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FANNIE/FREDDIE TAKEOVER PART 2 - Housing Market Problems Remain Unchanged!


Last Sunday's Fannie Mae and Freddie Mac takeover by the U.S. Treasury Department has indeed boosted confidence, both at home and abroad, that the mortgage market here will not collapse.   The added confidence prompted a significant fall in mortgage interest rates yesterday - in some cases, falling to as low as 5.85%, versus well over 6.25% last Friday, here in Chicago.

Good news, yes?  Well,  here's the bad news!

Loan underwriting standards remain stringent, and all but the highest-tier of credit-qualified buyers, and those without strong down payments, will not enjoy the best rates.  That's because the recently-instituted Fannie and Freddie Premiums and Fees, aimed at many of those with even high credit scores, can drive the effective interest rate for the average homebuyer right back over the 6.25% range.

In sum - if you didn't qualify for a new mortgage last week, or qualified at a higher-than-optimal rate - you're still in the same boat today!

Also, the excessive size of homes-for-sale inventory - over 14 months in parts of the City of Chicago our Team serves frequently - did not change overnight.

So, supply remains high, demand muted - in Chicago, and in other markets across the U.S. as well.

The U.S. Unemployment Rate remains undesirably high, and the number of those out of work is exasperating housing market recovery in some of the hardest-hit real estate markets - Las Vegas, California, Michigan, and other areas.  Says David Oser, Chief Economist with Chicago-Based ShoreBank, "I don't want to buy a new house, if I don't have a job!"

And those thousands of homeowners in danger of losing their home to foreclosure due to not making their house payments?  No help for them with the takeover, although the recently-passed Federal Housing Relief Act could give comfort to some.

U.S. Mortgage Investors and Guarantors Fannie Mae and Freddie Mac are critical to the success or failure of any Real Estate Recovery.  Together, the entities hold or back $5 Trillion in mortgages nationwide, nearly half of the total outstanding mortgages across the country.  Without a government safety net, they could have failed, perhaps crushing real estate recovery in its wake.

Wall Street investor confidence was high on Monday, as the Dow Jones Industrial Average gained nearly 290 points in trading.  Today, Tuesday, however, the Dow gave back over 280 points of that gain.

Well, who WILL benefit from the takeover, initially?  Those with strong credit looking to refinance.  According to, the average 30-year Fixed Rate, across the U.S., dipped to 6.08% on Monday, down from 6.26% at the end of last week.

Many mortgage experts predict the drop in interest rates could reach one percent, possibly more, because the Treasury takeover of Fannie and Freddie could convince investors in Mortgage-Backed Securities that their investment is now safer, more reliable - now that the Fed has stepped in.  Costs will drop for buying and guaranteeing these less-risky loans, and these costs will be passed on to the homeowner looking to refinance, or select homeowners looking to buy.

Homeowners who bought at the peak of the housing market in the U.S., however, may find their market values have fallen below what they owe on their home.  For these homeowners, the takeover offers little benefit.

Says David Dunham, Vice President of Interbank Mortgage in Northbrook IL, "I think it's more confidence than anything else. In terms of how many hoops we want people to jump through, this isn't going to affect that."

Some worry that falling rates and still falling prices may encourage potential home buyers to remain on the sidelines, waiting to see how far down home prices, and rates, will go.

"What's keeping people out of the market is people are waiting to see if it's bottomed out," said Judy Jisa, Broker/Owner of independent Burlington Realty in Riverside IL.

Mark Zandi, Chief Economist of Moody's, predicts home prices will fall another 5 to 10%, and it will take a few years before the supply of and demand for housing reaches equilibrium. The drop in prices, he added, would have been twice as bad had the government not intervened.

From many in the know, it appears the housing market, here in Chicago and elsewhere, is not out of the woods yet!

See Mary Ellen Podmolik's article in today's Chicago Tribune for more info.


Posted: Tuesday, September 09, 2008 8:29 PM by Dean's Team


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