july 2008 charleston market report

8/9/2019 July 2008 Charleston Market Report

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www.charlestonmarketreport.com

July 2008

Dear Subscribers,

I usually do not send out emails outside of the scheduled date unless there is very important news to discuss.Due to the high number of subscribers whose livelihoods depend on the real estate industry I felt it necessary todiscuss the current situation regarding Fannie Mae and Freddie Mac.

In the May 2008 Charleston Market Report I wrote the following:

Fannie Mae - The Next Shoe To Drop?

Effective June 1, 2008 Fannie Mae will roll out their new underwriting guidelines and they are going to bedifficult for originators and borrowers to deal with because Fannie is getting stricter with their lending standardsdue to the recent lending implosion. Fannie also has had its leverage guidelines increased by OFHEO in aweakening economy. With home prices declining around the country and a quasi government agency that

is poorly managed being given the green light to increase its leverage is a very dangerous sequence ofevents. When you combine the Fannie Mae's recent Q1 2008 earnings and take a peak at the big picture

you may have the making of another "Anatomy of A Collapse." Let us all hope and pray this collapse

does not occur because then the real estate market would really get messed up. I foresee the

nationalization of Fannie and Freddie in the future via another government bailout.

Fannie Mae does not use foreclosed properties in its price index. Thus, FNM significantly understates homeprice declines.


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From Kevin Depew at Minyanville.com:

"The fine print at the bottom of the slide is important because it speaks to the use of the case-Shiller indexversus Fannie Mae's own index upon which their price projections are based. According to Fannie Mae,

because the Case-Shiller index is value-weighted, it places greater weight on higher cost metropolitan areas.Fair enough.

Using the Case-Shiller index methodology, Fannie Mae says its projections would move from a 7-9% homeprice decline for 2008 to 10-13%, and from 15-19% peak-to-trough to 20-25%. There's just one catch with

those projections increases. They strip out the impact of foreclosure sales. As Fannie Mae observes, "Foreclosure sales tend to depress the S&P/Case Shiller index relative to the Fannie

Mae index."Below is the most recent stock chart on FNM:


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Here are the recent Fannie Mae highlights:

May 6: FannieMae Q1 net loss $2.19 billion; expects worse for next year. Cuts dividend, raises $6bncapital. Shareholder equity now below 0--> regulator said it will loosen restrictions on Fannie Mae'scapital once the company has raised the $6 billion. FreddieMac reports May 14.

OFHEO Annual Report, April 15: FannieMae and FreddieMac "remain a significant supervisoryconcern." OFHEO director Lockhart in March: companies may need $10 billion each.

March 24: Federal Home Loan Banks allowed to increase purchase of Fannie&Freddie guaranteed MBSby $150bn

March 19: F&F regulator cuts the companies' surplus capital requirement to 20% from 30% to helpexpand their combined $1.5 trillion in mortgage investments and revive the home-loan market. Initiativeis expected to provide up to $200 billion of immediate liquidity to the mortgage-backed securitiesmarket--> together with lifting of cap limits (see below) this should allow the GSEs to purchase orguarantee about $2 trillion in mortgages this year.

Shenn: The regulator to Fannie Mae and Freddie Mac removes limits on their combined $1.5 trillionmortgage portfolios, despite $3.55bn loss at FannieMae, $2.45bn loss at FreddieMac (with more lossesexpected.) Agencies hold or guarantee about $4.9 trillion in home-mortgage debt.

Interest rate on new prime mortgages is based on 30year Agency-backed MBS minus 1-year Treasurybill--> spread widened to 22year high in March on credit concerns.

Source:http://www.rgemonitor.com/175?cluster_id=7169


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During the time of the May 2008 CMR newsletter Fannie was trading at approximately $28 per share. Fannie iscurrently sitting at $13.20 per share and Freddie at $8.00. Below is the snapshot of this "Anatomy of ACollapse." If you were a shorter then congratulations.

Folks, Fan and Fred are probably toast but do not worry because they are too big to fail so the government willhave no choice to step in and bail them out. If you are an taxpaying citizen of the good old USA then we willall pick up the tab on the future nationalization of these two red headed step childs who have never beenmanaged properly.

If you do not know how Fred and Fan work please look below:


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The implosion process of Fred and Fan will be messy and will probably put further downside pressure on thestock market and housing prices in certain areas of the country. If you read my last CMR issue I wanrned youthe stock market was going on "defense" and hopefully you took the proper action on your stock accounts. Ifyou have sat around and done nothing then a bunch of your money has gone to financial heaven and it is gone.The buy and hold or "buy and hope" days are over and you must focus on risk management in real estate andsecurities in this day and age.

The future of Fred and Fan are critical to the economy and real estate industry which is why the government

will have to step in. Doing nothing would make the Bear Stearns predicament look like childs play. FannieMae and Freddie Mac are government-sponsored enterprises that help the mortgage market function bypurchasing pools of loans and packaging them into securities. If one or both couldn't function, the result wouldbe chaos. At the end of last year, Fannie alone had packaged and guaranteed about $2.8 trillion worth ofmortgages, approximately 23% of all outstanding U.S. mortgage debt. And these securities are highly rated andsold to investors all over the world.

From the NY Times:The companies are by far the biggest providers of financing for domestic home loans. If they are unable toborrow, they will not be able to buy mortgages from commercial lenders. In turn, that would make it moreexpensive and difficult, if not impossible, for home buyers to obtain credit, freezing the United States housing

market. Even healthy banks are reluctant to tie up scarce capital by offering mortgages to low-risk home buyerswithout Fannie and Freddie taking the loans off their books.Together the two companies touch more than half of the nations $12 trillion in mortgages by either owningthem or backing them. They hold more than $1.5 trillion of the mortgages as securities. Others are sold toinvestors in the form of mortgage-backed bonds.It is tough enough these days finding qualified home buyers so if the government did nothing the real estatemarket would be frozen. Our fearless leaders in DC will NOT let this happen and we will all just to pay thepiper to the tune of a trillion plus dollars. Vote your frustration at the polls but either way you look at it bothpolitical parties have dropped the ball on this deal.

If you want to communicate with your clients or prospects regarding this situation feel free to use thisnewsletter if you want. I would be proactive and communicate with clients regarding this because it will be allover the news. Nobody has a crystal ball on how this situation will effect our beloved industry but it will getfixed....it just will not be pretty. Let your clients hear from you rather than the hysterical media and I guaranteeyou they will appreciate it.

Just remember as all this bad news comes out it brings us closer to a bottom (Which will take time) and themarket is cleaning out the BS that has been created during the past few years. Hang in there everyone becausethese are difficult times but persistence and proactivity will help you get through this ugly part of the cycle.

Good luck!

Thanks,

brad

Sources:The Charleston Market ReportMay 2008 Newsletterwww.charlestonmarketreport.comFortune MagazineThe Fannie and Freddie Doomsday Scenariohttp://money.cnn.com/2008/07/09/news/companies/benner_fanniefreddie.fortune/index.htm?postversion=patrick.netThe NY TimesUS Weighs Takeover of Two Mortgage Giantshttp://www.nytimes.com/2008/07/11/business/11fannie.html?pagewanted=1&_r=1&ref=patrick.net


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DisclaimerThe research done to gather the data in The Charleston Market Report involves examining thousands oflistings. With this much data inaccuracies will occur. Care is taken in gathering and processing the data andinformation within this report is deemed reliable. IT IS NOT GUARANTEED. The real estate market iscyclical and will have its ups and downs. Past performance cannot determine future performance. The purposeof the Charleston Market Report is to educate you on current and consistent market conditions by reportingleading market indicators with the support of traditional real estate data.

This information is offered with the understanding that the author is not engaged in rendering legal, tax or otherprofessional services. If legal, tax or other expert assistance is required, the services of a competentprofessional are recommended. This is a personal newsletter reflecting the opinions of its author. It is not aproduction of my employer. Statements on this site do not represent the views or policies of anyone other thanmyself.

Investing in real estate is not a get-rich-quick scheme nor is there any guarantee you will make a profit. Everyeffort has been made to make this report as complete and accurate as possible. However, there may bemistakes. Therefore, this report should be used only as a general guide and not as the ultimate source formaking money in real estate.

july 2008 charleston market report

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