Few people outside of the industry 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.

If FRE and FNM do get destroyed a huge subsidy which has propped up home prices will be destroyed along with it. Easy financing will become a thing of the past as we return to the 20% interest rates of the 1970’s. In fact, with consideration of the credit crises we are currently in, interest rates could go much higher than 20%. In all, this sets the stage for the 50% drop in home values is possible in California (-30% YTD) as the savings starved American people create a horrific form of demand destruction. 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.

If 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 (Read: Abu Dahbi holding company).


In any event FNM, FRM, and Real Estate will suffer the fate first predicted by those who opposed government interferance in the very beginning. As a trade I am personaly off to the side but, It doesn’t take too 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 (CBG / 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.