USA Government Plans on Taking Over Fannie Mae and Freddie Mac

Introduction – These are the two largest mortgage lenders in the USA that operate as private companies. They have been financially failing. Together these two entities hold 50% of the USA mortgages. The government is saying the bailout could run as high as $25 Billion dollars. Other in the private sector feel the figure could be much higher. As of June 2008 – 9.16 % of USA homeowners (4 million households, way more than 4 million people) with a mortgage were either behind in their payments of in foreclosure. 39% of the loans that went into foreclosure during the second quarter were in California and Florida. This has caused a sharp decline in home prices. The drop in real estate values makes people less likely to struggle making payments in order to keep their house. Why struggle with a $3500 a month payment when you can rent across the street a similar house for $1500.

To see how great the government can do when it comes to mortgage lending lets look at the FHA (Federal Housing Administration), which is a federal government agency. Of their loans 14.87 % were overdue or in foreclosure. Borrowers can get FHA insured loans with as little as 3% for a down payment. Talk about an incentive to walk away from a mortgage in a declining market. In July 2008, the FHA insured 23% of all new mortgages, up from 1.8% in 2006. So now the trouble may be shifting to another agency, this time a direct government agency that makes bailout more direct and easier.

The Federal Takeover – Imagine having the IRS as your mortgage holder! That is essentially what they are doing. Think of the implications. Late payments mean a Federal collection agent faxes an order to your bank to deduct the payment from your bank without due process. If there is not enough in your bank then they send a confiscation order to your employer to start deducting money from your paycheck. Oh they will fix the late payments and foreclosures fast this way.

Lets keep working this through. Lets say they call this new takeover agency the Federal Mortgage Bank. Well we all know every federal agency in recent years has its own police force and criminal investigators. So if you are late on your payments a Federal Government collection agent from the FMB, with Federal credentials, badge, gun, handcuffs, police car etc will come to your house or place of business. Then a discussion begins as to how you are going to pay the mortgage ensues. You will be strongly encouraged to get with the program. They may tell you to disconnect your internet, cable TV and cell phones to make bigger payments like the IRS does to collect back due taxes. They will create an expense sheet and budget for you telling you what the government says you are allowed to spend and what must go to them. The federal collection agent will look your house over including personal property sizing you up for a confiscation and asset sale. For many years now these mortgages are not just backed by the real estate, it is a debt against the signatories personally.

The agent may take pictures, go into the garage and look at the condition of your cars. They may get an appraisal on your home as well. This is to decide how hard to squeeze you or perhaps they may do better liquidating you before things get worse for you economically. Now if you play games with them and conceal income and assets on your financial statements, which are collected, when you get behind on your payments then a Special Agent from the FMB comes for a visit. He or she reads you your rights, if there are even rights left anymore there, not sure. Then you are in jeopardy for a criminal case for defrauding them from their house payments. Let’s say you walk away from your mortgage because it is more of a make sense proposition to just rent a similar house across the street for much less money.

Now a FMB Special Agent complete with badge, gun, credentials, police car, etc comes to see you and it is explained that they are conducting a criminal fraud complaint against you for mortgage fraud since if you wanted to you were able to pay your mortgage but instead when the value of the house dropped and you were able to rent a similar house for less money you walked away from your mortgage. This intentional action left the mortgage lender (now them) with serious losses. This is of course designed to get you to agree to a settlement with them, which may be hundreds of thousands of dollars to cover them for the losses they incurred when you walked away from your mortgage. This will for sure stop people from walking away from their mortgages unless they absolutely have no money to pay for the mortgage anymore and in those cases the FMB or whatever they call it, will renegotiate payment terms with you just like they do with the IRS and with the penalties, back payments, and interest charges you will be making payments until you are dead and then they may pursue your estate and your family may then lose the house. Just look at the IRS and that is how it will become. Name one agency of the Federal government that deals leniently with people that owe them money. Well if you owe them less than $100 million anyway. The wealthy get sweetheart deals, grants, bailouts etc, but the regular people encounter an iron hand. Oh and you will get to pay for this bailout in higher taxes, higher loan fees etc.

The Housing Market Turnaround – You got to be kidding. Maybe in five plus years one may see a slight turn around but first lets wait for a bottoming out. You will see a greater drop in the next few years before any turnaround. They are getting ready for this and will deal with an iron hand to those who try to walk away from their mortgages unless they are flat broke. You will probably even have to ask for permission to default on the mortgage based on being broke and unable to work. The credit card loan crisis is looming which will make loans harder to obtain. Certain regions and areas will survive and probably never go down below 75% of their high values during the peak. Other more oversold regions may go down to 25% of their peak values. You need people with incomes and credit that are able to qualify with serious down payments for any turnaround. Residential real estate has ceased to be any sort of inflation hedge or diversified investment vehicle. Houses will be for living in and that is it.

Federal Renter Programs – This one is an interesting twist. The Federal Government has millions of people receiving assistance on them for housing. Some of these people are disabled; others are on welfare with numerous children etc. Now the Federal Government has all these empty houses from Fannie Mae and Freddie Mac foreclosures. These houses are sitting empty. Some may rent, many will not. The government may move the welfare recipients into these houses that are empty anyway to save money. So they basically pay themselves rent. Can’t say for sure that they will do this since it would probably drop housing prices in a lot of areas but they often have their own agenda, which defies reason and logic. This is one Obama could run with if he ever figured it out to get votes. Hey vote for me and leave your government-subsidized apartment for a nice four-bedroom home with a yard and Jacuzzi. The government could also take these vacant houses and rent them out not based on market values but based on what a person can afford to pay.

Broader Implications – The Federal Government will now become the “landlord” for 50% of the financed houses in the USA and that figure is much higher when you take into account FHA loans. Imagine the increase in power that brings with it. I suppose if you are able to pay all cash for a house then you will avoid them but of course make yourself a target for litigation, and other attacks on your assets. Maybe there will be a “No Buy” list similar to the “No Fly” list. If you are on the list you can’t get a mortgage. Imagine the anti-terrorist paperwork involved with buying a house. I would expect fingerprints if not DNA.

Auto Industry – The auto industry is also in trouble and some of it is related. Many people used a home equity loan to buy their new cars since the interest rates were much lower. Now with their home equity gone they have no equity to borrow against and if they do the lenders will qualify far fewer people and the amount of the loan will be less. According to Autodata new car sales in USA are down 15.5% from last year. The big three automakers are asking congress for a $25,000,000,000 bailout. Wouldn’t it be nice if your government would bail you out when you made a mistake? GM august sales were down 20.4% from the previous year. Ford was down 26.6% for August from the previous August. Chrysler August sales were down 34% from the previous year. This is bad. There probably will be a bailout and you will get to pay for it. Will they tell the auto execs to sell their mansions and yachts to pay for this bailout? Never. You will foot the bill not them, yet they keep all the profits.

Unemployment Rising – New housing starts are obviously in the dumps thus more unemployment. New car sales also in the dumps thus more unemployment. Factory jobs are disappearing in wholesale quantities. In August the service sector lost 27,000 jobs. Retail went down by 19,000. Payrolls dropped by 605,000 during 2008 so far. Can easily hit a million. That means a million jobs were lost. Well that is one way to get military enlistments up. The loss of jobs will further depress the housing market and the auto market. It is just beginning.

The government however did add on 17,000 jobs in August. This is an artificial figure. Government does not produce or manufacture anything. More coming. US airlines of course suffer since people have less money to fly. They are expected to cut 36,000 jobs by the end of the year. GMAC (financial auto loans) just layed off 5,000 workers. Wachovia the bank not doing so well just announced a layoff of 7,000. The US Bureau of Labor Statistics (yes the US Dept. of Labor has Special Agents with guns and badges if you are wondering) has statistics for discouraged workers. These are people who have actively given up looking for work as well as those just able to get part-time work. This figure is a full 10.7% of the US workforce. Don’t expect to see any improvement soon. First look for a bottoming out of the falling everything. That is a long way off it seems. Don’t think a new President can do much about this.

What to Do – Well you have options. You can certainly relocate. There is currently no law on you leaving the country. We did say currently. Now you need a passport to leave the USA, previously you did not. Exit visas may be just around the corner. An exit visa means you have to ask permission to leave. They may not let your whole family leave if it looks like you may not be coming back. If you have ordinary civil debts or owe taxes you may not be able to leave. The things just described are in place and have been for many years in many different countries. Don’t think it will not happen.

Years ago you could just walk across the border to USA or Canada. Now uniformed soldiers stop you 2 miles from the border who run your passport through a database to see if you can leave. This is in effect a mild version of the exit visa. You can buy nice homes in the country in Guatemala for $40,000. You can have easily affordable health care. Doctors make house calls. Prescription drugs do not require prescriptions. Freedoms are like they were in the USA fifty years ago. A live in maid is $250 a month. Prime beef is $2.50 a pound. A full steak dinner is a great restaurant is $15.00. Beer is $0.35 a can. The weather in Guatemala City is from 55 to 75 degrees year round. Banks will give foreigners 25 year fully amortized mortgages with 25% down. No sub prime crisis here. People are working. It is hard to get a parking spot in our 15 malls.

You could be enjoying yourself elsewhere waiting to see if the country ever bounces back or not. Of course you can always hope for the best and stay.

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