Real Estate
Change I wish I believed in
By Dan Smith

Change I Wish I Believed In
Well … what else is there to write about related to housing other than the latest bailout news? You may remember I recently wrote regarding Fannie Mae’s and Freddie Mac’s financial situation. At that time, I didn’t see any need to take over either institution, nor did the regulatory agency in charge. Back then, the consensus of opinion—including that of Treasury Secretary Paulson’s—was that the line of credit the government had put into place would likely not even be needed. So what happened between then and September 8th?
Well, I went back and dug into the financials published online at Fannie Mae’s site and, frankly, I was still bewildered. The first quarter of 2008 financials reflected the $40 billion plus in capital reserves I mentioned in the last article. In addition, the balance sheet shows $77 billion plus in mortgage backed securities and other bonds. So I just couldn’t understand how a company that recently started losing $2 billion to $4 billion a quarter could possibly require a bailout with these kinds of reserves. The losses had actually narrowed from the fourth quarter of 2007 to the first quarter of 2008, from a net loss of $3.6 billion to $2.2 billion. Economic forecasts were predicting the current housing slump would find a bottom level of support in the first half of 2009. So surely, I reasoned, this bailout just did not make sense. Then I found the word that sent chills down my spine … “derivatives.”
What happened on September 8th was that $1.4 trillion in Fannie Mae and Freddie Mac “credit default swaps” (a form of credit derivatives) were triggered. But who was guarantying this debt in the event of a default? Well, that turned out to be the laundry list of financial institutions we have all been reading about recently. It turns out they were even weaker financially that either Fannie or Freddie. Apparently, the lucrative fee incomes these institutions enjoyed in exchange for providing this guaranty did not require they demonstrate the ability to actually make good on it.
So now the Treasury (and, therefore, the citizens) of the U.S. has been effectively blackmailed. The entire amount of sub-prime loans ever made was something like $300 billion. But thanks to the leveraging effects of derivatives, the problem is exponentially greater than that. There is no other option but to bail out the financial system’s largest players (read as those that were the worst run), or face a Great Depression-style collapse. The cost will, of course, be that the dollar’s value worldwide will drop like a stone, which has already been reflected in $950+ gold prices and oil back over $120 per barrel … so far.
If there is any upside to all of this, it is that this intervention should finally end the liquidity crisis of the last 18 months, once it is put into place. But that, of course, remains to be seen.
For honest advice from someone who really cares, call the professional. Yes, he does commercial loans, too! Dan Smith can be reached at (303-674-0201), or visit his Web site at ColoradoHomeLoans.com and check out his complete consumer library today.