Now How Much Would You Pay for Inflated Real Estate?

In case you missed it earlier today, Freddie Mac is back with another quarterly money request. This time the failed mortgage buyer is letting us off relatively easily, demanding a mere $1.8 billion -- really, the kind of change you find just looking in the cushions -- to cover its second-quarter losses:

Freddie Mac said Monday it lost $6 billion, or $1.85 per share, in the April-to-June period. The company is required to pay a 10 percent annual dividend to the Treasury Department on money it has received from the government. That made up $1.3 billion of the company's second-quarter losses.

Last week Freddie Mac's special-needs sister Fannie Mae hit us up for an additional $1.5 billion, having lost a cool $3.13 billion in Q2. As we noted last time the former GSEs needed new handouts, the bad news is that this is the good news. The mortgage giants continue to take on more questionable debt (which, for the umpteenth time, is actually the opposite of what you're supposed to do when you're overextended), and the only bright spot here is that they have been on a trend to request a little less to cover their losses each quarter:

That compares with an $8.0 billion loss in the prior quarter and is the best three-month performance in a year. The firm lost $840 million in the second quarter of last year.

The company said losses stemmed primarily from loans purchased or guaranteed between 2005 and 2008.

The U.S. Treasury took control of Freddie Mac and its sister entity, Fannie Mae , at the height of the financial crisis in 2008 as loan losses mounted.

Since the government takeover, the two firms together have requested close to $150 billion from the government's unlimited credit line, scheduled to expire at the end of 2012.

Once again, the outright taking of taxpayer money is less bad than what the GSEs are doing with it -- continuing to underwrite artificially low interest rates for buyers with insufficient equity stakes, thus encouraging Americans to buy more house than they can afford. That's what got us into this mess, according to the president -- but only on Mondays, Wednesdays and Fridays. Tuesdays, Thursdays and Saturdays the problem is that people who work hard and play by the rules can't get a loan.

Comments

[Suki]

Tim is a posting MONSTER today!

[AA]

He has been on a roll the past few days.

[fresnodan]

I bow and grovel before your supreme postmastery!

[Hockey Guy]

I like his documentation of the collapse of California. Tim, keep these articles for your children and grand children. It would be great reading after the revolution.

[Irresponsible Hater]

"Reading"? PRINT hardcopies now: they'll be great eating after the revolution.

[Madbiker]

Serious question: what is a potential homebuyer to do? After 10 years of renting and having property foreclosed on underneath us (once) or sold from underneath us (three times), we've decided to stop being renters and buy a place, but I worry about getting a mortgage on an over-priced piece of property. How DO I know whether or not any potential properties are not overpriced/overvalued, and avoid a loan serviced by these fools?

We're planning to go through Navy Federal CU and get a VA guaranteed mortgage. Does this put me in danger of giving business to FM/FM?

[Irresponsible Hater]

"I worry about getting a mortgage on an over-priced piece of property."

Ask your real estate agent! That's what they're for!

[Take Care of THIS!]

Do your own research. You can search (google "wherever you're looking to live" + real estate). Look for similar houses, and see what they are asking. If the house you are looking at is in that price range, you should be OK.

[Tim Cavanaugh]

Commenter Ring has a helpful suggestion below. If you can get data from around 2001-2003, those prices are -- all other things being equal, which they never are -- about where you'll want to offer.

You ask about a situation where you're looking at a cape on a street of McMansions. That seems like something you'd know if you were scouting the area. Which you should be doing! Before listening to a bunch of strangers in a comment thread, you should be making an on-foot, multiday study of where you're looking to buy.

I'd also advise you to put any thoughts of overpaying/underpaying out of your mind. Buying a house is for the long haul. That's why mortgages are called mortgages and last 30 years. At the minimum, a smart person should plan for a five-year stay after purchase -- and not expect any windfall at the end of those five years. You're paying money so you'll have a nicer place to live, not putting it on a crap game.

All agents and loan officers are the enemies of the buyer. That's not a moral judgment, just ecology. Make sure your agent gives the lowballiest offer conditions will allow, and do not believe your agent when she says you can get an agreement and then knock stuff off during inspection. (Even if there were a possibility of that happening, the agent would make sure it didn't happen.) Get the loan officer to find out your maximum pre-approval number so you know where you stand before you make an offer. The loan officer might bellyache, but these days they have all the time in the world.

It's all common sense, except when it's not: You have to love the house. Just as they say, houses are like whores: If you're not in love, getting a bargain won't make you feel any better.

[joshua corning]

Just as they say, houses are like whores: If you're not in love, getting a bargain won't make you feel any better.

Not all of have such high standards....some of us just want to get laid.

Anyway bargains work more like getting free sex then paying for whores. Ask enough girls and one is bound to say yes.

All agents and loan officers are the enemies of the buyer. That's not a moral judgment, just ecology.

Also this is bull shit. I don't know about loan officers but agents are the friend of the sale. And if you want the sale they can be your ally and servant.

If the sale does not go through then they get no commission. Which is far worse then a slightly smaller commission.

My guess is Tim does not know his ecology very well. All that has different interests then you is not your enemy.

[theocrat]

The realtors work for the seller.

[Upgrayyed]

The realtors work for the realtors.

[CrackertyAssCracker]

get a buyers agent.

[Invisible Finger]

That's why mortgages are called mortgages and last 30 years. At the minimum, a smart person should plan for a five-year stay after purchase -- and not expect any windfall at the end of those five years. You're paying money so you'll have a nicer place to live, not putting it on a crap game.

A smart person will look for a 15-year mortgage. If you can't afford it at 15 but might be able to afford 20, then go for it. 30 year mortgages are a sure-fire way to become house-poor.

[Madbiker]

"you should be making an on-foot, multiday study of where you're looking to buy."

Exactly what we are doing. Thank you for the advice, Tim, and everyone else. It's a big step and I do have to remember that this is for the long haul and not just something that will dissolve in a few years' time, like most of my past lease agreements.

Wish me luck!

[Amakudari]

The VA will provide a guarantee equal to 25% of the conforming loan limit, that's it. The loans are through private lenders, and they can be securitized and additional guarantees purchased. In other words, if you get a 30-year conforming mortgage, it's probably being sold to Fannie or Freddie. They repackage it as a security and sell it to investors, paying the originating bank a mortgage servicing fee (something like 0.5% per year). Banks love it because they no longer have any risk and the mortgage is off their balance sheet, so they're receiving that mortgage servicing payment with little capital reserve.

Basically, the only way you can ensure that Freddie or Fannie don't touch your loan is to do a non-conforming loan, which either means buying a lot of house or a subprime loan. You could also try going to a portfolio lender, but most thrifts (Golden West/Wachovia Mortgage, Washington Mutual, IndyMac) got murdered in 2007 and 2008.

Frankly, though, you kind of want there to be securitization involved because it adds liquidity, which lowers the rate you pay. Fannie and Freddie have crowded out the private market, and trying to go around them is kinda pointless.

[Jennifer]

You could also try ignoring the "gottabuyahouse gottabuyahouse gottabuyahouse" hype and remember that, especially in the overtaxed Northeast (where property tax alone on a house can cost more than mortgage and taxes combined in a saner state), you're financially better off just renting a nice place.

Besides, the housing market hasn't finished falling. There's another crapload of ARMs set to adjust next year, and when this happens the number of underwater mortgage holders, or people who plain can't afford their monthly payments, will grow again.

[fresnodan]

TAKE YOUR TIME - it ain't like prices are gonna go up anytime soon.
And there are plenty of things that drop 90%...and than drop another 90%

[Irresponsible Hater]

that's a joke right? what if those houses are over valued too?

there is no answer to madbiker's dilemma. that's kind of the point of the real estate apocalypse and economy of shit, don't you think?

[Take Care of THIS!]

How do you think real estate agents set prices? Do you think they have some kind of magic powers? All they do is look at comparable homes that are on the market or recently sold and see where they are or were priced at. You can do all that yourself. No need to go to a real estate agent.

[Irresponsible Hater]

Right, and all the comparable homes are overpriced too.

[?]

there is no answer to madbiker's dilemma.

"Bring cash to Mississippi."

[Madbiker]

Exactly. What if my agent lies to pad her 6% commission? What if the tiny cape we like is surrounded by McMansion types (not likely in the areas we are searching, but still...) that artificially drive the property value up?

NJ is an expensive state as it is, and finding a place that has reasonable taxes and a manageable mortgage is not easy so far, unless I want to live cheek-by-jowl with questionable sorts right under the local power lines. Perhaps my home snobbery will get the better of me, but after a few years of condo-life (hate it), apartments, and row homes, we are just ready for some breathing room and to NOT live next to child-abandoning, pet-abusing alcoholics, and to have a bona-fide driveway instead of jockeying for a parking spot close enough to the front door that milk won't sour on the walk to the house. But that can't be had for less than $250K and $7.5K in taxes. Sorry. Real estate purchase blues are creeping up on me. That and the evening calisthenic regimen that my unborn child has going on right now make for a cranky Biker!

[Take Care of THIS!]

Check out these sites:

Recent NJ Home Sales

NJ Home Sales Search (from 1990)

[robc]

Find the Case-Shiller numbers for your area. If its close to 100, you probably arent overpaying. If its 180, run the fuck away.

[Madbiker]

THanks, we will look at them for all of our prospects. So much I do not know.

[Warty]

I thought you lived in Iowa, not New Jersey. You should probably move to Iowa and then buy a house.

[Tulpa]

You should use a condom next time.

[Spoonman.]

I don't know about New Jersey, but in urban counties in Texas, property assessments are available online, and you can see what it's been doing for the past three years, what nearby properties are like, etc. For example, I figured out that one house was a bad idea after I noticed that lot of neighboring properties were owned by the Harris County Flood Easement Authority or some such thing.

[Paul]

I'm beginning to realize what Obama meant by "hope" and "change".

[Ron L]

Nothing other than one more grab: "Tax someone who has more than I do!"

[Ring]

You could try looking at price history to get a sense of what similar properties sold for years ago before the madness. Does the local auditors office have an online site that shows you what properties sold for in the area?
It would give you an idea of how inflated prices are from say 5-10 years ago.

[Old Mexican]

Freddie Mac said Monday it lost $6 billion, or $1.85 per share, in the April-to-June period. The company is required to pay a 10 percent annual dividend to the Treasury Department on money it has received from the government[...]

Or the Treasury will break their legs.

[CrackertyAssCracker]

Hey, yo, Treasury? Can we borrow another couple billion? We need it to make our dividend payment.

[SIV]

Keep renting
They are always building more houses

[Tulpa]

I hear you can get a house in Detroit for under $10,000. No neighbor issues either, since most of the houses in those neighborhoods have been demolished already.

[Douglas Fletcher]

Liberal utopia.

[Amakudari]

The mortgage giants continue to take on more questionable debt (which, for the umpteenth time, is actually the opposite of what you're supposed to do when you're overextended)

I'd like to point out that this is technically false. For zombie companies, the temptation is to take on more debt so you can leverage the earnings and make yourself solvent. That was a big problem in Japan, and it's one of the main reasons why you want to see bank balance sheets cleaned up immediately during a crisis, whether you prefer bankruptcy, government recapitalization, or whatever.

[Douglas Fletcher]

Pardon me, but can't we just ram this whole thing up Barney Frank's ass? Their must be plenty of room up there by now.

[John]

I am beginning to think I will rent for at least five more years. This shit cannot go on forever. Those housing prices are going to come down. I can't see how buying a house would do anything but lose me money.

[kinnath]

The bubble did not affect the entire US. The prices rose modestly, but steadily, in Iowa during the bubble in the big metropolitan areas. Since the crash, prices have remained stable or have gone up.

Location, location, location.

[John]

True. If I got a job somewhere like that I would buy first thing. But here in Washington the houses are insane. And they are being propped up by the government spending orgy. That orgy is going to come to an end. And when it does, Washington is going to look like Detroit.

[kinnath]

When it comes to DC, are there many real choices beyond living in a cardboard box and showering at the Y?

[John]

There are but you have to make a lot of money.

[Jeffrey]

I live in DC, and I basically stole a foreclosed house. It needed a little work, but houses around me are already selling well over the price I paid. There are deals out there, it just takes a long time to find them

[Apple]

Thought that was the cover of Five-Eight's Gasolina! for a second there.