Will Fannie and Freddie Be Around For Much Longer?

The U.S. government is already starting talks about the gradual elimination of Fannie Mae and Freddie Mac. This can be good because there would be less government backed securities bringing some trust back into the market but could come at a cost. If this phase out happens it could raise borrowing costs and jeopardize an already fragile housing market. With fewer government guarantees, limits on mortgage purchases and size it will make it harder to borrow and we should see a further reduction in some volatile markets of the country. The plan is to have less government intervention (like that will ever happen), tighter underwriting standards and larger down payments on home loans. Wait, you mean like it use to be before government intervention in the lending sector? This is the way it should have been all along. Some of the steps they are looking to make are reducing the maximum loan limits to $625,000 from $730,000 currently, requiring borrowers to put 10% down and increasing insurance premiums on new loans backed by the FHA.

This crash should have happened years ago but with the government extend and pretend economics we are seeing the problems surface now and into the future. Fannie and Freddie have already been bailed out with about $150 billion in federal aid which is basically stealing money from the taxpayer. These are publicly traded companies that should have been allowed to fail. Now we are taking the brunt of the losses for them while they trade positions and increase the wealth at the top. The good news is that there is an abundance of opportunity in America and money will always flow toward opportunity. The current down turn in the economy, even though taking a stronger downward trend and a much larger problem then we have had in the past, is just part of a larger economic cycle that will eventually come back around.

We can take advantage of the current economic turmoil by positioning ourselves correctly. Because of the decrease in availability of loans for investors and homeowners it gives way to an opportunity to obtain a higher rate of interest or sell assets with seller financing. If someone cannot get a home loan, you can make money by solving that problem for them. For example, if you own a home that cost you $50,000 and want to sell it for $100,000 you can increase your sales price and return on investment by using a seller financed scenario. If you try and sell to a traditional buyer trying to get bank financing you may only be able to get $90,000 for the property however offering seller financing increases the properties value. If you have someone come in and buy the property from you for $100,000 with 25% down you can loan the other $75,000 at up to a 10% interest rate depending upon the usury laws in your state. Here is the math breakdown.
- Sales price of $100,000 with 25% down ($25,000)
- Monthly payment of $537/month ($6,444/year).
- Your cost still in the property is now $25,000 ($50,000 original cost – $25,000 down payment).
- Your cash on cash return on investment is now 26%! ($6,444/year divided by your $25,000 investment)

Now let’s look at the risk. Most financial planners will tell you with increased returns your risk goes up but that is not true at all. In the example above you gave someone a loan for $75,000 with 25% down. Therefore, they are less likely to walk away from the property and default on the payment they are making to you. They are really happy because they could not get a loan else ware because of bad credit, tightening lending standards, too many loans, etc. Now what happens if they do let the property go which is the perceived biggest risk. Well now you foreclose on the property and are into the property for your cost of $25,000 when it is worth $100,000, half of what your original cost was! Pretty amazing, increased returns with a decrease in risk. This can happen when you properly control your investments and educate yourself about how to invest correctly instead of handing your money over to a Fidelity money manager that gets a 30 second education about investing and is all of a sudden and investment advisor. Now you can stop letting the banks make all of the money and become the bank yourself.