prices, but rather that they were good for creating transactions (You know, how real estate professionals get paid). In the next year or two, the only way you are going to get buyers and sellers together is if you have banks selling at rock bottom prices.

melvin said...

Average buyer is a dedicated to my obsession with buying. Property prices generally above the means of the average first time buyer. It is a condescending view of the average buyer.
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Melvin
Foreclosure Listings