This is my column for this week from the Arizona Republic (permanent link).
Fannie and Freddie fall to foreclosure, but, still, lenders lend
I write this column at the beginning of the week, and it appears at the end of the week. My topics are usually timeless, but, if I turn my attention to current events, there’s always the chance that I’ll end up with my foot in my mouth.
Even so, the news that matters most in residential real estate this week is the takeover by the federal government of the Federal National Mortgage Association (FannieMae) and the Federal Home Loan Mortgage Corporation (FreddieMac). These two quasi-private corporations define the lion’s share of the secondary mortgage market in the United States.
What does that mean? If you got a conforming loan for your home, it will have been sold into the secondary mortgage market in short order. FannieMae or FreddieMac would have guaranteed the loan to investors, this so your lender could have had a renewed supply of capital from which to make new loans. Federal Housing Authority and Veterans’ Administration loans would have been guaranteed by those entities, and sub-prime (non-conforming) loans would have been marketed directly to private investors. The secondary mortgage market exists to keep loan originators liquid in a market where very few people keep their savings in banks.
Given the federal takeover, has the sky fallen on the secondary mortgage market? No, although things may be a little sluggish as the newly-installed management teams learn the ropes. But as San Diego real estate broker Jeff Brown says, “Lenders lend.” There are still plenty of dollars chasing mortgages, so there will be mortgages chasing dollars. It’s plausible that interest rates could even go down, now that the secondary mortgage market has a rich Uncle Sam to back its loans.
What is not so plausible is the notion that investors will suddenly abandon housing altogether. Things will shake out. The ideal situation would be for a new free-market clearinghouse for the secondary mortgage market to arise. A business like that could cherry-pick the strongest loans, those least likely to go into foreclosure, leaving the more marginal loans to the Feds — the FederalExpress principle.
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Late Night Austin Real Estate says:
Overall I have been pretty happy with the short term effects of the takeover. Interest Rates have fallen and I assume that will help the real estate market. We will have to wait 5 years or so to see what the long term affects of this will be.
September 14, 2008 — 2:57 pm
Tom Vanderwell says:
It will be really interesting to see if the failure of Lehman (almost a certainty), the buyout of Merrill by B of A (almost a certainty) and the failures of AIG and WaMu (a high probability)have any impact on the “lenders lend” philosophy. The only one of them that was a direct lender was WaMu, but a large portion of what sunk all of them was the mortgage market and the stupid loans that were done.
Stay tuned….
Tom
September 14, 2008 — 3:55 pm
JTB Convent Station NJ says:
Yes, I like the overall effect of the takeover as well. Almost a half a point lower interest rates sure does help when your starter homes are 400K in many towns.
September 14, 2008 — 6:59 pm
Jeff Brown says:
Historically I like this. Why? It will, once and for all demonstrate that lenders do indeed lend. What hasn’t been talked about much yet, is Bernanke’s role in all this. He’s been navigating one perfect storm after another without capsizing.
If I read correctly, one of the WSJ articles said the Fed has signaled strongly, no more direct bailouts. We’ll see if they can make that stick. I for one hope so.
Let’s rid ourselves of this deafening flushing noise sooner rather than later.
September 15, 2008 — 9:42 am
Tom Vanderwell says:
Jeff,
I agree that historically, I like this as well. Sort of like I liked my knee surgery. I knew it was going to hurt worse for a while, but it was something that had to be done. Until we can, as you say, flush the (*&(&))*( out of the system, we can’t start moving forward…..
Tom
September 15, 2008 — 9:47 am
Michael Cook says:
I would be interested to know how Jeff’s 2008 predictions are coming? I have to say it seems like things keep getting worse and not better. Housing, mortgages and all things real estate seem to still be getting much worse. There were a lot of bottom callers here the past few months, any new calls?
September 15, 2008 — 10:53 am
Greg Swann says:
I can’t speak for Jeff, but my own predictions for a bottom have stunk. The good news is that rental homes in Phoenix are so cheap by now that they easily self-amortize, so investors can buy all the way down and half the way back up and still make money. On the buyer’s side, I’ve sold two pricey homes in my own name this year, but I have a nice basketful of REO eggs hatching from now until the end of the year. It’s a sad thing for the folks who have lost their homes, but it’s a an easy world for people with money right now.
Thanks for being here, Michael. Your insights are invaluable.
September 15, 2008 — 11:07 am
Jeff Brown says:
Hey Mike — Good to read your thoughts, as usual.
I’m battin’ around .500 so far. But it ain’t over, so I for one will wait for the ghost of Kate Smith to show up before crowing. 😉 I’ve thought since last year that we’d be seeing big stuff happening in the market in the 3rd and/or 4th quarters, which is the case in spades. I surely didn’t predict the last few weeks by any stretch of the imagination. These past few weeks have redefined ‘big’ for sure.
My interest rate prediction, (no huge rise) has remained intact. I thought the huge players would would come together, private and gov’t circles and begin to make things happen. They are. Oil prices are a prime example.
The real estate market? I said imho that in ’09 we might look back in 20/20 hindsight, and say the real estate problems began to PUT ON THE BRAKES in preparation for the U-turn to recovery. I didn’t say ’08 would be the year of recovery.
And for the record, lenders are still lending, and will continue to do so. Also, as always, everything I’ve ever said has been accompanied by the obvious, which is that my crystal ball is as cracked as the next guy’s.
The difference between some of those ‘next guy’s’ is that they often have the benefit of Monday morning quarterbacking.
This hasn’t played out yet. What’s now happening, is what was the cornerstone of my January predictions: It IS the 3rd quarter, and the brakes ARE being visibly applied. The big guys DID come in to knock down oil. It’s under $100 now.
Meanwhile, really inexperienced investors like Buffett (RE firms) and the Hunt brothers (home development) are directly and indirectly investing zillions in the real estate market. Very quietly, (apparently not quietly enough) the latter are buying up huge tracts of land for current and ONGOING residential development.
What dummies.
September 15, 2008 — 11:51 am
JTB Convent Station NJ says:
I would say that I have been doing better on a yearly basis than I expected, though starting in August it was like hitting a wall. 16 different buyers that I had been working with, all with good credit scores, and a decent amount of money to put down, evaporated. So now I am working with a few buyers who are truly entry level buyers, and putting a listing on the market next week. One of my office partners who I would describe as a aggressive marketer, but has not figured out the web so well yet, has said that she is on tract to do about 20% of her goal for the year. I consider myself lucky, only need to do 3 or 4 more deals to hit my goal for the year.
Good luck to everyone, a little luck never hurts.
Jim
September 15, 2008 — 12:57 pm
Michael Cook says:
Good luck in deed. Surprisingly, my greatest concern is the market perception of these events. Fundamentals are terrible (jobs decline, inventory rising, employer confidence low, etc.)and people see large, bellweather companies going bankrupt. I have to think this is enough to make even the most optimistic person rethink spending major money.
The difference between Buffet and Joe Six Pack is the wait time. Buffet can buy something and wait five years for a recovery. Working Stiffs have to worry about even having a job tomorrow and wondering if their bank is going to go belly up. Oh and lets not forget about the 20% decline in their 401k, if they are lucky enough to have one.
I struggle with finding the turning point. That ray of light that will make someone say, ok, I feel safe enough to make a major purchase. Until consumers can see anything to hope for or to be even mildly excited about, I do not see a real estate bottom. For everyone’s sake I hope I am wrong.
PS. Jeff, great call on oil. Sadly, I think that is a sign that everyone else thinks our economy is going into (or is already in) the tank.
September 15, 2008 — 2:46 pm