Gregory J. Heym
Executive Vice President, Chief Economist
BY MAGGIE HAWRYLUK
After last week's government bailout of Fannie Mae and Freddie Mac, industry experts are holding their breath for what this latest fallen piece in the subprime domino effect will bring.
While no one knows for sure what the future will hold, many are positive that Manhattan's market will remain afloat as most buyers here have the power of cash and generally steer clear of conforming loans.
"This whole Freddie and Fannie situation goes to financial confidence. The problem with the stock market is that it can move in a heartbeat. We know there are more banks that will probably fail," Greg Heym, chief economist for Terra Holdings, said.
And the already tight lending market isn't going to get any looser.
"It's hard to know what the next move is," Heym added. "Rates are not going to go down. It's going to be a tough ride."
Although stocks rapidly dropped with the initial news that Fannie and Freddie — with a combined debt of more than $1 trillion and current holdings and guaranteed mortgages valued at more
than $5 trillion — would be getting a much needed shot in the arm with the Fed stepping in to offer emergency capital, the markets had rebounded by the end of last week. And the collective public is breathing a sigh of relief that the two entities will continue to guarantee mortgages. Though the step hasn't helped to ease jitters.
"There's been a clear loss of confidence in their ability to sell their securities. It's going to take a while to work this all out," Andrew J. Singer, chairman and chief executive officer of The Singer & Bassuk Organization, said. "There will be a great wait and see attitude."
And with news of foreclosures steadily rising on a national level — RealtyTrac recently announced that the national foreclosure rate has increased by 53% since a year ago — banks are set to lose even more.
Although lenders in New York have been faring better than the rest of the country, foreclosures in New York state increased by 21% since this time a year ago. While Manhattan in particular has been insulated from the problems of defaults cropping up around the other boroughs, the banks are not considering these statistics when originating loans.
"The real issue is if Fannie and Freddie will be able to continue making jumbo loans which could affect all Americans," said Singer. "The real question is whether they will continue to write $75 million to $200 million loans in Manhattan."
While no one is quite certain how Fannie and Freddie's current situation will affect our residential market, it seems clear that there won't be a calm on Wall Street for quite some time as investors sold bank shares in reaction to last week's slew of negative news.
"The impact will be more indirect. I'm more worried about what it will do to the financial market," said Heym. "Its just another major piece to the things that have been happening."
But Lance Margolin, Esq, an attorne at Pitnick & Margolin LLP is looking towards the positive.
"It may have an unexpected positive effect on the market. The money has to go someplace," he said of investors selling their shares. "The market is cyclical and my hunch is that we're probably comig to a turn toward the down end of the cycle."
Wednesday, July 23, 2008