More than just real estate.

I believe that this blog should be about more that just Atlanta Real Estate, after all as we now see nearly all financial markets are tied to each other, and calamity in one market can have global effects. Therefore where the opportunity arises or circumstances dictate I will blog about matters that are widely related to the Atlanta Real Estate market such as Finance, Economics, Politics, world affairs etc etc.

How did we get in this mess?
I have a large number of friends and investors who reside outside of the USA. Some of them have been asking me “How did we get in this financial mess?”. The effects have truly been felt all over the world. Huge investment banks that had weathered, world wars and depressions have thrown in the towel. (eg. Lehman Brothers, founded 1830). Yes this latest problem did originate here in the good old USA. I will devote a little time to help us all to understand how, and why it happened. I will stick to the facts, as far as possible and of course any views offered are my own personal views.

The current financial crisis definitely has its beginnings in the housing market. Greed and dishonesty …………those two bed fellows often found in the rubble of many a financial crisis, sure did play their part here, but let’s leave that for another time. Two of the biggest players on the block of housing finance were Freddie Mac and Fannie Mae.

Fannie Mae was created in 1938 at a time when millions of families could not become home owners or were at great risk of losing their homes. Fannie Mae’s role was to expand the flow of funds in all communities and enable more people to become homeowners. But it also had a duty to its private investors (read more about their history at http://www.fanniemae.com/index.jhtml ) Basically Fannie Mae is a privately owned company with a congressional charter (hence it became a Government Sponsored Enterprise - GSE) to operate in the secondary mortgage market, to guarantee loans and make sure that Mortgage Banks and other lenders have enough funds to lend prospective home buyers.

Freddie Mac is another GSE with the same role (http://www.freddiemac.com/.) It was created in 1970 to end the monopoly of Fannie Mae.

Unfortunately with the incestuous relationship these GSEs had to the government and Congress they were not as heavily regulated as they should have been. It became clear to a few trained observers that some of the subprime mortgages that were being bundled by the lenders (who incidentally only had to keep some of them for only 30 days!) were carrying huge risk. The issue was ignored by congress. Now we know that all financial markets thrive on risk, but as investors all over the world, purchased these bundles of loans, that carried the promise of collecting mortgage payments in the future, it slowly became clear that these bundles were not going to pay off. The other ingredient that turned a misfortune into a disaster was the falling house prices. Under normal circumstances when a home owner defaults on the mortgage, the lender takes over the property (foreclosure) and sells it off and gets their investment back. But unfortunately US house prices were falling, thus the banks could not sell them and break even, and when the market became flooded prices fell even further, creating a very difficult situation for everyone, from home owner, lender, Freddie Mac, Fannie Mae and even the investment banks, pension funds etc etc that held these bundled investments.

That’s it for today, next time I will talk about what being done to steer a path out of this situation.

On a positive note now is a great time to be buying a home, whether you're looking to move to Atlanta or anywhere else in the USA or become an investor, there is plenty of choice, property prices are amazingly low, interest rates are historically low, and with foreclosures at an all time high, there a plenty of prospective tenants. If you have any questions hit me back.