Bail Out Good or Bad?

By now you have certainly heard of the Government stepping in to take control of Fannie Mae and Freddie Mac. But, just in case I am your only source or real estate news, let me give you the Readers Digest version of what has happened in the past few days:

Fannie Mae and Freddie Mac, the government sponsored agencies charged with setting mortgage guidelines and purchasing mortgage notes currently hold roughly 50% of all US mortgage notes. Over the past year the two firms have experienced $12 Billion in losses.

As of this morning, the Federal Housing Finance Agency (FHFA) has taken control of both Fannie and Freddie. By placing the two firms in what is referred to as a “conservatorship,” the government has replaced the CEO’s, eliminated some dividends, and put a freeze on all lobbying efforts on behalf of both Fannie and Freddie.

So what does it mean to you?

What everyone is really wondering is “what will happen to rates?” I am increasingly convinced that people have three concerns about the housing problem: First, when will it be easier to get a loan; second, when will rates go down; third, when will home prices go up again. Truth be told, the government takeover of Fannie and Freddie will have some effect on all three questions, but it is impossible to know the exact effect.

The more immediate result will probably be a decrease of interest rates. CNN is projecting that rates could drop as much as 1% in the next year. That is good. Unfortunately, with foreclosures still at all-time highs, it is unlikely that housing guidelines will loosen.

So what do I predict? Traditional home buyers (meaning those who get a W-2 and have good credit) will be able to refinance into lower payments. Some first time homebuyers will be able to get into larger homes. Eventually the inventory of available homes will slow down and eventually we will see prices increase. I still think we are 12 months away from Utah home values increasing much. I also think we are 12 months away from things getting any easier for the self-employed or credit-challenged borrowers.

I wish the bailout was nothing but good news. I do think it is a good step. I think we will see more government efforts in the coming months. I also think that we will never again see the combination of loose guidelines, low rates and rapid appreciation. If you are counting on those things, good luck!