November 20, 2007
FreddieMac Board of DIrectors
To whom it may concern,
My purpose in writing, is to give my input with regards to the credit crunch. I believe that both FredieMac and FannieMae, need to put pressure on the powers that can change the conforming loan limits.
What the Federal Reserve need's to do, is a quicker response, instead of playing this wait and see attitude, as far as lowering the Fed Funds Rate.
While the U.S. economy faces a higher risk of recession from credit markets, housing and energy prices, and the falling dollar againt other currencies, most likely outcome, the fed funds can expect further cuts, despite what Federal Reserve Chairman Ben Bernanke said, in a recent congressional appearance.
He said economic growth would "slow noticeably" in the final quarter of this year and was seen as "remaining sluggish" during the first part of 2008.
Housing weakness, higher energy prices, and the ailing dollar will weaken consumer spending with credit-market tightening, are seen as the most likely recession triggers," the report said.
Consumers will cut back sharply, sending the economy into a big hole, which is a very dangerious position to be adding to bigger problems for the economy.
The Fed lowered a key interest rate in September by one-half of a percentage point, the first cut in more than four years. The Fed followed with a quarter-point cut in late October, lowering the key rate to 4.5 percent.
At that time, policymakers hinted that the two cuts may be all that is needed to energize the economy and help it survive the fallout from the troubled housing and credit markets. The Fed's final meeting of the year is Dec. 11.
Solving the nations problems economically is vital to a healthy America. While wall street observers, may have a different opinion about the real estate market, I am in the trenches, and I see the effects first hand, and in reality, the problem can easily be fixed, with an adjustment in the conforming loan limits, in high cost states, such as California.
The Federal Reserves can take action to reverse the slumpping housing market. The biggist question is, when? When is the Congress and Senate, as well as the President of the United States, going to stop the blame game and start taking decisive astion to solve the economic problems that we are now undergoing.
The Federal Reserve, shares some of the responsibility of the currrent credit crisis were in, partially because that took to long to repond to market changes, along with the negative newsmedia.
The Newsmedia bounces off any angle it can, to grab headlines long enough to capture readership in the quest to sell their advertisers advertising. (Which by the way, is part of the problem, that is Negative Headlines that perpetuate notarity, spurs long term negativness, which is counter productive.
Let's look at the problem that perpetuated the so called credit crunch. This not only affecting the real estate market, but many other areas that are inter related.
I wonder why, does it take a rocket scientist to figure why we shouldn't be doing something, and that we ultimently beat ourselves into a pulp, when the answer within our grasp. This is also known as a prescription to disater, by allowing ourselves to be victimized by negative press.
To first solve a problem, we first need to Understand the Problem, What caused it, and What other symtoms that are taking place because of it, and What's being done to correct the problem? But most importantly, How do we fix it!
The problem as I see it, Loans that were made with easy money created by Wall Street. 100% financing, and stated income programs. Both these type of programs were great programs, that actually that helped give many first time buyers more opportunities to own part of the American Dream, yes, some of those loans were abused by a few over zellious Loan Originators, Wall Street, and a few real estate professionals.
We need to understand not every purchase or refinance was made with 100% financing.
70% of the homeowners that purchased or refinanced their home, were move up or down sizing buyers, with equity of their own, which did not require 100% financing.
Another factor in the equation is, approx. 15% of the buyers were investors or speculators, that used cash, equity, 1031 exchange or a combination, their of, to invest in property.
What all this means is approx. 15% of those buyers who purchased a home, may have used many of the programs that were offered, such as; Down Payment Assistance Programs, Bond Programs (Community Block Grants) offered by Cities and Municipalities, FHA, VA, as well as, other types of financing available, including seller financing, and yes, 100% financing. Approx. 10% to 12% may have used 100% financing, not eveyone of those loans are in trouble.
So who is in trouble? Approx. 5 to 7% of those buyers who used a combination 100% financing and stated income programs.
Now, for the rest of the story;
What other factors that added fuel to the fire, of this mess. Because the Federal Reserve took the initive in 2004, to start increasing short term interest rates (Fed Funds Rate), inflation scares, caused by the rate of appreciation due to supply and demand, the Federal Reserves controls two Key Interest Rates that control the money supply. The Discount Rate, and the Fed Funds Rate.
To slow down the fast moving rate of appreciation that could be volitile to inflation, the Federal Reserve felt it necessary raise short term interest rates 17 consecutive months by a .25%. This was enough to slow down the economy, kill the real estate market, and curtail consumer confidence to a crawl.
Like a famous boxer once said, "I shook up the World" (Mohammad Ali), that is indeed what caused this part of the mess were in. A combination of Wall Street Greed, Over Zellous Loan Originators, un educated borrowers and wait and see attitude of the Federal Reserve always take a causious approach) . Well, we'll see what happened. Many sub Prime Lenders who provided funds for 100% financing, got caught with their shorts down, because they were not anticipating values to drop.
There is another part of the equasion, that many people are not aware of, and that is;
There are several High Cost States, such as California, for example that have many of these 100% financing problematic loans, that are currently or will be within the next 18 months start to recast their deferred interest.
These loans will have a problem, unless our Congressional leaders, including the Senate and the President of the United States takes deciisive action to increase the Conforming Loan Limits as well as the FHA Loan Limits.
Currently, the Conforming Loan Limits for FannieMae, and FreddieMac is set at $417,000, many of the loans that were made, are in high costs states, where the median price home far exceeds conforming loan limits. You may ask if you live in low cost areas, why should I worry about if California fails?
California has 1/5th of the United States economy. California is also facing an epedimic with our population growth, as well as an influx of immgrants, legal and otherwise.
Other factors in the equasion are, Crude Oil Prices, U.S. Dollar falling against other currencies and instability of other world economies, and the cost of war.
So, How do we fix it?
The Feds are need to take an agressive move to keep the U.S. Economy in the growth mode, they need to build consumer confidence. The only way they can do that, and they actually started, the decreasing the Federal Funds rate .75% in September 18th and October 31st., but has to be more agressive, and soon.
We need to contact your Congressional representatives and the Senate and voice this message.
The dollar is sliding, because of our so called credit crunch, and the real estate market. The Value of the United States is in our homes. It affects every aspect in.
As the dollar continue to slide against other currencies, we wil need to take decisive actions to improve the ailing dollar. Foriegn investors will see a window of opportunity to use Euro Dollars to buy in the United States, as they will get more for their dollar versus ours.
As interest rates move downward, treasury bills will be a safe resting place for nerve riddle investors with the stock market gitters cause by the volatility with crude oil.
The Saudi's have too much to lose if our dollar is not protected, and the best way to proctect is to booster the economy.
Here is the immediate fix;
1. Decrease the Fed Funds rate by an additional .50% basis point before the December 11th meeting of FOMC meeting.
2. Increase the Conforming Loan Limits, as well as the FHA Loan Limits for High Cost Areas.
3. Contact your legislators today. Contact the WHite House. Call, Write E Mails and Send Telegraphs stressing the importance.
4. Put pressure on the Newsmedia, by withdrawing any advertising media, that blatently distorts the news in the Headlines, as scare tactics to hold readership.
5. Educate the borrowers, who are taking on non conforming type Loans made by lenders that offer sub prime type loans.
Really know the your real estate market. Separate Hype from actual Facts.
In a normal market most lenders have a traditionally 3% to 5% delinquency rate.
In a Hot market, you have less. When trying to compare Foreclosure Statistics, or I should say the delinquency rates from a hot market to a more challenging, correcting market, the statistics can be misleading and is often distorted by the news.
As an example; if you had 10 defaults in a hot market, and in a correcting market you had 20 defaults, you now have a 100% increase in the amount of defaults. The newsmedia, will have you believe that the "The sky is falling." By examining your local market, you can determine the actual amounts of foreclosures.
In my market, which includes 21 Cities, from Long Beach to Whittier, from Compton to the City of Los Angeles, from January 1st to October 1st, 2007, we had a little over 12,600 homes in default and only 2,957 homeowners actually lost their home to the bank as an REO. That's a far cry that the sky is falling. How long will it take for the government to realize that how much harm they are really doing, before they distroy lives beyond repair.
These are facts, not hype from the media. Yes, we have problems, but I think the newsmedia sensationalizes headlines do more harm. Consumers are all confused, and politicians jumping on the band wagon without rationalizing the entire problem, and what were all the factors leading to the problem. Consumer Confidence levels are shaken.
Common sense, in realy looking at the under lying problems of the mortgage credit crisis, and how all the pieces of puzzle were intertwined that created the problem. To solve the problem, we need to know, who has the power to fix the problem. What needs to be done to solve the problems. If you have a cut on your leg, you don't necessarily have to amputate the leg to heal the cut.
Carlos R. Arvizu Sr.
Pronounced R.V. Zoo
562-755-3856
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