Do you know the worst day of a vacation? That would be the day you return. (ha ha) After planing, then postponing, and then rescheduling a summer vacation to Florida-- thanks to Hurricanes Gustav, Hanna, and now Ike- we have returned to Southeast Texas. Home Sweet Home!
Our vacation was great. The weather was beautiful. Apparently, Hurricane Hanna took all the bad weather North and we enjoyed three days without a drop of rain.
Now we are back and preparing for Hurricane Ike. The National Hurricane Center shows the storm moving west. Its been a close call for Southeast Texas this month. Gustav went a little East and hit in nearby Louisiana. If Ike stays on course its going a little west to Corpus Cristi. But enough about the tropical weather conditions in Southeast Texas, for that you can log on to The Golden Triangle Weather Website.
Here we discuss real estate. So it didn't come as a huge surprise to hear the news that the Government had stepped in and "bailed out" Fannie Mae and Freddie Mac. For those of you not familiar with the mega companies check them out at:
In simple terms- since I'm not an economist by any stretch- Fannie Mae and Freddie Mac are companies that bought mortgages from the banks and mortgage brokers that originated them.
The vital roles of these huge corporations is to provide liquidity, stability, and affordability to the nation's residential mortgage market.
In their own words Freddie Mac's Mission is to help keep the conventional mortgage market liquid with low and affordable rates.
Here's a "fictitious" example how they do that:
SETEX Bank has 100 million dollars in funds to lend to customers for home loans. After lending $200,000 to Joe and Sue Homebuyer to buy a home (and 499 other SE Texas homebuyers), the bank is out of money. No more money to lend to anyone else. That's bad for the bank and bad for other home buyers. So, SETEX Bank decides to sell the mortgages that are backed by homes as collateral. This is where Fannie Mae and Freddie Mac step in. They buy mortgage loans. SETEX Bank sells 500 loans to Freddie Mac and they get another 100 million dollars to lend. Freddie Mac collects the monthly mortgage payments from the mortgage holders and SETEX Bank collected the origination fees associated with loaning the money. Remember all those closing costs? One was probably an origination fee. That was part of the price the bank charged you for borrowing their money.
How did it all go wrong and why are Fannie and Freddie getting bailed out?
Again "fictitious" example from above continues. Joe and Sue Homebuyer paid $200,000 for their home. Because they didn't have much of a down payment or a very stable job history, they were approved for an adjustable rate mortgage. The payments were easy at first. Perhaps they even had a low introductory rate for the first year. But now the adjustable has gone up and they can NOT afford the payment anymore. First Joe and Sue fall behind by one payment. Soon they are behind by two. Before you know it they are facing a foreclosure sale. This is bad for Fannie and Freddie because they aren't receiving the mortgage payments that they had paid SETEX Bank for. Multiply this by thousands of home buyers and all of a sudden Fannie and Freddie are running out of new money to buy mortgages with. Let's not even talk about the homes that go into foreclosure that the banks have to repossess and then sell at below market prices. That will wait for another day.
Its all a crisis of liquidity.
When no one has money to lend then there are no new mortgages. No mortgages= no home sales. No home sales = falling home prices. Its all interconnected.
So to stop a crisis like we haven't seen since the Great Depression, the Government steps in. They are going to back all the securities sold by Fannie and Freddie and guarantee the holders of those securities will be paid.
If you want to read more about the bailout and what it means to the economy as a whole here's a few articles to confuse... or should I say clarify what it all means.
I think its a little early to know how this will affect home sales in Southeast Texas. For one our area doesn't have a glut of foreclosures. Southeast Texas hasn't been experiencing median price declines like many markets. Our inventory numbers are up a bit since 2007 but that's not affecting prices yet. Lower rates are good for the market. Financing is still harder to get this year. Down payments are once again required so start saving your pennies if you want to buy a home. That's the biggest difference in the market right now. Industry and population in Southeast Texas is growing and that is a positive trend for the housing market.
It will be interesting to watch the housing market here in Southeast Texas and across the nation between now and the election. Stay tuned. I'm sure we will hear more about the Fannie and Freddie Bailout. Time will tell how it affects us here in Southeast Texas.