Tuesday, March 15, 2011

Fannie Mae and Freddie Mac Reforms

Want another dark cloud for residential real estate going forward over the next ten or so years?

Put another way, precisely the time frame when a large chunk of baby boomers will be retiring and wanting to sell some homes and rental properties to provide for their Golden Years.

Reform is coming to the scandal-ridden and financially crippled Fannie Mae and Freddie Mac.  The era of large scale government loan guarantees in the mortgage market seems to be coming to an end.

Treasury Secretary Geithner is suggesting some type of covered bond market.  Interesting idea, but not if the Federal government is running it.

Whatever comes out of DC it is going to be EXPENSIVE.  Here is one realistic estimate of $5 trillion.

If that sounds like a wild number, it really isn't.  Fannie and Freddie will have cost American taxpayers $169 billion through fiscal year 2012.

Government reforms always come with large price tags.  Watch what is coming closely.

This development further underscores the fact that homeownership rates in the United States have likely permanently peaked, at least for the next fifty years or so.  Check out this editorial from Fortune magazine that says homeownership should no longer be part of the American dream.

All this seems like statistics but think about it.

Who is going to buy your rental houses and condos in ten or twenty years?

How are they going to finance them when PIMCO's Bill Gross says to buy mortgage paper he would want a three point premium?  More precisely, how many are going to be able to afford it?

I hope investors are asking these questions.  These are not bullish signs of a robust real estate market circa 2021-2031.  Those dates may look futuristic but today is March 15, 2011.