“The housing recovery will start in three to six months”.  “Housing prices will bottom out by the third quarter of next year”.  “Existing home sales have increased this month, the first sign of recovery”.  Blah Blah Blah!!

Since January of 2007, almost every “expert” I read or listened to would echo similar verbiage to the quotes listed above.  From every respected independent Economic Study Group, to Government Accounting Offices,  to Chief Financial Officers of every major financial institution……WERE ALL WRONG!!!

Every month for two years now, we’re “3 to 6 months away” from the housing/banking recovery.  From the Wall Street Journal, to the Economist, to MSNBC Business wonks, to the Bloomberg , Forbes and Kiplinger folks.  No one predicted this.  The brightest business minds in the world, smarter than most of us when it comes to the market variables and where they will lead us, can take credit for their forecasts or predictions.  That said, I can confidently spout my own prediction, since the worst I can do is mirror the “experts”.

AS SOON AS BANKS START LOOSEN UP LENDING GUIDELINES, THE HOUSING RECOVERY WILL BEGIN.  Slowly but surely.  I’ve been saying this since March of 2007:  housing will continue it’s downward spiral as long as the supply of lending keeps decreasing.  It was the supply of easy and cheap money that created this bubble, and it’s the lack of easy money—literally any money—causing our housing prices to further cascade at levels not seen since the Great Depression.

MARCH 2007: Sub-prime Mortgages Gone (20% of all loans in 2004 & 2005)

SEPTEMBER 2007: Alternative (“Alt-A”) Mortgages Gone (65% of all loans in 2004 & 2005)

OCT ‘07—TODAY: Tightening up on guidelines-daily- on the only loans left—> FHA & Conv 30 year fixed.

Being on the front line of lending (the supply side of real estate — the buyers), it didn’t take a Rocket Scientist to figure that if you cut out 85% of the buyers, your housing market tanks!!  Add the 90,000 homes for sale in the valley (double what is normal) and you get—presto—housing implosion.

Think about it, ironically, the banks probably doubled their potential losses last September by the cutting off lending, in the effort to shield themselves from those vary losses.  So when anyone says to me, “we should be OK in a few months”, I ask, “what do you base this on?”  Their answer is usually based on either optimism, or some expert they heard in the media.  So many of my real estate associates echoed their National Association of Realtor economists, who up until a couple of months ago, were as wrong as any entity out there.  I pray for a quick recovery, but since I’m allowed my own opinion, I’m entitled to this prediction:  we bottom out between August and October 2009. 

Fannie Mae (FNMA) is an acronym for Federal National Mortgage Association.  It is a government sponsored enterprise (GSE) of the U.S. Government.  It was created in 1938 as part of President Roosevelt’s “New Deal” to provide money and liquidity to the mortgage market which collapsed earlier in the decade during the Great Depression.   It is a shareholder-owned corporation authorized to make loans and loan guarantees. 

Freddie Mac (FHLMC) is another GSE, founded in 1970, has the exact same functions and operates the exact same way as Fannie.

The main mission of Fannie and Freddie is to provide liquidity into the mortgage markets by purchasing loans made by local lenders and repackaging them into bond-market security pools that are sold to investors with the U.S. Government’s stamp of approval.  A simplified example is, I may get you a home loan with Wells Fargo at 6.5%——who then sells your loan with a bunch of others (called pools) to Fannie/Freddie for 6.0%, who sells them on Wall Street (called mortgage backed securities).  Wells Fargo collects your monthly payment (called servicing) for a fee; however, they’ve already sold your loan on Wall Street.  This loan is “guaranteed” by Fannie or Freddie, which is what makes our interest rates so low.  Without this flow of money (liquidity), our home rates would be, who knows, 2% to 4% higher, is a guess.

HISTORY

In 1968, to remove the activity of Fannie from the annual balance sheet of the federal budget, it was converted into a private corporation.  Fannie ceased to be the guarantor of government-issued mortgages, and that responsibility was transferred to Ginnie Mae (Government National Mortgage Association).  This entity falls under the guise of HUD and provides all of our FHA and VA loans—amongst others, such as Indian Housing and Rural loan programs.  In 1970, Freddie was founded to expand the secondary mortgage market and to combat Fannie’s monopoly.  When you hear the term “Conventional” loans, that means Fannie & Freddie, which are allowed to guarantee loans up to $417,000.  Anytime you hear “Jumbo” loans, those are loans greater than $417K, money comes from a smaller pool of non-Fannie/Freddie investors, thus Jumbo loans higher rates.

TODAY 

Fannie and Freddie own/guarantee over half of the $12 Trillion mortgage market.  There is a wide belief that these securities are backed by some sort of implied Federal Guarantee.  These days, Congress, The Fed, The SEC are all talking about how to keep Fannie and Freddie afloat if the foreclosure rate threatens their liquidity.  The big fear for our economy is if these GSEs will eventually be supported by U.S. Treasuries, then eventually, us tax payers.  Stay posted!!