Fannie Mae and Freddie Mac – OTC or Penny Stocks

Posted: 06 Jul 2010 04:25 AM PDT

Over the counter or penny stocks is not the place where people put their retirement funds. But years of mismanagement and social engineering have landed Fannie Mae and Freddie Mac in the world of OTC stocks.

Trading under a dollar for too long has gotten these stocks out of the New York Stock Exchange and into the nether worlds of the penny stock trading floor.

There is an irony that what is perceived as the underbelly of the investment world is where Fannie Mae and Freddie Mac are forced to live. The full faith and credit of the Federal Government, who own 80 percent of the two companies now, can not prop the valuation of the remaining 20 percent of shares to over a dollar.

And what makes matters worse, these two companies are providing the liquidity to an already distressed housing market.

But to listen to the politicians in Washington all is fine with the housing market and home buyers have nothing to fear.

I am not so sure of that anymore.

• When the guarantor of the housing market is essentially a subsidized federal program, I get nervous.
• When the private market does not see any value in lending to home buyers, I get nervous.
• When investors see no value in holding mortgages, once seen as the safest investment that many built their retirements around, I get nervous.

We have to remember that the housing market needs to be self sustaining once this crisis is over. The valuation of our homes have to be based upon what the free market thinks they are worth without government subsidies. Tax credits, artificially low interest rates, and other government props do not make a healthy market, especially when the government is running huge deficits.

The politicians, the media, and the National Association of Realtors all can not talk about the problems we have in the mortgage world but the real barometer is how the investment world sees the problem.

By delisting Freddie Mac and Fannie Mae, the financial markets have spoken that the companies that are the underpinning of the housing market have no value to investors.

Thanks for reading this post. If you would like to see more articles like this, please come visit The Real Estate Bloggers. where it was originally published.

Many people blame the banks and mortgage companies for the housing meltdown.  I guess it’s foolish to think that our government officials would take the blame.  Many of us understand that government policies that initiated in the 1990s are the real culprit in this mess.  And now a political challenger in the race for governor of New York claims that Andrew Cuomo, former housing secretary in the Clinton administration, was directly responsible for the housing meltdown, was directly responsible for the housing meltdown.  Political mudslinging aside, the 2010 election cycle may bring out additional insight as to the root cause of the housing meltdown as this Business Week article points out:

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Paladino said that as secretary for Housing and Urban Development, Cuomo "couldn't wait to get in front of the cameras at press conferences" to say how he was encouraging the federally chartered mortgage giants Fannie Mae and Freddie Mac "to lower their standards so every American can enjoy having a house."

"He did a terrible injustice to those poor Americans telling them they could have a house they couldn't afford," Paladino told reporters a day after he formally announced his campaign for governor. "He did a more egregious injustice to the taxpayers and the people who had homes as he created the sub-prime meltdown, which resulted in lower valuations."

"He was initiator of a policy that was carried by others," Paladino said, naming Clinton and Republican President George W. Bush. "It turned into a monster ... all in the name of Andrew's political career."

Click here to read the entire article: Business Week

Newton’s Law of Motion: To every action there is always an equal and opposite reaction.  Looks like the health care bill’s negative impact on industry has already begun.  When businesses lose money it affects the entire economy, especially in the area of job creation which ultimately affects the housing market.

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Caterpillar Inc. said Wednesday it will take a $100 million charge to earnings this quarter to reflect taxes stemming from the newly enacted U.S. health-care legislation.

The world’s largest construction equipment manufacturer by sales warned last week that provisions in the legislation would subject it to federal income taxes on the subsidies it receives for providing prescription drug benefits for its retirees and their spouses.

Click here to read the entire story: WSJ

Home purchases made by buyers identified as investors climbed to 17% in January, up from 15% in December and 12% in November.

Click here to read the entire article: USA Today

Losing your home in a short sale process has got to be about as much fun as having a dozen root canals done all at once.  But once it’s over….it’s over….right?  Not necessarily; a short sale is a sale of real estate in which the sale proceeds fall short of the balance owed on the property's loan.^[1] It often occurs when a borrower cannot pay the mortgage loan on their property, but the lender decides that selling the property at a moderate loss is better than pressing the borrower. Both parties consent to the short sale process, because it allows them to avoid foreclosure, which involves hefty fees for the bank and poorer credit report outcomes for the borrowers. This agreement, however, does not necessarily release the borrower from the obligation to pay the remaining balance of the loan, known as the deficiency.   The following CNNMoney article explains this in a little more detail.

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Former homeowners may still be on the hook if there's a difference between what they owed on their mortgage and what the bank could sell it for at auction. And these "deficiency judgments" are ticking time bombs that can explode years after borrowers lose their homes.

It can even happen to people who got their bank to approve them selling their home for less than it is worth.

Vanessa Corey, for example, short sold her Fredericksburg, Va., home in April 2008. She and her husband built the house in 2004, but setbacks, both personal (divorce) and professional (housing bust), made it impossible for the real estate agent to keep her home. So she negotiated the short sale and thought that was the end of it.

"My understanding was that the deficiency was negotiated away," she said. "Then, last November, I got a letter from a lawyer telling me I owed my lender $65,000. I had to declare bankruptcy. There was no way I could pay it."

Click here to read the entire article: CNNMoney

In order for a short sale with two loans to happen, the second lien holder has to drop the lien.

If they don't, and there's no short sale, the home goes to foreclosure and the first lien holder gets the house because second liens are subordinated debt to the primary loan.

In short, the second lien holder gets nothing. In order to get the second lien holder to drop the lien, the first lien holder generally negotiates some partial payment to the second lien holder. The second lien holder doesn't have to agree, but more and more are doing so.

That's all legal.

But here's what's not legal and what's apparently happening quite often recently. Since many second lien holders are getting very little, they are now allegedly requesting money on the side from either real estate agents or the buyers in the short sale. When I say "on the side," I mean in cash, off the HUD settlement statements, so the first lien holder doesn't see it.

"They are pretty clear and pretty upfront about the fact that if the first lender knows they are getting paid, the first lender will kill the short sale," says Brandt. "So these second lenders are asking for the payments off the closing documents, off the HUD statement, usually in a cashiers check prior to closing. Once they receive that payment, they will allow the short sale to go through, which according to RESPA laws and the lawyers that we have spoken to on the topic is not legal."

Click here to read the entire story: Short Sales

A post from The Real Estate Bloggers  web site.  I couldn’t of said it better myself.

A Rant on Congress, The President, and Commercial Real Estate

Posted: 02 Feb 2010 07:28 AM PST

Can I be blunt. Our government is nuts.

On one hand it is sending signals to the New York Times that they are worried about commercial real estate, yet at the same time they are following a White House that recommends a 1.9 trillion dollar tax increase on businesses and the wealthy and wants to punish banks with an additional tax increase.

Morons.

I understand that they ran on helping the little guy, but let’s face it, the problems we face in commercial real estate are big boy problems. If there is no money to invest in labor, you need smaller offices, and smaller factories, and smaller distribution centers.

And when the government takes more money, there is less to invest in the private sector. Not exactly rockey science.

And when you announce new programs on a monthly basis that will impact the private sector with additional costs and regulations that may or may not pass, the private sector stops taking risks.

Again, not exactly rocket science.

If you in Washington want to experiment, that is fine. The people elected you to your offices and you have that right.

But what you can not do is then not expect consequences from your experiment.

Like the little boy who does the science experiment and makes a mess of his Mom’s kitchen when it blows up, you have to deal with the consequences.

The problem is these folks are running their experiment, making the mess, and then using a credit card to try to pay the folks to clean it up. And the guys who are supposed to clean it up are not going to take a credit card from a 9 year old boy.

So let’s be serious. If you want to worry that the credit markets, commercial real estate markets, and the residential real estate markets start functioning again, you need to change your game.

• Stop printing money and making us worry about devaluation and inflation.
• Stop changing the rules of the game every few few days so we know if we can make any money or not. We make investments to earn money.
• Stop making us look stupid by backing one initiative and then changing it mid game.
• Stop threatening us and making us look like the bad guys when all we are trying to do is keep the system going and feed our families.

Right now we are all on eggshells and we don’t want to play another round of Russian Roullette with your administration.

Well, as Ronald Reagan said “Government doesn't solve problems; it subsidizes them."  I guess all the stories out there about tarp funds going to waste and a revamping of a revamping of the government’s efforts to stave off foreclosures are a modern day example of Reagan’s infamous quote.  The government helped create the mortgage crisis by “regulating” or should we say ‘deregulating” the banking industry via Fannie and Freddie back in the 1990’s. This was the government’s effort to make sure that those that wanted to own a home could, regardless of their ability to pay the loan back.   Today, the government blames the “fat cats” for the problems and vows to fix them.  Anybody ever wonder what would happen if the government just stepped back and let the market sort thing out?

The following story from CNNMoney is just another in hundreds about the government helping us all out:

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Under fire for the low number of people receiving long-term mortgage help, the Treasury Department on Thursday announced new guidelines that will require applicants to provide all paperwork before getting a trial modification.

The new policy will make it harder for troubled homeowners to start the process, but it should make it easier for them to qualify for permanent assistance under President's Obama foreclosure prevention plan.

Click here to read the entire story: CNNMoney