Few people are familiar with Freddie Mac and Fannie Mae. These NGO's are engaged in providing subsidized public funds to mortgage lenders through its purchases of mortgage assets, and issuing and guaranteeing mortgage-related securities that facilitate the flow of additional funds into the mortgage market. In short they are the backbone of the real estate market.


Freddie Mac has declined 94% year to date and Fannie Mae has declined 84% year to date, and it is becoming clear that it is only a matter of time until they reach final support at $0 per share.

With the destruction of FRE and FNM a 50% drop in home values is possible in California (-30% YTD) and to a lesser extent the entire nation. My sympathies go out to the American consumer as the real estate market is on the verge of the abyss which extends well beyond the CDO mess.


When FRE and FNM fail there are four possibilities which I foresee:

1) The government bails out FRE and FNM, paying for the 5 trillion in debt with newly printed money. Virtually destroying the dollar and causing hyper inflation.
2) The government bails out FRE and FNM and raises taxes guaranteeing dept slavery for generations eternal and strangling the economy.
3) The government abdicates the responsibilities to the private sector which will not provide the subsidized 'free lunch' to home owners which artificially prop up home prices.
4) The republicans in power bail out FRE and FNM and raise the capital by selling Americas rich coal, Natural Gas, and Oil deposits to themselves.


In any event we should see real estate fail, just as those who opposed FRE and FNM in the very beginning predicted. As a trade It doesn’t take to much imagination to identify which sectors will be hit hardest by this tragedy. Commercial real estate is vulnerable from the risk of tax increases, inflation, and from the notion that many small business owners could easily retreat to their home offices (CBR / BBT). Furthermore investment properties such as the million Dollar track homes developed by Toll Brothers (heavy insider selling from Mr. Toll recently) also share a real risk.


The real tragedy is that this all could of been prevented, and we will fall much as Rome did. For Rome fell not because its walls were low, but Rome itself was low; distracted by fleeting culture warrior morality, greed and treason from the highest sources.