Fannie Mae and Freddie Mac: Worthless, or an Opportunity? |
| On October 19th, 2009, broker and investment bank Keefe, Bruyette & Woods (KBW) cut price targets for GSEs Freddie and Fannie to zero. This coincided with a 22% tumble in value: a disastrous day. KBW said their common and preferred equity was worthless in an accompanying report. Their analysts urged Washington to set them up as poisoned asset holders "Bad Fannie and Bad Freddie," killing them off as viable actors in the market.
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Of course, Bad Fannie and Bad Freddie would be the ultimate discount store for investors looking to reinvest in homes in preparation for a recovery. You have to wonder at KBW's motives, since the subprime crises has taught us all exactly how much self-interest and distortion goes into rating systems. What is less controversial, however, is that the mortgage industry isn't undergoing an orderly recovery. Several TARP-funded banks that reported initial profits have stumbled this quarter.
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Nevertheless, the situation looks like it will prolong the GSEs' woes, and may further limit the market's respect for its conforming mortgage loan guidelines. Institutions have been reluctant to respect conforming loan amount increases, so there's a growing role for customized mortgage loans that, while technically non-conforming, represent limited risk for the investor. There's just no way to do this well with institutional mortgage notes, which must abide by a one size, fits all policy to cover millions of Americans. That means the system need seller-held mortgage notes to fill the gap.
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This is an excellent option if you'd like to sell a property valued over $417,000 and up (depending on the exact conforming limits). These mortgages are sought after by successful professionals with a keen understanding of their own financial situations, who are more likely to demand a mortgage note that caters specifically to their needs.
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Get an experienced real estate lawyer to help you develop the terms you're prepared to accept if you want to target this market with a private mortgage note. You may discover that many normally high risk conditions are more tolerable when you know they fit the profile of an individual borrower. The advantage of a private note is that you can drill down very deeply into a borrower's situation to discover the right conditions instead of going by a broad policy.
Don't increase your risk; pick borrowers who aren't risky. And if you find tracking the note bothersome or want to increase your cash flow, don't forget that you can
sell your note.
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DMO Direct Funding, 218-A E. Eau Gallie Blvd., #110, Indian Harbour Beach, Florida 32937
Main Office: (321) 777-2833, info@DMODirectFunding.com
Copyright 2008, Buyers of Seller Held Mortgage Notes
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