Ask Me Help Desk - The mortgage crisis/Fannie Mae & Freddie Mac.

So I guess my question is: With the residual values in the properties, will the net loss be as great as is being stated?

Thanks for asking, Bobby. We are about 75 mi East, and a little South of Dallas, Texas. There was wind on both sides of us, but thankfully, all we got was rain, which was not excessive. I have a daughter and her family with us until the electricity is restored in Conroe, just North of Houston. Folks down there are looking at maybe a month without power. Gasoline prices here are up only 10 cents, as of today. If it takes them a whole week to get the refineries back on line, that will likely get worse before it gets better.

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Originally Posted by CESElizabeth

ETWolverine,

Your presentation is logical and true but I do have a comment. I am one of those Poor people who would not have a home without Fannie Mae. I am a single woman, blue collar, my income would never be high enougth for the housing market. I still have my home and am not in default and likely will not be. Fannie Mae sent me a program I had to study before I received my loan. I did study it. I have a fixed rate and no other debt but my home and utilities. I have just been approved for Social Security Disability. My house payment will be 1/3 of that income.

Part of the problem is people creating additional debt and not educating themselves. I believe the banks took advantage of it by telling them it would be all right and they believed because they were the professionals. Greed is the culprit for profit and not fiscal responsibility. I believe they should be bailed out but not the banks, their turn is coming. Sadly many people are going to be hurt because of the banks actions.

Frankie

Hello, Frankie.

I understand that you have been helped to buy a home by Fannie. And from your perspective that is a good thing. I hope that you enjoy your home, and that you see many good, happy healthy years in it.

But that doesn't make Fannie and Freddie right for putting you into a home that you wouldn't be able to afford without government assistance.

I do believe, as you say, that you have not and will not default on your mortgage. In fact, for all the problems that Fannie and Freddie and the mortgage market as a whole are seeing, fewer than 3% of sub-prime mortgages are going to go into foreclosure, even in the worst-case scenario.

But that doesn't change the fact that under normal market conditions you would NOT be a homeowner. You would be a renter, like more than half of Americans.

Why is that a bad thing?

You see, Frankie, the problem is the blithe assumption that EVERYONE deserves to own a home. That is simply not true. Or at least it wasn't until Congress decided that real-estate ownership by EVERYONE (whether they can afford it or not) constitutes the American Dream, and that they (Congress) are in charge of making that dream come true.

And the result of Congress messing with the natural workings of the economy is the mess we are seeing today.

I'm sure that there are many cases of people who own homes because of Fannie and Freddie, and who own those homes in good standing, without any mortgage problems at all. But that doesn't mitigate the problems caused by those who HAVE defaulted on their mortgages. And that number is higher than it should be because the government stuck their hands into the pie. Annecdotal evidence that Fannie and Freddie did good things for some people doesn't change the fact that Fannie and Freddie have done some very poor things for the economy as a whole, and EVERYBODY (yourself included) are feeling the pinch caused by the results of their actions. In fact, I would venture to say that the very poor people that Fannie and Freddie were created to help in the first place are the ones who will feel the crunch caused by the mortgage crisis the most.

Elliot

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Originally Posted by excon

Hello El:

Sounds like a lotta banker hoo ha, to me. It's a lot simpler than that. What caused it? De-regulation. What can be done to fix it? Re-regulation.

Even McCain agrees with me, if he can be believed. He said he's gonna "..clean up Wall Street".... You don't do that by DE regulating them further.

excon

No. What caused it is the very existence of Fannie and Freddie in the first place. THe only sensible and permanent fix is the ELIMINATION of Fannie and Freddie.

I'm not in favor of either de-regulating or re-regulating Fannie and Freddie. I'm in favor of getting rid of them COMPLETELY. They never should have existed in the first place, and it is their very existence that caused a need to regulate them.

IF Fannie and Freddie didn't exist, there would be no sub-prime loans, because no bank would make such loans without some sort of guarantee that the bad loans were covered, and without Fannie and Freddie no such guarantee would exist.

So the sensible solution for getting rid of sub-prime lending is to get rid of Fannie and Freddie.

Elliot

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Originally Posted by Galveston1

I will state up front that I am certainly no expert on economy. I only have to make my own accounts balance out.

I have a question that I would like those of you who are well informed to answer.

I understand that the mortgage market is collapsing due to bad loans in the first place. So what happens when the houses are foreclosed? They still have value, maybe less than the debt on them, but not total losses. Why can't those houses be re-sold, or even re-financed at more liberal terms? There would be loss, but wouldn't it be relatively minimal compared with what I have been hearing? Someone is going to buy those properties at some price. I think in normal bankruptcy, assets are sold and the proceeds paid out to creditors on a percentage basis. What am I missing here?

In essence, that is what will happen. The proceeds of those sales will go to pay down a portion of the outstanding loans, just as you suggest.

However, the foreclosure process is LONG and DIFFICULT. It will take many months, even years, for courts to issue foreclosure orders, during which times the banks are still sitting with the bad debts of their books. (Judges tend to give multiple extensions to the borrowers before finally ruling in favor of foreclosure.) As I mentioned before, every loan that a bank has on its books is money that they can't use for some other purpose... which means that money is tied up in a bad asset. And current banking regulations also call for even more money to be tied up in order to have a "reserve against loan losses" in addition to the loan amount itself. So for all those months, the bank is sitting with money that it cannot use... a drain on liquidity and a cost to their bottom line.

Then there is the fact that once they take control of the property in the due course of time, they have to be able to sell the property. And until they sell the property they have the cost of maintaining the property, which includes any repairs of damage that might have been caused by weather, natural disaster, wear-and-tear, or by ticked-off former owners who want to stick it to the bank. They also have to cover the property taxes. These are expensive items. There's also the cost of selling the properties (real estate attorney fees, closing costs, the legal fees for foreclosing on the property in the first place, etc.)

The cost of foreclosure and sale of a property is high, and the amount recouped from the sale, after all costs are taken into consideration are MINIMAL at best. The idea of foreclosure is not as simple as it might seem to an outsider. It's a COSTLY procedure.

Elliot

ETWolverine,

The material that I had to read was informative and educational, but no one stood over you to read it. You just had to confirm that it was read and studied. I believe many people did not do their "homework". I gave the information on a high risk loan and what to do to make sure you did not get in over your head, because I read it I did all the advice that was given, even though the bank wanted me to do an adjustable rate.
I agree with you about the consequences to the economy, I agree with who it will hurt in the long run. I do not agree with you about the government giving the opportunity to give people like me the chance for homeownership. No bank would touch me despite a credit rate over 700, my income was not high enough. I have no debt and I was paying higher in a rental than my home payment.
I lay the blame for the economy mess on the banks not government. Corportate greed caused them to do high risk loans.

Frankie

Frankie,

I agree that there was corporate greed involved. But it was a greed that said "We can make all the loans we want and we don't have to worry about loans failing because the government will cover us." If the government had not said that they would cover those bad loans, the banks would have never made those bad loans in the first place. Yes, banks are to blame... but the mechanism by which they abused the system was created by Congress in the form of Fannie and Freddie.

Quote:

I have no debt and I was paying higher in a rental than my home payment.

Then your banks weren't doing their jobs.

As a lender, I can tell you that if your total housing payment goes DOWN when you purchase a home, and if you have been covering you old housing payment, there is no reason that I wouldn't lend you the money. However, if the payment for housing costs goes up, and you cannot demonstrate the ability to pay the new housing cost, then you would NOT get the money.

It may be true that with a Fannie "special" mortgage you can cover your housing costs. But what if you had to get a traditional mortgage? Could you cover that amount? If not, you shouldn't be a homeowner. If you could cover it, there's no reason that you shouldn't have been able to get a standard mortgage.

So as an expert in this field, one who has been doing this for 15 years, I really must question why no bankers would want to have anything to do with you. Something about your story doesn't track. Something is missing, some critical piece of information that makes you a high risk, even though you can demonstrate the ability to cover your housing costs. What are we missing?

Now, as I said, if the government had never created entities that guarantee bad loans, the banks would not have made those bad loans. Ergo, there would be no mortgage crisis, because there would have been no sub-prime loans made by banks in the first place.

You can feel free to disagree with that point, but I'd like to know on what basis you are disagreeing. Do you truthfully believe that banks intentionally make bad loans without some sort of safety net to rely on for when those loans go bad? That would be somewhat counter-productive to greedy banks looking to MAKE money rather than lose it.

Elliot

The wife and I were talking about this massive boondoggle and she said, "why don't we just make up the difference between what these strapped home buyers can pay each month and what they need?" Something like a second mortgage to be paid at the end of the first mortgage. Granted, we don't understand high finance, but it would probably be cheaper in the long run.

Quote:

Originally Posted by tomder55

IBDeditorials.com: Editorials, Political Cartoons, and Polls from Investor's Business Daily -- Congress Lies Low To Avoid Bailout Blame

Thanks for the link:

Quote:

But the crisis began much earlier. The Carter-era Community Reinvestment Act forced banks to lend to uncreditworthy borrowers, mostly in minority areas.

Age-old standards of banking prudence got thrown out the window. In their place came harsh new regulations requiring banks not only to lend to uncreditworthy borrowers, but to do so on the basis of race.

These well-intended rules were supercharged in the early 1990s by President Clinton. Despite warnings from GOP members of Congress in 1992, Clinton pushed extensive changes to the rules requiring lenders to make questionable loans.

Thanks ET for the banking primer.

I think it is all greed -

Investment banks, hedge funds, banks using leverage to make money.
Consumers for buying into the McMansions, house flipping, upgraded kitchen, put everything on the credit card mindset.

What do you think of:

"If it doesn’t pass, then heaven help us all,” responded Mr. Paulson,

Do you think financial armageddon is possible or was this a power / political play?