The mortgage market has been in trouble for well over a year now.  We are all aware of the mortgage defaults within subprime, alternative A, and now the beginnings of what was once considered prime loans defaulting.  No one ever expected that Fannie Mae and Freddie Mac would be nationalized in our lifetime.  The worst case scenario actually came to pass.  At first glance it is rather impressive that Congress and the entire leadership hierarchy seem appalled that Secretary Paulson used the “bazooka”.  Did everybody forget about Franklin Raines the former Fannie Mae CEO and the 11 billion in missing funds or covered up losses (fraud)?

As I recall, we sent our brother Raines packing with a tidy sum of severance.  Congress looked the other way and continued to push their affordable housing programs and no one looked very closely at the GSE’s books. The GSE Punch Bowl was such an unpopular subject because Congress has been mingling their hands in the GSE’s for quite some time.  Of course nobody wanted to find out that it was a house of cards and that the capital was gone.  Then The Treasury Department, headed by Secretary Paulson, hired Morgan Stanley to investigate and low and behold approx 35 billion of the supposed capital was tax credits and a ball of you know what.

It took a man formally from the private sector to do the dirty work.  Conservatorship sounds nice but eventually the government will nationalize these firms.  For now it’s a nice Band-Aid unless you were a stockholder.  The good news is that the FHA program that is run by the government has never cost taxpayers.  Maybe the government is the ideal foundation as a cornerstone for a stable nationwide mortgage platform.  History is a good guide that Fannie and Freddie are in safe hands and we will have mortgage money available for qualified applicants to buy homes.

At this juncture, we have a reasonable level of stability with the government backing both Fannie Mae and Freddie Mac.  These institutions will continue to play a significant role in the backbone of mortgage availability and they will set the pace as the guidelines that protect both lenders and borrowers revert to the old school ideology.  The reversion is well underway and it is prudent that you listen to the market and interpret important messages.  A recent very positive message can be drawn by changes regarding foreclosure at Fannie Mae.  Both GSE’s used to require any perspective borrower seeking a loan that had a prior foreclosure to have a minimum of three years reestablished and/or re-affirmed credit.

A comfortable old school guideline was 3 years with a minimum of 5 traditional trades reestablished and/or reaffirmed over a period of not less than 24 months.  This was considered reasonable given foreclosure was considered the kiss of death in the mortgage arena.  Today I am told that the guidelines for foreclosure at Fannie Mae recently went to 5 years with some consideration from Fannie and many secondary market lenders going to 7 years before borrowers would be eligible for a new mortgage after a foreclosure.

However, there is a very interesting catch.  Fannie stated that if you, as a distressed homeowner, successfully completed a short sale with your lender then you would be eligible for a new mortgage in a little as 2 years.  What is the message the market is conveying to you?  The market is telling you that responsible homeowners that do not dump their problems on their lenders, but rather provide their lenders a solution, will be rewarded.  Regardless of your situation the potential for gain is significant when you use the weapon of choice, the Short Sale.  Fear not, for you have everything to gain and when the dust settles no one will be able to deny that there was a housing crisis that affected millions.  Those that took the positive productive path towards a solution with their lenders will be rewarded by the market.

Submitted on Tuesday, September 23rd, 2008 at 7:40 pm