Hi All,

I like to keep my comments short and sweet, so this one is a little long, but it is a GREAT explanation of the latest government action to prop up the credit markets.

From Larry Baer at Market Alert www.mktalert.net here is the explanation:

Commentary: Like trauma room doctors – Treasury Secretary Paulson, Fed Chairman Bernanke together with support from most members of Congress are scrambling to revive the critically ill global financial system.
It looks like one of the treatment regimes being considered will strongly resemble a critical care technique from a bygone era.  Treasury Secretary Paulson is finding growing support for the development of a government entity similar to the Resolution Trust Corporation (RTC) which proved useful in helping resolve the savings and loans crisis of the 1980s.  Rather than hold and sell the assets of failed banks as the RTC did, the new entity would purchase toxic loans at a steep discount from solvent financial institutions — and then eventually sell back those repackaged loans into the market through an auction.
This is not an all bad idea – especially if the majority of these loans are collateralized by an asset such as a single-family residence.  Here’s a look at the general idea.  Because the original loan from the bank to borrower was not paid back – the bank must write the loan off as a complete loss – at least until the underlying collateral is sold and the true dimension of the loss can be calculated.    For instance, a $100,000 loan secured by the “sticks-and-bricks” of a single family home goes bad – and the bank is forced to take a gross $100,000 ding to its balance sheet.  Just because the bank took the write-down it certainly doesn’t mean the value of the home has fallen to zero.  If someone would simply buy the foreclosed home from the bank at $100,000 – the bank would generally be out nothing more than legal and administrative fees.  No big deal.
The proverbial “rub” here is that many lenders have suffered more losses in their loan portfolio than their cash position can support – rendering many lenders insolvent and leaving many more hanging on the edge of financial disaster.  The quick sale of the collateral (the homes) is too slow to stave off possible collapse and the short-term credit markets have frozen-up – cutting off any opportunity these institutions might have to borrow themselves out of trouble.
Treasury Secretary Paulson is proposing the government create a new entity, funded with hundreds of billions of dollars of taxpayer money, which will buy these troubled loans from still solvent institutions at a discounted price, and then eventually sell them back into the market through an auction process.  The lenders off-load bad loans from their balance sheets for cash, immediately improving their financial viability.  If the bank sells a $100,000 loan to the government for, say — $45,000 – the lender’s actual loss on the original transaction is now only $55,000.
The new government entity will ultimately auction bundles of these troubled loans they bought from the banks and other institutions.  In this example, the government stands a good chance of getting its money-back under this structure – especially if  auction participants (investors) believe the value of the underlying collateral- the residential properties themselves – are undervalued in terms of their then current fair-market value.
The strong rally in the stock market is a solid indication that capital market participants around the world believe this plan has a good chance of sharply diminishing — if not resolving — the massive credit crunch that has held the global banking system hostage over the past 18 months.
This structure will take time to develop, and it will require a mammoth bi-partisan effort on the part of Congress to enact.  In the interim, mortgage interest rates will likely continue to swing wildly as all of the resources of the government are focused on stopping the seizures in the global banking systems –before focusing specifically on the current level of mortgage interest rates.
Looking ahead to next week, headline news events and trading action in the stock market will exert far more influence over the direction of mortgage interest rates than will the upcoming release of the August Existing Home Sales (Wednesday, 9/24) and August New Home Sales (Thursday, 9/25) sales figures.
Be patient . be disciplined . and play it by the numbers.

Regards,

Doug Smith – Stratis Financial
Your Conventional, Jumbo, and FHA/VA expert since 1993

3625 Del Amo Blvd #220, Torrance CA 90503
Direct 310 697-7033     Cell 310 508-5832     Fax 310 371-7469

Sept. 8, 2008

Dear C.A.R. Member:

This weekend, the U.S. Dept. of the Treasury placed Fannie Mae and Freddie Mac, government sponsored enterprises (GSEs), into a conservatorship. The federal government is authorized to take up to an 80 percent stake in the companies, and, as part of its duties under the conservatorship, will review both Fannie’s and Freddie’s financial condition quarterly, as well as inject money into the operations as needed.

Under the conservatorship, both GSEs will be allowed to increase their mortgage funding over the next year and a half, then, beginning in 2010, the plan calls for a reduction in their portfolios of 10 per cent a year until they have been reduced to $250 billion. As part of this weekend’s action, both CEOs were relieved of their duties and Herbert Allison, former Merrill Lynch vice chairman, and David Moffett, former U.S. Bancorp CFO, were selected to lead Fannie Mae and Freddie Mac, respectively.

In light of the U.S. Dept. of the Treasury’s action, C.A.R. today reaffirmed its support for Fannie Mae and Freddie Mac and their countercyclical roles.

While the short-term impact of the Treasury’s actions over the weekend served to calm the markets and restore confidence, in the longer term these entities need to be able to fulfill their historic mission. A privatized Fannie and Freddie will short-circuit the countercyclical role the GSEs have played during precarious times in real estate markets.

Without an institutionalized mortgage-backed securities market, mortgage capital eventually will be less predictable and more expensive, and adjustable-rate mortgages could become the standard loan for home buyers, as could higher down payment requirements. The 30-year, fixed-rate mortgage as we know it will no longer be readily available for most home buyers and may effectively disappear. The result could be a dramatic decline in homeownership rates in California and across the nation.

C.A.R. is concerned that the Treasury, and Fannie Mae’s and Freddie Mac’s new CEOs, will overreact and change the mission and role of the GSEs. Wall Street and investors are understandably reluctant to buy mortgage backed securities (MBS) that are not either originated from or guaranteed by Fannie or Freddie.

The GSEs hold or have securitized nearly half — roughly $5 trillion — of all mortgages in the U.S., and in the current environment with private lender constraints, they account for the vast majority of all new mortgages in California.

We have just recently begun to see an increase in home sales, currently at nearly 490,000 units on an annualized basis, up from 284,000 in the fourth quarter of last year. The most significant, reliable source of home loans in California today are financed by either Fannie Mae or Freddie Mac. California’s and the nation’s housing markets simply cannot withstand the financial rug being pulled out from beneath them. Additionally, the repercussions this could have on the already weak economy could be devastating.

C.A.R. is urging lawmakers to support continued government involvement in supporting the institutional secondary market and its role in creating homeownership opportunities.  While we applaud the U.S. Dept. of the Treasury for increasing the GSEs portfolio limits, we will be asking Congress to enact legislation to ensure the two companies continue to fulfill their mission.

To help your clients understand the role of the GSEs, please take a look at a new video featuring C.A.R. Executive Vice President Joel Singer at http://www.car.org/newsstand/video-js-gse. In “Fannie and Freddie: Why They Matter to You,” Joel explains the often confusing but critical role Fannie Mae and Freddie Mac play in the housing market in clear and concise terms. I’m also featured in a new video developed especially for our members about the GSEs. You can find “Understanding Fannie and Freddie” on the car.org home page at www.car.org. I hope you find them useful. We’ll also be tracking the story for you as it develops in Wednesday’s “C.A.R. Newsline,” and will have additional information to help you make sense of the story for consumers in this Thursday’s edition of “Market Matters.”

Sincerely,

William E. Brown
2008 President
CALIFORNIA ASSOCIATION OF REALTORS®

Hi All,

I am sure you have received about 482 emails talking about the government’s taking over Fannie and Freddie.  However, in an effort to make it easy to understand for you and your clients I will give you my take on it:

What has happened?

The Regulatory agency that oversees FNMA and FhLMC has assumed operational controlof both organizations.  Also, the government has pledged funds to enable both to continue their role as the largest purchasers of Mortgage Backed Securities.  This means that government money  will be available to “keep the wheels turning” within the conventional mortgage market by making money available for both to keep buying funded loans.  This is a very big statement of “we believe in the quality of mortgages as an investment, and so should the rest of the market” by the government.

What does this mean?

In the short term, the move has restored confidence in US financial markets.  Both the stock market and the bond market have experieinced a nice rally today.  As of now, confidence in mortgages as an investment has been bolstered.  If they are percieved as a safer investment, the folks buying mortgages will accept a lower rate of return (the interest rate).

What does the future hold?

We won’t really know until the full cost of this intervention gets figured out.  As we discover what the cost will be, the financial markets will take their long term cues from that.  The more it is estimated to cost, the more rates will be pressured to go up.  If the long term cost stays within initial estimations, this could be just the ticket to help the economy continue to recover without too much upward pressure on rates.

So , right now, it is providing buyers with a nice little dip in their cost of borrowing.  How long that will hold true remains to be seen.

I have never seen as volatile a market as the one we are currently in, so it seems like a great time to take advantage of the dip in rates.  Today’s euphoria is often followed by tomorrows paranoia.