Big news this weekend with Paulson and his minions announcing measures to provide funding to the two government sponsored entities (GSE’s) Fannie and Freddie.  These entities which together guarantee almost $5 trillion in home loan securities were, as Warren Buffett put it, technically insolvent.  They had to do it or the economy of the entire world would have suffered.  Under the announced plan, the Treasury will provide funding to these entities in exchange for senior preferred shares which will take precedence over the current existing preferred and common stocks.  So - two things - first, the existing shareholders face a massive dilution in the stock values and have a subordinate claim to the assets of the companies behind the newly issued senior preferred shares and the already existing preferred shares.  The share price dropped from $6 at the opening to less than a dollar.  Secondly - how many rounds are left in the bazooka.  The car companies are now clamoring to get in on the action.  A little scary, no?  The obvious statement here is that Fannie/Freddie were a shareholder company and a public interest company at the same time - they were bound to get in trouble.  Wall Street kept clamoring for newer and bigger earnings at any cost and the management forgot why they were set up in the first place, to provide stability to the home finance market.  Newer and riskier products began to emerge (by the way as I have stated over and over, Bayside never did a single one of these) and the whole thing imploded.  Had we stayed the course and stuck to the basics, our housing market and values would still be the envy of the world.

Well the markets around the world responded exuberantly to the news - what will happen in the next few weeks remains to be seen.  Interest rates were way down as the government’s “implied” guarantee became an “explicit” guarantee.  What I fear is that when the dust clears and the audits are complete, there could be a much bigger hole than we knew about.  The only way to pay for this hole is raise rates, higher and higher. 

Bottom line - if you are thinking of buying or refinancing - I would do it sooner rather than later.  I was watching the mayor of Key West on TV where he said that he hoped he was stongly criticized for ordering the evacuation of the town.  Ike isn’t coming there but he didn’t want to gamble with people’s lives and would be quite happy to be accused of raising alarms too soon.  Well, I feel the same way - the time for gambling has ended and I hope I am very wrong about the future of our business.  It isn’t that I think that the housing market is going to spiral into nothingness, it’s that I believe rates will go higher and money will become more expensive, which will make borrowing tougher.  Again, I hope that I’m wrong… after all the welfare of my two labradoodles and me depends on this business but my advice remains - do it sooner rather than later!