Under attack, yet again…
Fannie Mae and Freddie Mac, the mortgage financing behemoths, are under attack again. And it’s not altogether good news for real estate investors looking for future investment property financing. The latest salvo comes in the form of a new lawsuit by California’s attorney general, Kamala D. Harris, who just filed the suit as part of a huge fact-finding hunt to see what both super-agencies actually knew about all the risky loans they were guaranteeing. (They currently act as guarantors for about half of the 10.3 trillion dollars in U.S. home loans.)
The suit asks for both agencies to comply with this fact-finding by producing records about the mortgages they had bought up, as well all the foreclosed houses they currently own in California. (Specifically, the suit asks for a voluminous amount of information – including records of every vacant house the agencies own, as well as whether both agencies knew of any drug dealing, prostitution or presence of explosives and radioactive material in these properties.)
Write Downs R Us
Ultimately, it’s assumed that other states attorney generals are prepared to file similar lawsuits to obtain data as well. At the same time, Fannie Mae and Freddie Mac are being pressured by Washington to write-down their existing under water mortgages. In so doing, they would be able to bring principal amounts on these loans down to reflect current market valuations, thereby propping up the overall real estate market. But propping up at who’s expense? Both agencies are currently being bailed out by taxpayer funds, ostensibly because they’re too big to fail. Taxpayers are on the hook for about 150 billion dollars in bad loans.
Concurrently, and as reported on a recent edition of CBS’s “60 Minutes,” Cleveland is currently employing a radical course of home tear-downs in severe, economically-blighted areas of the city. Other cities around the country are also utilizing this strategy to prevent further erosion of market value (and tax revenue) for homeowners already making a stand and remaining in their homes that have lost more than half their value in recent years, thus leaving virtual ghost towns inside of these once-thriving urban areas. In so doing, local municipalities also aim to lessen the spread of further urban blight, usually brought about by high amounts of vandalism to already vacated properties. This is reminiscent of firefighters laying down a controlled blaze around the perimeter of an out-of-control forest fire in order to quell the overall fire.
Unfortunately, this kind of economic firefighting comes at a great cost. Writing down bad loans to reflect current market values, all done on such a massive scale, will also greatly weaken banks around the country. Currently, Fannie Mae and Freddie Mac are suing a bevy of the nation’s largest banks to try to recoup some of their losses. There could be a large ripple effect if they were to prevail in the court system.
Lessening the bailout
Banks would have to write off many of their own bad loans, as well as attempt to settle potential lawsuits by a number of states attorneys general over robo-foreclosing abuses. They would then have to make restitution to Fannie Mae and Freddie Mac as well. Ultimately, the taxpayer may be well-served as total government bailout funds are lessened. Unfortunately for the property investor, at what cost?
Further credit tightening on the horizon
In this scenario, banks would invariably need to tighten up their credit and mortgage loan qualification rules, thus further increasing an already tight mortgage credit market. Only those with the absolute highest credit scores will qualify for loans. And investors can look for further belt tightening by banks through greater loan-to-value ratio qualifiers for investment property mortgages. Thus, cash will be king in making future investment property purchases. And leverage capability further eroded.
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