Concerned about buying?

This question was raised by a client of mine in a recent e-mail. I'm sure she's not the only house hunter with this concern. I thought it would be informative to post it here along with my response.

"I have to say, this financial "crisis" situation has me scared silly. I'm watching my stocks plummet, my down payment money disappearing, and the future forecast of economics in this country is just plain scary. I feel like it's just the wrong time to buy, but everyone says it's ok, go ahead and buy a cheap place. What do you think?"

You have reason to be concerned about the current market conditions. What we're seeing going on has never happened in this country before. In a way, it's exciting being right in the middle of history being written.

Is it the right time for you to be buying? Yes, because you are personally ready to become an owner. The property you buy is primarily a place for you to live. When you find a place you can see yourself living in with a payment that you are comfortable with just go ahead and do it. You'll have to pay rent somewhere anyway, so why not pay for a mortgage instead? Chances are the property value will go up over time but if it doesn't? You still had a place to live. You're not speculating, buying a house with the intention of flipping it. You are buying a home and you are not going to buy something you can't afford. Relax and find something you like.

Don't buy something just because it's cheap. You'll end up with something you're not happy with. Find something you can see yourself living in for the foreseeable future. Buying a home is a lot like buying anything else. If you buy solely on price, you end up disappointed. You need to strike a balance and buy something that you see the value in. Value is a combination of size, location, layout, condition and price. The decision is a personal one; the property needs to feel right to you.

Being concerned is a good thing. It keeps your thought process grounded, helping you make rational decisions. You can't allow concern to grow into panic resulting in an inability to move forward with your life. Balance market conditions with your personal financial situation and develop a plan of action from there. You may decide to buy now or you may decide to put off buying. The choice is yours. All I suggest is that you look at all facts and come to a logical decision, not an emotional one.

Take charge of your life, leading it in the direction you want to go. Don't become a lemming and blindly follow the leader off the edge of the cliff.

The New Fannie Mae

I’ve read the announcements. I’ve gone though what’s been written over the last 2 days. I’ve studied the history of Fannie Mae. What’s happened this weekend is that Fannie has gone full circle. Fannie originally was a government program created to create liquidity in the mortgage market. No different than what the government is looking to achieve today. (Freddie Mac was created in 1970 for the sole purpose of creating a competitor to Fannie Mae. It’s nothing more than Fannie Mae’s younger sibling.)

Fannie Mae was chartered in 1938. The impetus for creation of Fannie Mae was twofold: the national commitment to housing and the inability or unwillingness of private lenders to ensure a reliable supply of mortgage credit throughout the country. The primary purpose of Fannie Mae was to purchase, hold, or sell FHA-insured mortgage loans that had been originated by private lenders. In 1968 Fannie Mae was split into two parts: Ginnie Mae and a reconstituted Fannie Mae. Ginnie Mae would continue as a federal agency and be responsible for the then-existing special assistance programs, and Fannie Mae would be transformed into a "government-sponsored private corporation" responsible for the self-supporting secondary market operations. The reconstituted Fannie Mae was to be stockholder-owned and managed.

In the Sunday, September 7, 2008 edition of The New York Times a staff writer identified the obvious flaw in the creation of Fannie Mae. The government mandate to Fannie Mae required it to serve 2 masters, a situation that is designed for failure. As a private company it was suppose to put the shareholders’ interests above all else and as a government agency it was required to assist first time homebuyers, maintain liquidity in the mortgage market and time keep the cost of mortgages down.

Things were moving along fine until the same greed and corruption that ripped through Wall Street and the banks got into the GSEs. Could it have been avoided? Should we have seen it coming? It doesn’t matter now; we’re already in trouble.

The government had the right to take over the GSEs under their original charter going back to 1968. The recently enacted emergency housing bill gave the Treasury to ability to invest in the GSEs though various avenues. This was an excellent gambit by Treasury Secretary, Paulson. If having the authority to buy into Fannie created stability in the marketplace, great. If it didn’t work, don’t use the additional freedom to invest and move directly to the takeover. Taking this path the government now has full managerial control. We are already seeing the first positive steps, a new chairman has been brought in, dividends have stopped being paid to shareholders and the lobbying budget has been eliminated.

I have been promoting that way out of this mortgage mess we’re currently in was for the government to become the secondary market. They could create an agency in the mirror of Ginnie Mae. But instead of securitizing government mortgage loans it would be in the business of securitizing mortgages issued by private industry. This would slowly recreate a secondary market. This is exactly what’s happening here. But instead of creating a new agency they are taking over the GSEs (Fannie Mae & Freddie Mac). The infrastructure needed to package mortgages and then issue mortgage backed securities is already in place. The existing systems will now be working for the government instead of for the shareholders.

Although the media is calling this a bailout of the GSEs, it really isn’t. Current shareholders have lost their dividend payments and the stock they’re holding is worthless. It’s only after the Fannie Mae and Freddie Mac reimburse, with 10% interest, any capital invested and the government decides not to exercise their option to purchase 80% of the stock of the GSEs at a price of $1.00 a share will the existing shares have any market value.

It’s my opinion that unless the government totally screws thing up, this will turn out to be a profit center for Washington. Washington will then have the option to keep Fannie and Freddie under direct government control, turn then back into private enterprises or break them up into smaller more manageable private entities.

This is the beginning of the end of the housing crisis.