Category: Lending

Donna Pacchini, of Pan American Mortgage has generously shared her knowledge and insights with us once again.  Thank you Donna!

First Fannie and Freddie: As EVERYONE knows by now, Fannie and Freddie were taken over by the Federal Government last Sunday.   What does that mean?   A couple of things that have become clear so far:  1) The fact that US government is now not only implicitly backing Fannie and Freddie’s debt but explicitly (putting your money where their mouth is) has had a good effect on mortgage rates.   We dropped as much as .5% on Monday and since then, things have trickled back up a bit, but we’re still .25% lower than we were last Friday.   2) One of the reasons that they did it was to keep the mortgage markets moving and that appears, at least so far, to be a success.

The things that aren’t so clear yet about the Fannie Freddie bailout are: 1) How much is it going to cost the taxpayers long term?   2) Are the executives really going to get the multi million dollar golden parachutes that it looks like?  3) Starting in 2010, Fannie and Freddie are supposed to downsize by 10% per year.   What sort of mortgage market is going to take their place?   That’s going to be a topic of a lot of discussion in the government going forward.

Now on to what else is effecting the markets.   Let’s just say that it is looking like Fannie and Freddie won’t be the only financial firms that are going to suffer a financial death during the month of September.   Here’s the latest as I know it:

Lehman Brothers is rumored (LOTs of rumors) to be on it’s death bed.   What killed it?   Too many investments in risky mortgages.    They are supposedly looking for buyers who would save them from the untimely death.   Will someone step in and buy them at the last minute?   Maybe…..  Who are the most likely buyers?   The rumors have Bank of America and Goldman Sachs as the buyers.   Will they buy them at market value?   Uh, probably not!

Washington Mutual – While they are still maintaining that they are a strong bank, the market doesn’t really believe them.   Their stock prices have gotten hammered lately, the ratings agencies have downgraded them, they are operating under a Memorandum of Understanding with their regulators (that’s sort of like a note from the principal) and it doesn’t look likely that they’ll be able to remain a complete entity.   What’s the most likely scenario?   A couple of them that have come out in the rumor mill on Wall St:  1) There are probably one or two banks who could be big enough to buy them in their entirety (Chase being the most likely one).   2) They sell off chunks of the bank to a variety of different entities.   For instance, Citibank might buy their deposits and branches in one state,  Chase might buy another, etc.   3) The FDIC comes in, shuts them down, opens them as a new entity and eventually parcels them out.    Just to give you an idea the size we’re dealing with, the shut down of Indymac was the largest failure since 1984 and I’ve heard reports that Washington Mutual is 10 times the size of Indymac.  Oh, and what’s the biggest problem with Washington Mutual?  Too many risky mortgages.   Sound like a recurring theme?

So what difference does this make to those who don’t have stock of Lehman or Washington Mutual?   A couple of thoughts:

1. It shows that the credit crisis isn’t done and the ramifications of it are spreading further and further.

2. It raises questions about the Federal Government’s role in the financial services sector. Should the government help stem some of the losses with Lehman Brothers and WaMu?   It’s reported that the FDIC is going to lose $9 billion (no that’s not a misprint) on Indymac.   If WaMu is 10 times that size, would the loss be that big?   Can the government afford to step in on something like this?   Can they afford not to?   No easy answers to that question.

3. If Lehman and WaMu go down, what will the ramifications for the rest of the financial world be?   Will it make lending become more cautious?   Will that in turn cause more problems?

A couple of other economic reports came out (though it’s been a light week for those:)

1. Retail sales came in lower than expected. Apparently people aren’t feeling much like shopping right now.

2. Wholesale prices came in lower than expected - mainly due to the lower cost of fuel (though Hurricane Ike could change that!)

3. Consumer Confidence came in better than expected – mainly due to lower cost of fuel (though Hurricane Ike could change that!)

A lot more questions than answers this week, and it’s that way for a couple of reasons:

1. We’re in the middle of an unraveling situation and it’s hard to know exactly which way things are going to fall with those issues.

2. I hope that people at the Treasury and the Fed and many other places of importance are asking questions and really assessing what the best course is.   I’m afraid that if the government becomes the lender of last resort for these types of things, we are all going to regret it in the long run.

Have a good weekend and say a few extra prayers for those in the way of Hurricane Ike.

Until next time….

Donna M. Pacchini
Sr. Mortgage Consultant
Pan American Mortgage,
A wholly owned subsidiary of Pan American Bank
847-464-5015 Direct
847-628-0899 Fax

This week’s important news about the Fannie Mae and Freddie Mac bailout requires some lender expertise and further explanation. Donna Pacchini, of Pan American Mortgage, has been kind enough to share some of her insights with OC Real Estate Voice readers.

Well, it happened.  In case you haven’t heard the news, Fannie and Freddie were bailed out by the Federal Government over the weekend.   I’m not going to go over all of the details but just try to hit some “high points.”

So, here goes:

1. The Federal government now owns 80% of Fannie and Freddie.   That means that the shareholders in those two companies lost 80% of their equity in the company compared to what they had last Friday.

2. Why did the Government do this?   It’s pretty simple.   The markets had lost confidence in the long term viability of the two institutions and therefore the debt that they have issued was being questioned and their ability to finance additional housing was being called in question.   This was done to stabilize and calm the financial sector of the markets which were very volatile to say the least.

3. What has changed since Friday?  A  couple of things:  1) The “unofficial” backing of Fannie and Freddie’s debt by the US Government is now official.   2) The question of what will happen to shareholders in the company has pretty much been answered.

4. What hasn’t changed since Friday?  The problems in the loan portfolios at Fannie and Freddie haven’t gone away.   The problems in the housing market haven’t gone away.  However, today the markets so far have been breathing a huge sigh of relief that says, “Yeah, Uncle Sam is here to protect us!”

So what does this mean going forward?

1. I’ve already heard that a lot of economist are saying that there could be a significant drop in mortgage rates.   I’m not so convinced that we’re going to see THAT BIG of a drop for a couple of reasons:   a) The US Government just became on the hook for an additional $5 Trillion in debt and that will have an impact on the cost of treasury debt and so forth.  b) The additional borrowings by the government are going to have an impact on the value of the dollar and that will make US debt more expensive.   c) The only thing that has really changed is that the “right to foreclose” on Fannie and Freddie has actually happened.   It hasn’t changed that much.   But we’ll see.   I hope I’m wrong.  Our rates dropped by .25% today.

2. Volatility in the financial markets will be the “norm” this week.   Expect big fluctuations as the markets attempt to sort out what this all means and what happens from here.

3. The government did this to prevent the mortgage markets from seizing up.   That was a necessary step because having a mortgage market that keeps lending money is crucial to eventually working through the housing debacle that we are in.   However, there are substantial issues in the mortgage world that aren’t being solved by the takeover.

4. No substantial changes in programs or underwriting guidelines.   The goal of the bailout was to keep Fannie and Freddie functioning and that will happen, but it’s not going to make credit a lot easier or downpayment guidelines lower.   Let’s face it, Fannie and Freddie weren’t making any money doing things the way they used to, so I don’t think we’ll see a return to that.

5. As the markets realize that the fundamental issues in today’s housing/economic/credit market crunch haven’t gone away, we’ll see the euphoria of the first day or two slip and the value of the bailout will diminish.   However, it will continue to keep the housing market moving so we can attempt to work through the inventory issues and eventually find a bottom and start building from there.

Is this the silver bullet that is going to answer all of the housing market and economy’s problems?   Sorry, I wish it was, but I don’t see it that way.  It was basically the implementation of what the markets felt was coming any way.

Until next time….

Donna M. Pacchini
Sr. Mortgage Consultant
Pan American Mortgage,
A wholly owned subsidiary of Pan American Bank
847-464-5015 Direct
847-628-0899 Fax
One of the biggest speculations today is, ‘When is the real estate recovery?’  We can’t have an economic recovery without it. 


I got an email from a client and friend this morning.  He and I have had some wonderful conversations about the market over the last couple years.  As I was putting together an email for him – I thought this is a great topic for ‘The Voice’.Orange County


The good news in Orange County…Steven Thomas, Re/Max Real Estate Services’ President, wrote in his May 29th Market Time Report, “Current Orange County houseing demand not only obliterats 2007 levels, but it now has surpassed 2006 levels as well.  Demand has reached a mark not seen in 24 months.” 


So what is holding back a real estate recovery in Orange County?


♦  Short sale inventory- I’ve said it before but it’s worth repeating…this is dramatically impacting the market.  Banking institutions could easily improve this by changing their approach and preapproving a hardship and determining a short sale price before properties hit the market. 

As it stands today, I have to list a home low enough to even get an offer, then I submit the hardship and the offer to the bank for approval.  Backwards!  The bank can deny both the offers and the hardship!  The result – inflated inventory and below market values to elicit offers that may never be approved.  Traditional sellers competing with absurdly priced short sales!  Until this part of the problem is solved – we are in this thing.
♦  Shortage of financing options and collective perception -  This is improving to some degree.  The irony is that it’s not that bad.  It’s perception.  I was talking to my dad about some of his real estate purchases when I was a kid – AITD financing, seller carrybacks, and 12 to 15% interest rates.  We have collectively been spoiled by unrealistically low interest rates and lowered qualification standards for too long.
♦  Economic Uncertainty – With a strange election process and a new presidency on the horizon, fuel prices, increased unemployment, and inflationary woes – consumer confidence is an issue. 
♦  Buyer Psychology - People love to buy as things are going up.  It’s just simply human nature.  It’s fun jumping in and riding a wave up when friends and family are all doing the same thing.  It’s not as fun when there is so much negative media.  What if the market goes down 10% after you buy?  Even if you are not intending to sell, it doesn’t feel good.  And then there is the added bonus of friends and family having the option to say, “See, I told you to wait.”  So buyers continue to wait until we are back in the upswing – even if it costs them a bit more in price and higher interest rates.

It was not long ago, lending was easy, too easy. Did you need money?  No.  Did you need assests?  No.  Did you even need to prove you had income?  No.  So why do an FHA loan?  We didn’t.

Times have changed and there are limited options for first time buyers that aren’t coming away with a ton of equity from the sale of their last home.  Fortunately, there is FHA.

The Federal Housing Adminstration, or FHA, provides mortgage insurance on loans utilizing FHA approved lenders.  The buyer must qualify but only needs a limited down payment. The key here is that if the buyer is looking at condos, the complex must also be FHA approved.

16 Via Garceta

I recently took a listing in Rancho Santa Margarita.  It’s a well priced condo by RSM Lake.  A 2 bedroom, 2 bath home with a 1 car garage, it’s one of the few traditional sellers in that price rangeNo waiting for the banks – but with no FHA approval currently on the complex, we have cut some of the great first time buyer pool that would be great for this home at $285,000.  In the meantime the Brisa Del Lago is working on getting that approval again.

And therein lies the problem.  Whenever a complex has had a litigation of any kind, they loose their FHA approval and must go through several steps to regain that FHA approval once that litigation is settled and work completed.

Because FHA lending has not been an issue for some time, many complexes not only let their FHA approval lapse, but once the litigation was resolved, many of the homeowners associations never renewed the applications.  No one complained because no one was applying for FHA loans.

The Homeowner Associations owe it to the homeowners to get this issue resolved sooner rather than later to maximize the buying pool for their homeowners.

If you are a buyer or an agent looking for a condo, check to make sure it is approved by FHA.  If they are not approved, hope is not lost.  Find out if your lending can do a ’spot approval’ for that one unit.  More and more lenders are working on this while condo’s are processing the applications for renewed approval with HUD, U.S. Department of Housing and Urban Development.

Orange County condos and homeowner associations are working on this but it will take some time to catch up to the changing buyer pool and lending restrictions.


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