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Fannie Mae hammered by $2.3B loss. What now?

On Friday, Fannie Mae which, with Freddie Mac, holds or guarantees about 1/2 of all outstanding mortgages, declared a $2.3 billion loss.  Analysts had expected a loss of about $0.68/share, a fraction of the reported $2.54, which sent shares of FNMA falling 9% for the day.


The huge blow is largely attributed to a surge in foreclosures.  As if anyone needed confirmation, sub-prime (or Alt-A) holdings, which account for 11% of Fannie Mae’s portfolio, were to blame for more than half of the repoted losses.  The company issued a statement that it believes the worst may be over by year end, but many industry analysts expect to see defaults continue as a result of the Alt-A lending that was done well into 2007.  Risky financing + falling property values = foreclosures.


The implications of this situation are huge.  First of all, Alt-A financing will all but disappear.  For buyers of Phoenix real estate and Scottsdale real estate, at least, so-called stated loan options are generally relics of the past.  Now buyers that qualify can still leverage traditional FHA and VA programs, which only require 3% down, but fewer and fewer ‘private’ programs are available for buyers who have less than 20% to put down.


The huge losses are also bad news for homebuyers.  Since the losses continue to mount, the government is stepping in to assist the mortgage giants.  To make up for the losses, FNMA is increasing its rates, which will be passed along to the homebuyer in the form of higher interest rates.  Anyone who understands the theory of amortization realizes that a rise in interest rates has a much more significant impact on the cost of a loan over its lifetime than even a substantial reduction in purchase price.


Many of the prospective home buyers who are sitting back to see if prices continue to fall may miss out on their best opportunity to purchase.  They may find they no longer qualify to purchase or, worse, may end up paying more than expected due to higher interest rates. 


While the numbers lead me to believe we’ll continue to see prices lower, in my opinion it is an excellent time to buy.  Inventory remains high, from Scottsdale luxury homes to Phoenix condos, and interest rates are still low in a historical context.  No matter how much prices fall, if average buyers either cannot qualify for a mortgage or if the cost of borrowed money rises, buyers will lose.  Pundits will argue that they’d expect a Realtor to say that, but I’d say that uncertainty is the greatest risk of all.  We could see all of the people left holding the bag by trying to time the top of the market joined by those who tried to time the bottom.


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