← The David Greene Show
The David Greene Show
Mortgage Monday -Fannie & Freddie to Split from the Government? | Episode 51
00:40:14
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- [00:00]
A
Welcome to Real Talk Real Estate, the show where we cover how to build wealth in real estate with no fluff, no BS and no sales pitches. I'm David Green and I've been doing this for over 10 years. I've seen the ups, the downs and everything in between. This is the show where we pull back the curtain and show it to you too. So if you want to build wealth through real estate or you just love learning about it, you found your home. What's going on, everyone? This is Real Talk Real Estate here with Mortgage Monday. I'm joined with my partner and the broker of the one brokerage as well as the mortgage mutt bringing you guys update. Mortgage Mutt, that's right. He is going to get his two cents in on today's talk. So if you think that financial talk is boring but you want to support the channel, well, just look at that puppy the entire time. You can keep yourself interested. Today, Christian and I are going to be getting into Fannie Mae and Freddie Mac potentially becoming privatized, meaning they will no longer be supported and sponsored by the United States government. That's something that I believe it's the Trump administration has said that they're looking to do. We're going to be talking about what you can expect if that happens as well as what's going on in the market. So, Christian, how are you today?
- [01:07]
B
I'm doing good today, David. I'm, I'm playing puppy patrol right now, but, but I'm glad to be here. This is going to be a fun topic for our listeners.
- [01:14]
A
Yeah, this is pretty impactful. If this does indeed happen, which we don't know if it's going to happen, but there's talks of making it happen. It's going to have a pretty big impact on the mortgage industry as a whole. So basically this article comes right out of CNBC.com about the privatization of Fannie Mae and Freddie Mac and what that may mean for home buyers and investors. So let's assume people don't know what Fannie Mae and Freddie Mac are. Why don't you give us a quick overview of what these terms mean? Yeah.
- [01:41]
B
100 I, I like to basically think of them as the rule setters. Right after 2008, when basically the mortgage industry was the wild west, right. There needed to be some regulation, some, some, some standardization of what the mortgage process looks like in America. And ultimately I think the article mentions about 70%. I think it's a little bit more than that, but about, you know, seven tenths of everything of every Loan in America is done under Fannie or Freddie guidelines. And when you hear us or other, you know, influencers or your mortgage provider talk about a conventional or a conforming loan, 99 chance they're talking about a Fannie Mae or a Freddie Mac product. And all that really means is that it fits within the certain confines of what these two giants have determined to make a loan lendable. Right. A certain debt to income ratio, a certain down payment, a certain credit score. Kind of the, the, the, the skeleton of the rule set of what defines a conventional loan is determined primarily by these two, these two heavy hitters.
- [02:49]
A
Yeah, so that's a great explanation. You could also look at it like the government has a vested interest in making sure that there is loans to be made to us. The people, they want to keep loans going out. So houses keep changing hands, even businesses are started, but there's risk in giving out mortgages. So what happens is banks, in order to mitigate their risk, will not give loans to people below a certain credit score, below a certain debt to income ratio, which means the rich get richer. It's basically only the rich that can trade in housing. And that isn't something that the government wants. They want everybody to be able to buy a house. Even if they have a lower credit score. Their debt to income isn't as strong as a bank would like it to be. Additionally, if there's more risk, the bank has to compensate for that with a higher rate, which makes housing less affordable. So the government comes in and they go, hey, here's the rules that we want you to follow. And if you follow these rules and you give loans out according to these terms, we feel comfortable insuring you against losses. I don't know exactly how that plays out. I don't know if anybody that is in our world knows the exact terms of it. But the loans are insured by the federal government so that if people go into default, the banks have a percentage of that loss, probably a high percentage covered, which makes them feel much better about making loans they might not have made. It also incentivizes them to make loans under the 30 year fixed rate rules. We just are used to that in America. That's normal. But Christian, I think you and I can agree neither of us would have lent out our own money at 3% for 30 years where it never goes up. Nobody would ever do that.
- [04:23]
B
Super good. This is, this is a question that I got a lot of during COVID like who's, who's buying these loans and getting a. I mean if I told you guys, there's some investment opportunity that has a, you know, a 2% cap rate. You know, like you don't love that. Like nobody's out here buying two cap, right? And ultimately it's a, the primary purchasers of this 30 year debt. Obviously when rates get up into the 6, 7, 8, there's some, you know, ideal return there for investors. But ultimately it's these huge massive hedge funds, right? And I think there's a little bit of stuff going on that we don't see. Right. Like, you know, you hear of these rumors of like, you know, during COVID where everything was at risk of falling apart. You know, there was talk of like, hey, is blackrock going to bail out? You know, Fannie Mae, you remember those talks, we had that on the BiggerPockets podcast, David, like, hey, if BlackRock comes in and buys all of the mortgage backed securities that no investors will buy, is there something they're getting in exchange from the federal government? You know, and without being a conspiracy theorist, yeah, it makes sense when market rates are healthy, right? When it's 5, 6, 7, 8% returns, that makes sense as an investment. When things got to where they were during COVID the reason why we're now kind of reeling from that is that that was artificial. Right? And if you guys know, David's talked a lot about it in, in books on the Bigger products podcast here, quantitative easing started to become a thing where instead of the government needing and Fannie Mae and Freddie Mac needing to make these investments worthwhile for the public to invest into, they just bought them themselves. And the government shouldn't be buying its own debt. Right, but that's how those rates were artificially kind of held down for much longer than in an otherwise healthy economy they should have been. Right?
- [06:17]
A
Yeah, yeah, great point. And to clarify this, when we say it doesn't make sense for someone to invest when rates are 4%, we are not talking about the person borrowing the money to invest in the real estate. We are talking about the person buying the loan that you got at 4% to buy the house. It wouldn't make sense for them to go spend their money to collect a 4% return with the risk of foreclosure that is going to happen on a percentage of those loans. So in order to incentivize people to continue buying these products, which if they buy the loan, then money goes back to the lender, the lender can now give another loan. If they don't buy the loan, the lender has to hold the loan on their books, they run out of money. You can't give mortgages now. Mortgages get expensive because there's less money to be able to go around. The government comes in and they, they sponsor this with a government sponsored enterprise, a gse. The two main ones are Fannie Mae and Freddie Mac. And last question. Christian, before we get into the article, can you kind of break down from your perspective as a broker and a loan officer what the difference would be between Fannie Mae and Freddie Mac?
- [07:19]
B
Oh, good question. Very minute differences is my answer. And what I mean by that is that like, like I mentioned earlier, there's this subset of rules, right? And, and essentially to the public's, from the public facing side, they're the same thing. They're, they're brother and sister, right? When you're a loan officer and you study the industry and you're working on getting people mortgages and you're understanding the criteria of funding that deal. Fannie Mae and Freddie differ in very small avenues. For instance, last year we made a big announcement, if our listeners remember that Fannie Mae is Now allowing for 5% down multifamily purchases, right? You could put 5% down and buy a three unit primary residence. You could never do that before and still to this day you can't do that with Freddie Mac. That's a Fannie Mae program, right? Where they wanted to incentivize first time home buyers to get into multifamily house hacking, you know, they started to kind of accept that world in the same way that earlier that year Freddie Mac started accepting rental income from ADUs. So now these are very small minutia, right? My new regulations and loan products. But when that becomes the make and break of a borrower getting the loan, it's a big deal, right? If you needed the rental income from that ADU to qualify or you didn't have the 15 or 20% down payment to buy a triplex and you couldn't get an FHA loan. These are now loan products that allow you to purchase, whereas otherwise you wouldn't have been able to. So really the, the benefit of having both of them is that you have two takes on the same problem. How do we continue to incentivize first time home buyers? How do we, you know, ensure this debt so that it's still appealing to investors, right? Because the investors had to accept to lend to 5% down triplexes now, right? Like that, that's something that Fannie couldn't just decide like are we going to have a market for this? Can we sell it. They determined that there would be and ultimately that's why the product exists now. Right. Freddie Mac did not come to that same conclusion. And that's kind of interesting, I think. Right?
- [09:19]
A
Is it? So we know that the, the GSEs, Fannie Mae and Freddie Mac, they have their own set of criteria that the government has to give it stamp of approval on. And so when you hear about a certain type of loan, those are usually offered through one of these two. So like, what's an example of a Freddie Mac loan you can give our audience?
- [09:38]
B
I mean there's, there's unique. I mean, usually it's just a conventional loan and you either choose to underwrite it through Fannie or Freddy. But if you guys remember us talking about things like the Home Ready or the Home Possible loan, Home Ready and Home Possible are a low cost first time home buyer program. They're almost the same thing though. Homeready is Fannie, Homeready is Freddie. So they have their own take on a more affordable first time homebuyer product. And they just called it two different things right now. Something that I think will negatively impact from. The whole reason we're doing this episode is because we're discussing the potential privatization, which means instead of being what David referred to as a gse, these are now going to be privately held entities. Do you think a privately hold held investor is going to be really incentivized to lower costs for first time homebuyers? Probably not. The first things that would possibly go are programs like Home Ready, Home possible or maybe 5% down for multi families, because what's the likelihood that's in the best interest for the investor and not the buyer? When it's a government enterprise, the government can kind of overrule the profitability argument by saying this is good for the public. Private investors don't really care what's good for the public. They care what's good for the bottom line. Right.
- [10:50]
A
So when we see products like, hey, you can now get a duplex or a triplex for 5% down instead of 15% down as a primary residence. These are programs that the head people sit down in the room and they're like, all right, what's the problem here? Affordable housing is getting really tough and multifamily homes is a great way for a low income family to break their way into the multifamily market. But they can't because they don't have 20% down. All right, well let's offer this product based on all of our other ones are doing really good. None of them are defaulting because the economy is great. So we can take some of the profitability and we can shift it over and give out loans that are not going to be as stable. More people will default on them, but that's okay because they're going to be saved by the ones over here. And a lot of people don't realize when they hear about new homes or new home programs that it's actually coming from these two entities. And then additionally, Christian, how would you describe their role in actually owning the mortgage backed securities after the loans are collected and then they're bundled together there?
- [11:54]
B
Yeah. If the pro process works how it's intended, they should never own it. Right. Fannie Mae and Freddie Mac are not supposed to be purchasers of this mortgage. This is kind of a public misconception. Like I have a Fannie Mae loan, therefore I pay Fannie Mae every month my 6% interest rate. You typically don't and shouldn't. If the program works right, there should be an investor that purchases that, you know, that mortgage backed security, which is a combination of mortgages that are bought and sold, similar to like a stock. Right. A security. And you should be paying, you know, whoever. I hate to say their names, but the blackrocks, the Vanguards. Right, the people that buy the mortgage backed securities, when times get rough, it breaks. And that's the definition of quantitative easing. Is the government or GSEs buying their own debt, which is not the way the system is intended to work.
- [12:46]
A
Correct. So to answer your question, imagine they.
- [12:48]
B
Should never own that. Right.
- [12:49]
A
But they, but it's, they're the backup plan. So if no one buys a mortgage backed securities, they come in and they buy the loans that they also issued, which, which the fancy term is it puts liquidity back into the market. But think of it like this. You run up your business's credit card to the limit. A hundred thousand dollars, you can't buy any more money and there's no income coming in. But you need to pay your staff or you need to buy a new product or you need to do something and you need some cash. So what you do is you basically your personal self goes in and says, hey, I will buy the debt of my own company. I'll give $100,000 to the company. Now that $100,000 that they owed to somebody else, they owe it to me and they have to make a payment to me for a very low interest rate. Now the company has liquidity, but you personally owe $100,000 and you're going to collect debt, debt on it. And the idea here is once the company gets turned around, now you can either sell it back to the company or you could sell to someone else that would have bought it at a different point. That shouldn't be possible with our own country, but through the process of quantitative easing, they're like, hey, we have all this, like, debt. People owe us all this money on mortgages that defaulted. Well, let's just sell a bunch of treasury bills to people, get money from that, use the money to buy the debt that defaulted. And what it, what it does in practical terms is it makes the money supply way bigger than it should be. So that's why it's not accurate to say that we're printing money. I would often use this phrase because it's easy for people to grasp it. You're not actually making more dollar bills in circulation. You're adding to the balance sheet of the government. And that introduces more money into circulation because that bad debt basically just kind of disappeared in a sense, and that's what created the inflation that we have right now. So hopefully the majority of the people listening caught up with that. If this explanation made sense to you, let us know in the comments.
- [14:37]
B
O.
- [14:38]
A
That's what everybody's been talking about this entire time. I'm glad you broke it down. And now that you have a background in how these GSEs work, we're going to get into some hypothetical situations of what it would look like if the government said, we don't want to own these anymore, we want to split from it. The government doesn't want to be on the hook for mortgages defaulting. So first question, Christian, before we get into that, let's play our conspiracy theorist game here. What do you think is motivating either the Trump administration or Congress? I don't think the article says who it is that wants to do this, but what's the motive from wanting to split away from being on the hook if mortgages default? Do you think the government sees foreclosures coming and they're like, I don't want the American taxpayer on the hook for this, and they're trying to cut ties before the shark that's on the other end of this line makes it to the boat?
- [15:30]
B
Yeah, that's definitely a possibility. That. Let me, let me answer this with, with the theoretical. And I think this is a really good, like, thought exercise. And if you guys are listening to David's explanation and you're still churning with it, listen to this. This may help bring it all together. Let's say the government didn't have the opportunity to buy its own debt or artificially impact rates. What would otherwise happen is that those bonds, those mortgages are now not appealing to an investor. So what happens when something's not appealing? It needs to become more appealing. And to an investor standpoint, that means what, it pays back a better return. Right? So you're increasing the mortgage rates. Well, the government has a vested interest in not increasing mortgage rates, right? Because re elections and nobody likes. It's like gas prices, right? No president's going to say, I'm going to make this decision specifically knowing it's going to increase gas prices. Because that's what everybody likes to complain about, right? Same thing with mortgage rates. So if this goes privatized, the government now does not have a vested interest or at least as big of an impactful, you know, ability to artificially impact those rates. Right now the government can still buy a private company's debt, but then you start getting really weird, right? Like the government's. Now imagine like the government just came in and bought all of Amazon's debt. Like that probably wouldn't make the American public super comfortable, right?
- [16:50]
A
No, you'd be like, what? Who do they know at Amazon and who's hooking who and who's sponsored who?
- [16:55]
B
Yeah, that, so that, that, that starts to bridge some, some gaps that I think would really start some questions. But the alternative is just let the market determine mortgage rates. And that I think also gets dangerous because if we enter a territory where investors aren't buying at 6%, guess where we're going next? We're going up to seven. What if they don't buy? We're going up to eight. What if they don't buy, we're going up to nine. And now we're in like this runaway roller coaster of mortgage rates being completely determined by private investors, which, to be honest, in a super healthy economy that didn't just deal with six years of. I know we're saying they're not technically printing money, but the term. Right. Printing money and this artificial stimulus, a lot of pain is going to be felt, right, if we let this just kind of naturally fix itself. And I'm not sure anybody's kind of got the backbone. Maybe Trump does. But David, we've commonly said in personal talks that the only way to get out of this habitual, you know, routine of print money to fix problems, you have to have somebody in command that's okay with not being liked, right? And probably on his second term where he can't get reelected and say, hey, I'm going to take one for the team and, you know, we're going to go through a really hard time to kind of get back to a healthy economy.
- [18:16]
A
Yeah.
- [18:17]
B
And maybe that's the answer. I'm not sure anybody can really be okay with us going through that type of time, though. And I think the privatization of Fannie and Freddie is a step in that direction. I ultimately think it will lead to higher rates, which is what this article gets into details of. Private investors are not going to continue driving rates down with the fed down to 4% again, like, they're just. Right.
- [18:43]
A
So let's talk a little bit more about what the article says, and then let's get to what Trump's motivations might be or what might not be. Every time I have this conversation on YouTube about things that absolutely affect real estate because they affect the economy, I get people in my comments that keep telling me to stay out of politics, folks. I'm not running for office. I'm not supporting or going against any of the things we're talking about. You just don't want to be dumb. You don't want to not know what is happening and what you should expect. Right. Regardless of if you like the president, you love the president, you hate the president, it doesn't really matter. You have no control over what they're going to do. You do have control over how you position yourself, your investments, your portfolio, your strategy, and even where you go work in this economy. So why would you not want to pay attention to what the weather pattern is going to be? Right. Even if you hate the God of the wind and you prefer the God of the sea, like, it just doesn't matter. Right? Right. Look at this, like, objectively, and stop reading into the fact that Christian or I are sharing political opinions, because we are not. We're not saying one way or another that we like this. Now that I've said that, I'm sure I'm still going to get people that are angry at me because we said.
- [19:49]
B
I'm glad you're saying that because I get it, too. And this is like David said, guys, it's important to understand Trump's motivations, whether or not you agree with him and how that may impact you. Right?
- [20:00]
A
Yes.
- [20:01]
B
And I don't agree with everything he did. I don't agree with everything that anybody does because I'm not them. Right. And same thing. I know how David feels, but it's important to talk about. And we're not going to stop talking because we say the name Trump and that's kind of a trigger word right now. These are important things to discuss and they should be, they should be out there for the public to develop their own opinions of.
- [20:19]
A
Just like tariffs are, they could have a very big impact on our economy. They could have a very big impact on the types of jobs we have, the types of jobs we lose. Like what stocks are going to do, which areas are going to do. Well, like just today, we should probably do another video on this. He talked about putting a 25% tariff on all auto imports coming into the country. Well, guess who, the first person to jump up and shout and say, yes, we love it. It was United Auto Workers. They're like, hell yeah, we're going to make more cars in America. More people are going to buy American cars now. That means that they're going to need to build more plants and hire more people and have more of a hierarchy of management and invest in new technology. Well, guess what, the areas where this stuff happens are going to have a greater need for housing. So we're going to talk about it so you guys can know. So if you come to the one brokerage to get pre approved, you know, you might want to be paying attention to what's going on, where they build cars. Not to go too far down this rabbit hole, but Christian, do you remember when we visited United Wholesale Mortgage in Detroit area?
- [21:17]
B
Absolutely.
- [21:18]
A
Yeah. Do you remember what the building that we walked through, as huge as it was, what it used to be used.
- [21:22]
B
For, there was an old auto manufacturing plant.
- [21:25]
A
Yeah. So what happened is all of the auto manufacturers lost their jobs during like basically the last recession and we all started to get imports on cars. Other countries imposed tariffs on America. So other countries didn't want to buy Fords and Chevys anymore because they were too expensive. But we never put tariffs on theirs to the same degree. So we were still buying Hondas and Toyotas. So what happened is we killed the American car companies and promoted the foreign car companies, the Mercedes and the BMWs and everything else, because they put tariffs on us that we didn't return the favor. Well, it stayed a ghost town in Detroit until the mortgage industry moved in, bought up their huge buildings and moved the literal mortgage industry into that part of the country where most of the loans get done. Revitalized the community, real estate values came back. People started investing back into the area. They started having concerts there. The whole place is now like vibrant. When Detroit was a ghost town, they used to say, you can have a house for free. As long as you agree to pay the price. Property taxes. They were giving houses away for. For free. Right. So this is why the stuff is relevant. All right, let's get into the article. Now that I've given a little bit of a history lesson there. During Trump's first term, the White House attempted to release the Federal National Mortgage association, also known as Fannie Mae, and the Federal Home Loan Mortgage association, which is known as Freddie Mac. Fannie Mae and Freddie Mac are nicknames. Their real names are what I just said, into the private market. It didn't materialize because of the complexity, according to experts. Don't you love it when they always say according to experts? Like, who is the expert that just says that this is why it didn't materialize? While Trump hasn't talked about the idea to sell the government shares into the private market, the topic is now bubbling up in his second term. It could lead to higher mortgage rates and risk for investors, experts warn. In January, the Fannie Mae and the Treasury Department agreed to amend the senior preferred stock purchase agreements between the treasury and Fannie Mae and Freddie Mac, each gse, to ensure their eventual release from conservatorship. So they're putting plans in place, according to the article here, to break away from government oversight, which was established in order to make sure that they weren't like, ripping people off and they weren't making bad loans or they weren't only giving loans to certain people. Experts are torn about the release of the GSEs and how it will be handled, when it will happen and if the government will continue to somewhat oversee the mortgage giants after the fact. I don't know that I'm usually, I like, I'm like, no government. I don't want them involved at all. However, I just know how greedy bankers are. I mean, what's your thoughts on that, Christian? Do you think that bankers are just so inherently terrible that they need government?
- [24:02]
B
I'm usually, I'm usually fairly erring on the side of anti big government. And, you know, you're kind of a libertarian.
- [24:10]
A
I would say in a lot of ways you seem to me, yeah.
- [24:13]
B
However, I talk to a lot of people. So we, we do a lot of. I'll just. This will be a quick rabbit trail here, but we do a lot of foreign national loans. That's loans for people who are not U.S. citizens. And when I discuss the American mortgage system with somebody from Europe or somebody from China or somebody from South America, they're like, how is this possible? I just talked to somebody from Mexico, the Other day and he said, oh, I have a mortgage at like 18, 20, 22%, I think he said. He's like, that's normal. You know, you have to go get a loan from a dude. And he's like, what's, what's the rate up there? I'm like, well, you get a really high rate because you're a foreign national. He's like, what does that look like? I'm like, eight and a half. He's like, really? Yeah. He was stoked. And he's like, oh, is that like a three year loan? I'm like, no, it's a 30 year. He's like, how's that possible? Who's accepting 8% return? I'm like, that's what I'm saying. You know, like when people are looking from the outside in, it looks incredible, you know, because ultimately this system has been built, insured and governed since 2008 by the federal government. And they're able to take margins on things that private investors would not accept. This would not put an end to it. But this, I think, would significantly impact the ability of the mortgage system in America to operate as it has for the last two decades. Right?
- [25:33]
A
Yeah, yeah, it's a great point. Because it would never work. You'd never have a 30 year fixed rate loan if it wasn't for the government saying to them, this is what we want you to do. Kind of twisting their arms. They don't offer that in Mexico, that. I mean, they don't offer it in commercial financing at all. Right. It's only, it's like this crazy, amazing thing we do here and people still find a way to complain about it. Right. When rates go from like 4% to 5 and a half, people just scream about how high rates are. But then people in Mexico might pay 18%, I think I had a buddy in Egypt and he was building a house and he basically had to borrow 50%. He had to put 50% down and then he had to pay the money back in two and a half years. Otherwise they would take the whole house. That's just a normal thing over there. So what happens in these other countries that don't have this is you got to have money to make money. If you are not wealthy, you don't have an opportunity to own real estate or invest in real estate or improve real estate. And all the things that we talk about, like in my book, Better Than cash flow, the 10 ways you make money in real estate, none of that matters to you because you have no capital to get in the game, right? We ask people to put 3% down and they still lose their minds. That's so much money. How am I going to save up $15,000? And I'm not trying to disparage the people that don't have $15,000. That is a lot of money. I am more pointing to the fact that that's only a possibility for you at all because the American government through the taxpayer base creates these incentives that keeps rates really low. Now you can also make the argument that that's one of the reasons that home prices are high, because rates are really low. And that's kind of true as well. I think it does push things high. But on the flip side, that's what allows people to create wealth. In real estate, you can be the person that doesn't have a great job, you work at Craig and Auto Parts, but you put 3% down on your house and in 10 years you've gained $300,000 of equity. And that's life changing money that you're never going to earn selling spark plugs. Okay, so we're not saying right or wrong. We are saying this is the way that the game is being played, played and it could, this could have a significant impact on the rules of that game. Now one of the things the article mentions is they think that the motivation for this is that if it breaks from conservatorship, the shares of Fanny and Freddie are going to go up in value. They think that that's why politicians are pushing for this, because they, they own shares of Fannie Mae and Freddie Mac themselves. What are your thoughts on if people should be investing in that, in those shares?
- [28:00]
B
That's a tough one because honestly, if I'm being 100 honest, I don't think this is very likely that it'll happen. I think it's a very good thing to discuss, to be prepared if it does. I think it'd be so hard, man, there, there would have to be so much pain in reassessing how mortgages are done in America without the government conservatorship, without the ability to artificially influence rates. There's so many pros, there are some cons, like increased house values. You know, houses in America are worth more than most countries, right? Because it's so not easy. But it's easier than other places to access. If that ease dries up though. And like what if, what if you had to make 500k to buy a house? Like the buyer pool shrinks by what, 90? Like how many people make 500k? A year in America, very few. Right. If that was now the requirement like it is with your buddy in Egypt, there's no first time home buyer programs anymore.
- [28:54]
A
Right.
- [28:55]
B
Those are gone. You need to put 50 down because an investor is only willing to give you a 50% loan to value it. I think it would be detrimental. I think it would really suck. I hope it doesn't happen. That's my official take. It may not be as severe as I'm leading on, but I do think it would be a negative impact to first time home buyers, ultimately the entire mortgage industry in its total. And you know, it would increase interest rates, which. The only benefit that may come from that is decreased house values, which means it would be easier to buy. But if your rate's 10%, who cares?
- [29:30]
A
Yeah, like you're still, your mortgage is still going to be just as expensive, but your house is worth less. It doesn't really benefit people like they think it's going to. The article mentions that the Fannie Mae and Freddie Mac came under this model with the government being a part of it called conservatorship in 2008, which was basically. Remember that whole too big to fail thing. I don't know if Christian, you've been old enough to remember this, but the idea was banks made BS loans for a long period of time. Everybody used these loans to buy houses. The loans were all defaulting at the same time. And the banks went to the government and they said, hey, when these loans all default and nobody is making their mortgage payments to us anymore, we are not going to have any money. What that means is we will not be able to make loans to other banks. We will not be able to make loans to people that want to buy a car. We will not be able to make loans to grocery stores that want to buy their products and stock the shelves. We will not be able to like give out any new home loans. Obviously there will be no one that can buy all these houses that are going down in value because they won't be able to get a loan to buy because we won't have any money. Basically it was like the car engine is going to have no oil. It is going to seize and stop. And I don't know how we'll ever get it started again. The only people that will buy homes will be the people that have the cash, which are the rich people. Okay? And so the government came and said, all right, here's what we're going to do. We are going to buy your bad debt which is going to give you money again under the guise that you're going to go make these loans. Remember tarp? That was like one of the things that everybody was kind of talking about it. Can't remember what it stands for at the top tip of my tongue right now, but it was basically, hey, we're going to give money to people to lend out so the American public can start buying stuff again. We can rebuild. Exactly what we did led to insane inflation, which is why home prices went really high again, which is why we now have everything costing a lot of money. So we bailed ourselves out at the cost of the future. The talk would be if we don't want to have him connected anymore, because it's not 2008, we don't want the government involved. If, in addition to rates possibly going up, we also have to think if home loans are not being monitored by the federal government, the odds of what we call predatory loans or subprime loans or fancy financing is because they're not always bad. Sometimes they're just confusing. It's like tricky. That's probably coming back, right? Like this is how, this is how banks got in the mess is they're like, we can rip somebody off by creating a system of loans that, uh, nobody can understand what they're getting, but it looks really appealing in the beginning. And they'll get the loan and we'll sell it to them and they'll sell it to them and they'll sell it to Lena. It becomes hot potato. And ultimately guess who ends up holding that bad paper? It's your mom and dad in their 401k plan. That was the problem with this whole thing, right? Because that's why when all the loans imploded, it, it ultimately caused the stock market to plummet because so many people's portfolios were made up of these loans that were no longer receiving payments. And so if this does happen, I think in addition to higher rates, you're going to see the 7:1 arm, but you have an opt option to have a balloon payment at three years. If you bring in this much money and you can convert it into that and you can combine it with the HELOC and you're have all of these little moving pieces that we work thrown into the same thing to confuse the consumer, which I think would trigger another collapse. You know this more than me though, because you work every day seeing the loan products, talking to the borrower, seeing what the lenders are offering us to offer our clients. What are your thoughts on if that's a legit Risk to consider.
- [32:53]
B
I would say this. When you guys hear us ever start talking about the best loan for you is a three year maturing arm or a 40 year fixed or a, you know, interest rate where an ARM with no cap to the increase of the rates, that's the time to grab your stuff and run. Right? That's, that's when you, the, the, the sirens sound, the, the flags go up. I am not seeing that that's not the case. I think the, for the vast majority of people In America, the 30 year fix is the best option for you. I have maintained that stance since COVID and before then, since I've been in the industry, there are specific times where arms interest only things like that do work. But it's the very, very rare minority of people situations. If that's the direction we start to see people, especially if these come privatized and David, like you said, return for the investors becomes the ultimate biggest priority. I think we're entering dangerous times. I, I hope we do not go there and I hope we have smart people in leadership that see the risks in that. Ultimately it's not me making the decision, but we can start a conversation and tell you guys when to, when to fret. If it does indeed happen, I hope the privatization of Fanny and Freddie does not take place. I think it is better the way it is. And that's coming from somebody who is anti government. Right. I think this is good where it, it needs that protection because ultimately it's tied to the most fundamental human need for Americans, which is housing. Right. People need housing and it should. If the government's going to spend its money anywhere, it should be in housing their citizens. Right?
- [34:39]
A
Yeah.
- [34:41]
B
Considering every other crazy place that spends.
- [34:43]
A
Money, I would add whoever controls the money controls an abnormal amount of power in a society. Like we tend to think the guy with the bigger muscles that can fight is the one that has all the power, doesn't have any power if he doesn't have a way to make money. He's begging somebody for bread. Right. Like power is a tricky thing. It's not always as obvious as who's the tallest or who has the biggest gun. The person that controls the finances can open the spigot, can close the spigot, can turn you into a beggar and can make you believe falsely that you are super powerful because you have some of that money too. Money does things to people's brains that is unlike anything else. It's like a drug. And bankers are so much better at understanding contract law, at understanding how to raise capital at building relationships with the people that have the capital at learning how to butter your bread. If you butter my bread, they are so good with money that the average American does not stand a chance if you got to go toe to toe with somebody who actually controls what you have to do, say, or sign to get access to it. And that's why, like you, at this stage in my life, I do air towards this is one of the areas I. I'm okay with the government being involved. I'm okay with us having a military. I'm okay with us having police and firefighters. I'm okay with us having roads that they work on. And I am okay with them overseeing the banking industry as long as the government's not corrupt, because it can so easily go against what your mom or your aunt or your grandma can understand. And they're just. It's so easy to prey on them and get their assets. Now, the last piece I'll say of my concern would be if they break from conservatorship and we see higher rates and we see unaffordability get even worse. I don't want the big private equity funds to scoop up all the real estate because the mom and pops can't buy it anymore because they don't have enough money. That's just. I'd rather see more people own less homes than less people own more homes. And I know I take heat from people that think that I want to buy every single house in the country. That is not the case. I want to educate people so everyone can at least own their home and can hopefully own more homes. And we can create a system where you rent a house from somebody else and then you save your money and then you buy your house and then you rent it out to somebody else who is doing the same thing. And you sort of create this, like, apprenticeship pattern of wealth building where you don't stay in the same stage, whether it's owning all the homes or renting all the homes for your entire life, that it's sort of like you grow through this and owning a home can supplement your retirement, as opposed to just depending on Social Security. So that's what motivates Christian and I. That's why we have the one brokerage. That's why our rates are so competitive. That's why we have so many different loan products. And that's why we are not the predatory lenders that frankly, most. Most of our competition is. We would make a whole lot more money if we did the kind of stuff they did. But we'd have to look ourselves in the mirror. And Christian just got a brand new haircut. He definitely doesn't want to stop looking at himself in the mirror right now.
- [37:35]
B
I, I would, I'll comment on that. Without sharing too much behind the scenes, we could definitely run the one brokerage with incredibly higher profit margins if we did not care about honoring the best deal that we can for our clients. I get loan estimates all the time from lenders that are just, to me, ludicrous without making just a plug here. Talk to us if you're getting a mortgage. I think it's worth a phone call if this gives you value. If you know, you know, anybody, you know, searching for a mortgage, obviously what we do for active income is provide this service. By no means am I saying we're the only people you should talk to, talk to enough. And I, I think you'll see that the difference is, is substantial enough to care here.
- [38:24]
A
Yeah.
- [38:25]
B
We do this because we love it. We do it because we invest ourselves. We build these loan products and these lender relationships because we want to access them as well. I do David's loans, right? David's not getting loans at Chase. He gets them here. Right. I do the same thing. If I, if we ever run a company where we're not getting loans from ourself, you should know what's going on. That's not a good sign. Right. But we believe in these products. We believe in our offers. We make them as competitive as possible. And that's what we got.
- [38:55]
A
All right. If people want to reach out and talk to you directly, where's the best way to do that?
- [39:00]
B
Instagram's easiest way to get me at the one broker underscores between the words. Also our websites easily findable. The one brokerage.com little contact us tab in the top, right. If you want to reach out and.
- [39:11]
A
Get in touch, you can find me@davidgreen24.com you can actually chat with me directly if you go to that website. You can also check out realtalkrealestate.com which has information similar to what you find on the show. Or if you like the old gram, you can find me at David Green 24. Send me a DM and say, David, here's what I'd like to do. And I will personally put you with the custom fitness loan officer for your needs. We really hope you guys do. We hope you leave some comments on the show letting us know what you thought, what you learned and what you think about the show. Also, please remember to subscribe to the channel like the show and share it with somebody else, particularly a real estate agent that you love. On this same feed, every single Tuesday, we have a show called Real Talk Realtor, where we interview different real estate agents and make content for real estate agents and those who are curious about what goes on behind the scenes in the industry. Christian and I both sell homes and do loans, so we have a little bit of insight into everything. I think you'll love the new show. Thanks a lot everybody. Make sure you leave a comment. We'll see you on the next episode of Mortgage Monday.