Thursday, November 28, 2013

THE FLY IN THE OINTMENT—THE DEMISE OF FREDDIE AND FANNIE


The article discusses the 26 different housing plans compiled by the Center For American Progress  (25 of which discuss the possible dismantling of FREDDIE MAC and FANNIE MAE currently overseen by FEDERAL HOUSING FINANCE AGENCY). The article points out that if these two agencies were removed from the mortgage industry that the job would fall to the private sector, mainly the large banks and private money lenders.

During congressional hearings, “Georgetown Law Professor Adam Levitin estimated that private investors would only fill 1/8th of the housing market’s annual capital needs. This lack of capital would have a damaging impact on the market, as prospective homebuyers would have difficulty getting mortgages.”

The question that I throw out is do we really want to usher the wolf into the hen house? Isn't that part of what led to the last major recession? Banks and private investors are not in business for the “public good,” they are in business to make a profit. And while I am not against making a profit, it is not in the interest of the private sector to focus on what is best for the public. Yes, they will look at “what does the public want and how can we give it to them to make a profit.”  But they are not producing the product or service because that is what the public needs. If this were the case we would see private utility companies only charging what it cost them to provide their service. We would only see banks charging what was essential to cover their costs. The “public good” is not what motivates the private sector.

The additional flaw that I see is in this plan is the fly in the ointment. The private investment capital will avoid the heavily regulated arena of the owner-occupied housing market and concentrate mortgages with the non-owner occupied commercial property owners. We could easily see fewer and fewer “home owners” and more and more landlords, resulting in a burgeoning growth in rentals.

There is much to be said for having “home” ownership and how it produces a self-interest in protecting, preserving and improving the property that we own. Not all landlords are slum owners, but there are many that are. They will only repair or replace those items that they are forced to repair or replace to preserve their investment vs the profit it produces. They are not providing rodent control for the benefit of the tenant.

Since the focus of this blog is whether you will flip or crash in real estate, let’s bring this discussion full circle.

If the proposals to do away with Freddie and Fannie come to fruition, this means that you as the investor will have many more opportunities to buy cheap and sell high. Some private money lenders such as COGO CAPITAL and SECURED INVESTMENT CORPORATION, and PRIVATE MONEY EXCHANGE will be offering loans and funding to the private investor in larger dollar amounts (disclosure—I am training for the mortgage broker program through PME because I see what is coming).

Banks, as well, may move their focus to the investor and away from the homeowner making home loans even more impossible to acquire. Banks make their money off of taking deposits from their customers, making loans, servicing the loans, and selling the loans to other companies in the secondary market. That gives them the money to make more loans and collect fees. If they have fewer players in the secondary market and they have to keep more of their loans on their books, they too may be more motivated to focus their efforts on the commercial investors and less on the personal homebuyer.

Be prepared for the next major housing and stock market correction that is coming within the next few months. And stay tuned. I have provided some useful links if you would like to read more on the specific topics and agencies mentioned.

References:

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