I recently received an email from a friend that has a broker that was the Nation Director for FannieMae before he retired. This man knows more about the lending institutions and processes that they go through than I ever hope to be able to absorb.  My friend sent me an email that his broker had written to a client that couldn’t understand the current market. Some of the things that he mentioned are worth passing on because I certainly did not view things as he does until I read his email.

I shall try to condense a rather lengthily email in to a few of the salient points that I thought he brought out. Many of you know that FannieMae became a private company in 1968. FreddieMac followed two years latter. (or close to that) Recently FannieMae reported that they suffered a 1.4 billion dollar loss and Freddie Mac had a 2 billion dollar loss for the third quarter. FrieddieMac warned that it may have to curtail its business if it can not raise fresh capital.

Unless you have been in Real Estate a long time you probably don’t remember when lenders had to have money available to lend since there was no secondary market for mortgages. It meant that a bank had to have cash on hand to make a loan. Mortgage money became very tight. It is a scary thought that these two companies could end up with few investors if they don’t clean up their act. They are part of the problem with the loose guidelines and could drive the economy into recession. The jury is still out on that!

The need for the secondary market for mortgages is one of the largest financial markets we have and without it we are in trouble. In the event some of you may not understand what they do, here is a brief overview. Both companies package mortgages purchased from original lenders and sell them as mortgage back securities (MBS). These are sold through security dealers. This allows the lenders to sell their mortgages for cash and re-lend the money. Both the companies guarantee the mortgages so the investor doesn’t have to worry about the underlying principal, unless they go out of business. Since these are private companies, their stock has taken a beating and it doesn’t raise confidence for raising capital. On the positive side of the ledger is the fact there is a lot more capital out their trying to find a home. The big question in the upcoming months will be the amount of losses they will incur and how the investors will react. I might add they have been two of the most profitable lending intuitions that don’t lend money to the public. They just buy mortgages.

If you were unclear on the why this mortgage crisis was having a negative effect on our business, I hope this helped to clarify it. This is one of the reasons credit has become tighter.

At this point I would like to write that here is the solution however, I believe only time and more rigid policy compliance will help but I feel they realize this and that move is under way.