The real estate market is crashing around us. Refinances get harder to finish every day. Usually because the borrower’s home is worth less than it was when they bought it two years ago. Subprime lending is a faint shadow of what it used to be. Every day FNMA and Freddie Mac or the mortgage insurance companies tighten up the reins on us just a little bit more.

Today, Countrywide – the biggest or next to biggest lender in the country most of the time – actually had to make an announcement that it wasn’t going to file bankruptcy in order to stop its stock from falling further!

Worst of all, today Freddie Mac announce that it had lost $2.02 billion in the third quarter and “absorbed both a $1.2 billion provision for credit losses as well as a $3.6 billion charge in mark-to-market activity for its portfolio assets.”

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Several years ago a problem cropped up all across the mortgage/real estate world and started causing a lot of problems for lenders whenever a mortgage defaulted. Every Tom, Dick and Harry that stayed up late at night wanted to become a real estate investor and “flip” houses. There is a very real market service being provided by legitimate investors who buy distressed property, restore it to market standards and sell it through an arm’s length market transaction. Unfortunately, these investors flooding the market didn’t quite fit that description. They would make an offer on a property having no possible way to finance it or to pay cash and then go in and sweep it up and mop a little before the closing. Simultaneously, they would find some sap who didn’t really understand what was going on, agree to pay all their closing costs and down payment assistance, and get them qualified for an FHA loan. Next would follow a set of back to back closings where they would buy the property and sell it to the new buyer without ever having put up any money of their own. Often at double the price they paid originally!

Of course these “sellers” would offer such easy terms (at a time when it was a seller’s market and others weren’t making such concessions) that they would have a boatload of potential prospective homeowners to choose from. Unfortunately after this had been going on for a few years, some of these new home owners began to default on their mortgages and HUD would have to pay off the lender from the FHA insurance fund. This is the source of all the HUD houses you see advertised in the weekend papers. Trouble is, when HUD was trying to sell these houses they kept having to take a big loss, endangering the very existence of the FHA program.

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