Sorry. Can’t help all the Fannie puns. They’re just too good not to use.
Today the Associated Press published a report “Fannie Mae seeks $15 Billion in US Aid after 3Q Loss”. In case you’re keeping score, Fannie and her brother Freddie Mac have gobbled up about $111,000,000,000 ( we showed you all the zeroes for dramatic effect) in the last 14 months since regulators seized them.
“So what?” you may ask. “I’m just a small time investor trying to find a property that will cash flow.” Great! You’re in luck because there’s lots of those out there right now. That’s one of the big benefits of this recession. Great properties are on sale.
But when you read the AP article, you’ll see they quoted “Fannie Mae” herself as saying, “There is significant uncertainty regarding the future of our business, including whether we will continue to exist, and we expect this uncertainty to continue.”
Wow! Where did THAT come from? We went digging and found it actually came from page 20 of the 10-Q (you’re welcome…sorry, another stupid pun) Fannie filed with the SEC. You can find it on Fannie’s web site. It’s 241 pages. In case you don’t know, companies issue press releases and say how wonderful everything is, then they file the 10-Q with the SEC in which they need to be much more straight forward.
You may recall it wasn’t too long ago that the now-former Fannie Mae executive team was telling us, “Liquidity problem? What liquidity problem?” Obviously, Fannie Mae is in trouble today.
Again, so what?
Remember, appreciation is a product of supply, demand and capacity to pay. In terms of housing in the US, we have builders slowing way down while our population continues to grow. Last time we looked, people like to sleep under a roof, so we’re guessing that demand is persistent and growing. The big monkey wrench is capacity to pay. People without jobs don’t have much capacity to pay. People whose credit was ruined while they were out of work or who decided to sacrifice their credit to get out of a bad loan can’t really borrow right now. For the remainder of buyers, Congress is extending a first time home buyer’s tax credit. Somewhat helpful, but not the big horse that’s been pulling the cart down the road.
As we’ve been commenting on for some time, most of the lending going on is through Fannie, Freddie and FHA. To the extent that there is capacity to pay in the market right now, it is largely propped up by these three. If they go away, then what?
In the short term, prices would likely drop. Why? Less loans mean less buyers. Duh. In the long term, new players would step in to fill the void. How do we know? In a capitalistic society, no problem lingers in the market place for too long before some “greedy” entrepreneur figures out how to solve it for a fee. Ironically, the thing that keeps many of these “saviors” on the sidelines is they don’t want to compete with the government, who seems to take pride in driving the profit out of everything to “help” people, right up until the private sector collapses.
Oops. Our opinion is showing.
You don’t have to agree. This isn’t even a matter of how it should be. It’s simply a matter of how it is and what are you going to do about it.
For now, prices are good relative to cash flows. Loans are cheap and readily available if you (or your investment partners) have good credit and documentable income. We think the argument could be made it would be a good time to buy, but plan to hold for 10 years or more . Remember, the key to control is cash flow.
If Fannie goes away, we’ll wish we got those good loans when they were here. An investor can never get enough cheap money.