The Government is Expected To Take Over Fannie Mae & Freddie Mac As Soon As This Weekend!

Thank You Drew Sygit for bringing this to my attention - I thought I would share this with MCC!

FNMA/FHLMC are seen as being too big to be allowed to fail, controlling an estimated 50% of the mortgages in this country.  That 50% equates to five trillion dollars in mortgage loans!

The bailout will cost U.S. taxpayers billions and lead to the exit of the CEO's for both companies.  Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson and James Lockhart, the companies' chief regulator, met Friday afternoon with the top executives from the mortgage companies and informed them of the government's plan to put the troubled companies into a conservatorship.

This announcement followed a report from the Mortgage Bankers Association that a record 9% of U.S. homeowners were either behind in their mortgage payments or in foreclosure.  That's over 4 million households!  The industry is starting to see Americans with solid credit and financials struggling to make their mortgage payments on ARM's and exotic Pay Option products where the payments are now increasing, often substantially.  Increasing numbers are also just walking away from properties they're upside down on.

Also on Friday, Silver State Bank in Nevada was taken over by the FDIC.  It's the 11^th bank this year to fail.

What's this Mean for the Real Estate Market?

Well, don't panic!  The goal of the government bailout is meant to protect & stabilize the market. 

There will definitely be changes though.  Look for mortgage products with the most risk, stated income and investment property loans, to be curtailed to some extent, if not terminated.  Credit requirements may be further increased along with tighter debt-to-income ratios.  These all were already tweaked in June-July of this year, but may get addition scrutiny.

An End to the Bad News?

This may actually be good news for homeowners facing foreclosure and the real estate market in general.  When the FDIC recently took over IndyMac Bank, the nation's 10^th largest mortgage lender, they suspended all foreclosure activities and are in the midst of a radical experiment.  Unsolicited, they're offering homeowners loan modifications to keep them in their homes instead of foreclosing on them!

All the common-sense decisions we've been asking for may now be possible!  How many of us have ranted that lenders should do more to keep homeowners in their homes instead of foreclosing on them?  Lenders lose significantly more through foreclosure than they would if they just reduced interest rates and payments or forgave part of the mortgage balance, so a homeowner could afford to stay in the property.

Common Sense May Finally be Here!

This wasn't possible before due to the complex nature of the mortgage market and mortgaged backed securities (MBS).  Lenders can't make these types of decisions because they don't actually own the mortgages, FNMA/FHLMC do.  The lenders are just paid a fee by FNMA/FHLMC to service the loans they originate.  Now, FNMA/FHLMC are also restricted on what they can do because they more or less sell the rights to their mortgages by issuing MBS.  MBS are bought by pension funds, insurance companies, investment banks, & foreign governments.  Contractually, FNMA/FHLMC just can't tell their investors that they'll be taking a hit on their investment to keep homeowners in their homes.  Remember, FNMA/FHLMC control $5 trillion in mortgages and almost 10% are delinquent - that's $500 billion in problem loans!

What FNMA/FHLMC and lenders cannot do, the federal government can!  As they've demonstrated with IndyMac Bank, the government is willing to bring common-sense solutions to the mortgage meltdown.

 It's not going to happen overnight as the sheer numbers are staggering.  It has to happen though, to get this country out of the financial tailspin caused by our overindulgences in mortgage debt.

Hang on for a bumpy ride and rough landing, but stay focused on living through this!