What we have seen to date in the residential mortgage crisis was a mild headache compared to the atomic bomb that has just gone off with Freddie Mac, and Fannie Mae. The great depression of the 1930 was largely due to residential leading crisis, and Fannie Mae was created in 1938 as part of the new deal in order to add liquidly to the banking system, and improve home ownership. Prior to Fannie Mae residential loans would require on average 50% down, have lending terms of anywhere between 2 to 5 years, and contain annual balloon full repayment terms.

All bets are off on a housing turn around until confidence is restored in the leading system. If we are lucky, and the crisis is well managed that maybe in 2010. At a minium I expect to see housing prices to drop to 2001-2002 pricing levels before starting a slow recovery.

The news is that bad. :(

H, I hope you're right about the housing market prices. Obviously, no one wants to see Fannie & Freddie trigger some sort of massive credit crisis (on top of the one we have already).

It seems a shame that this entire fiasco was created by the greed of a few.

Anon,
Prices are going to fall, but in the near term I would bet on an increase in US Treasury bond insurance cost, plus the Fed will allow Freddie and Fannie to direct borrow as soon as they need money.

The size of the problem is going to force residential lending rates up over the next few months. Thank the almighty that the Chinese like buying US mortgage backed bonds.

H,

Unfortunately, I think you're right. What shoe will drop next?

Anon
Underwriting changes. To rebuild confidence we are going back to late 80's early 90's underwriting guidelines.

No bridge loans.

Refinancing to get the borrower out of trouble and keeping a home equity is a no no.

No seller help on closing cost.

Buyers must pay at least one point orgination fee. No more lender cover closing cost, and buyers get higher rates.

Total avaliable credit part of credit score. No more back door financing down payment using credit card.

This will force prices back down to levels where people can actually afford the houses. It will reduce the number of buyers, but the crisis now indirectly effects the US governments financing cost. It's an open secret the US government will save both Fannie, and Freddie Mac. The scale of the problem is large enough to increase the US Treasury cost.

Keep in mind that above underwriting changes are a balancing act, the stricter the policies the greater effect on the economy.

I was was trained as a mortgage underwriter, and one of my first jobs out of college was handling residential mortgage foreclosures. There is no mystery on how to write good loans. Loans normally go bad within 3 years, and closer to 4 for adjustable rate loans. That sounds like a long time but last thing the lender wants to do is foreclose on a property. In the end there are vary few options. Keep in mind that when a lender takes a $100K loss that can effect up to 19 different finincial instraments, and can translate to closer to 1.9 million dollar loss accoss the financial system.

Anon,
Besides residential underwriting guildlines standards go back to our last bank crisis in the late 80's and early 90's.

Aka No seller help on closing. Buyers have to pay at least 1 point orignination. No more home equities kept open after a refi, No bridge loans (forces buyers to have 20% down plus costing plus income or forces buyers to sell home first then buy next home). Revoling credit part of credit score (no financing downpayment on credit cards), and investment/second homes require 30% down plus closing with proof of income.

It's also very possible for the stock market to drop back to 9/11 trading ranges. That could mean another 2000 point drop on the Dow; however, the road back up to current trading levels will take longer.

It's a slow road back from here.

My first job out of college was working in mortgage banking collections and foreclosing on bad loans. The last things anyone wants to do is foreclose on a loan. If the mortgage company takes a loss at auction that loss can get multiples up to 19 times accross the financial system. ($100K loss x 19 = $1.9 million gone from the systems)

From my experience most loans that go bad will fail within the first 3 years for fixed rate, 4 years for 1 year ARMS, and 6 years for 3/1 ARMS loans. The underwriting guidelines began to change in mid 2007. (Pick a pay ended last month.) With effective government actions that puts a recovery slowly starting in 2010. I do not agree with 2009.

By the way the greedy you refer too are highly likely part of the people taking the most losses. Good and bad we will all likely suffer.

Sorry about the delayed reaction on approving comments, guys -- I was out of pocket for about 24 hours.