Monday, September 15, 2008

The Little Guy / Small Businessman

Here's what no one seems to be talking about...(those who are, aren't speaking loud enough, or aren't being heard!)

As the federal government picks and chooses which financial institutions will be saved and people debate "moral hazard", the issue remains liquidity. In the housing market, that means loans for builders and mortgages for consumers. From my perspective and for my benefit, I am in no rush to see more homes built with the supply as it is, so my concern is with access to mortgages.

As we all know, or should know, mortgages were being given out too liberally. This debt was ultimately packaged and sold on the open market through complex vehicles that no one understood. When borrowers started to default on mortgages and the end investors figured out that what they had bought was backed by no-documentation/no-verification loans, the money supply dried up. (simplistic, but basically accurate)

Here's the problem now...

As is often the case, the pendulum has swung way too far in one direction. There is/was a valid need for the loans discussed above. The small businessperson who uses legitimate tax planning tools is unable to justify his/her ability to pay back a loan and right now it is almost impossible for him/her to qualify for a mortgage.

I sincerely hope that the mortgage industry is able to create a mechanism by which these people can qualify for mortgages. In the alternative, the government must restructure the tax code so as to make it practical for small businesses to make a profit on paper. After all, small businesses employ roughly 70% of the workforce. Owning a small business has many drawbacks. Do we really need to create another by blocking access to home ownership for the people taking most of the risk and who act as the engine for our economy?

Saturday, September 6, 2008

Fannie/Freddie

As many of you may have heard, Fannie Mae and Freddie Mac, which own, or guarantee, roughly $5 trillion in U.S. mortgages are on the verge of being taken over by the federal government by way of conservatorship. (Source: WSJ)

This raises many issues:

Is this merely semantics? It is my understanding that both agencies are usually classified as quasi-goverment agencies. I suspect the stockholders may suffer, but what effect will this have on the average consumer applying for a mortgage? There will likely be a shakeup in the corporate hierarchy, but, again, what will the practical consequences be in the functionality and viability of these agencies?

I suspect that there will be a stabilizing effect on the mortgage industry and that rates will improve slightly over the short term. Of course, the converse could also hold true. The need for a government takeover could affect the psyche of the general public and institutional investors in such a way as to have a negative impact on the economy as a whole, including the availability and affordability of mortgages.

The practical implementation of this takeover in conjunction with the changes that follow should be closely scrutinized by anyone who has an interest in the subjects covered in this blog. This may be a non-event or could reverberate through the housing/mortgage industry for the next few years.