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ECONOMIC ANALYSIS:

Thinking About Seizures

by Fred Cederholm

We are clearly looking at a long haul before this housing mortgage crisis truly fixes itself. In the end, the trend will prove that Uncle $ugar (make that the taxpayers) will be the primary mortgagors for the bulk of homes sold in the USA.

I’ve been thinking about seizures. Actually I’ve been thinking about Freddie Mac, Fannie Mae, upside-down, foreclosures, home sales, “investors,” and rent. “Seizures” can refer to a forceful takeover, or it describes an uncontrolled spasmodic shaking. Superficially the form of everything has changed: in substance... nothing has – TH*NK of it as the “Battle Hymn of the Republic,” or “Dixie” which had been played by a flute now is accompanied by a tuba. Lyrics and melody didn’t change. There’s more noise coming from the stage: you can’t hear any people singing because the volume was kicked up.

You see over the weekend it became official that the Government Sponsored Enterprises (GSEs) became Government Owned Enterprises (GOEs). Freddie and Fannie were belly up and would be taken over by Uncle $ugar. They had drowned in the tsunami of real estate valuation declines and the dearth of non-performing mortgage paper. We all knew this was coming as funding for these seizures, takeovers, interventions, and/or bailouts was “approved” by the US Treasury/FED and by their co-conspirators in Congress and the White House when the ceiling on the national debt was raised yet another TRILLION!

These appointed (and elected) financial wizards really had no choice in their action. There will be hyped euphoria: the Dow Industrials shot up almost 350 points in the first 5 minutes of Monday’s exchange opening. Abracadabra, presto chango, nothing up my sleeve... POOF, all fixed? Hardly... and here is why!

Recent guess-timates project that between 40 and 50% of homes with mortgages are now worth (or marketable at) less than the outstanding balances due on the mortgages. The borrowers are upside- down. Values will continue to decline. “Buy and bail” where people buy a new place at less and then walk/default on their old and higher mortgaged dwelling is a growing phenomenon. The seizures of Freddie and Fannie as now being hawked, hyped, and spun won’t change this.

Foreclosure and pre-foreclosures are a levels unseen since the Great Depression. Seizures and evictions by lenders are a costly and time consuming process. Paperwork mis-filings (lack of perfection filings) will be challenged in court with the “foreclose-ers” having an increasingly difficult time proving their standing against the “foreclose-ees”. The seizures of Freddie and Fannie as now being hawked, hyped, and spun won’t change this.

Home sales will continue to stagnate as more and more dwellings work their way onto market. The economic reality of the downward pressure of increased supply and diminished demand will guarantee that the “bargains” of this month will prove even bigger “bargains” months down the road. The seizures of Freddie and Fannie as now being hawked, hyped, and spun won’t change this.

Investors in Freddie and Fannie stock just lost everything via the seizure. The investors in the Freddie and Fannie mortgage pools still won’t be able to unload their units at anything close to their invested values – if they can unload them at all. Given the complex nature of the system behind such mortgage backed securities, true valuations can occur only when the component properties are finally sold and the pools are ultimately liquidated. The seizures of Freddie and Fannie as now being hawked, hyped, and spun won’t change this. This seizure puts this onus of new funding for future loans on the backs of the Treasury, FED, and taxpayers. I mean... having already been burned this badly losing mega BILLIONS, who in their right mind would invest or re-invest under the old system - and risk more?

We are clearly looking at a long haul before this housing mortgage crisis truly fixes itself. In the end, the trend will prove that Uncle $ugar (make that the taxpayers) will be the primary mortgagors for the bulk of homes sold in the USA. Even if you are lucky enough to have no mortgage and “own” your own place, you are still renting from the county, the park districts, the fire districts, the school districts, etc, etc, etc by the RE taxes you must pay each and every year. The second installment on current Ogle County property taxes is due in a week. Ompah, ompah, ompah... “roll out the barrel, we’ll have a barrel of ...”


Copyright 2008 Questions, Inc. All rights reserved. Fred Cederholm is a CPA/CFE, a forensic accountant, and writer. He is a graduate of the University of Illinois (B.A., M.A. and M.A.S.). He can be reached at asklet@rochelle.net.

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This story was published on September 8, 2008.