Worsening economic conditions will blindside many, but you do not have to be one of them if you follow a few critical recommendations including checking the safety rating of your bank (See below for details)

As the U.S. credit crises marches on, both residential and commercial borrowers are feeling the squeeze as bankers tighten up their lending belts leaving many without a lending solution and stifling their growth plans.

Mortgage Meltdown Continues
In the mortgage market, nearly half of all subprime loans issued in 2006 are now delinquent…late payments on mid-quality “Alt-A”mortgages have soared 41.5%…and delinquencies on prime jumbo mortgages are up a staggering 55.2% in the past 6 months.  U.S. home foreclosures skyrocketed an astonishing 55% in July according to RealtyTrac. 

One in every 464 American homes went into foreclosure in July alone.  There are a staggering 750,000 abandoned homes nationwide. Moody’s has warned another 2.8 million homes are estimated to go into default in the coming months.

GSEs in Deep Deep Trouble
Martin Weiss of Weiss Research continues to sound the alarm in his recent alerts.  Here are some critical points he makes…

At Fannie Mae and Freddie Mac, responsible for over half of the nation’s massive mortgage market, losses are mounting so quickly that even their supposedly “safer” preferred shares are crashing in value in a mere 102 days:

Fannie Mae’s preferred shares are down a whopping 58.8%, falling almost as quickly as the common shares, which have lost 77% of their value.

Freddie Mac’s preferred shares have sunk even more, down 65.5%, while the common shared have taken a nose-dive down 89.6%

Banks Across the Country Will Continue to Get the Wind Knocked Out of Them and Some KO’d
These devastating losses in Fannie Mae and Freddie Mac are spelling disaster for lending institutions.

For example, Sovereign Bank, the 3rd largest savings and loan in the U.S. is a prime candidate for bankruptcy because of its D+ safety rating by TheStreet.com and its big exposure to mortgages.  Sovereign Bank also has a $632 million stake in Fannie and Freddie preferred shares – the same shares that have lost about two-thirds of their value since mid-May.

Hundreds of other banks and thrifts were also encouraged by banking regulators to buy billions of dollars in similar Fannie and Freddie preferred shares.  In fact, the regulators thought these investments were so reliable, they let the banks use them for capital that’s required as a cushion against loan losses.  They even allowed banks to take a tax break on 70% of these securities…imagine that!

But the list of Fannie and Freddie preferred share holders doesn’t stop there –
Countless U.S. brokerage firms, life and health insurers, property and casualty insures are loaded up with these securities and so are major financial institutions overseas.

All assumed these shares were safe.  All believed they were getting something considered as a government-guaranteed investment.  Oh well…

B-B-B-Bailout Here We Come
According to Weiss, a Federal bailout is both inevitable and imminent and yet, preferred shareholders can still come away very disappointed.

The reason is, in any federal bailout of this magnitude, if the government uses taxpayer dollars to support the value of high-ranking securities (like bonds), it simultaneously destroys the remaining value of the lowest-ranking securities (like common and preferred shares).  A bailout signals that the companies are bankrupt.  And if the companies are bankrupt, it means that, by definition, the shares in the company are worthless.

Banks stuck with Fannie and Freddie preferred shares are hoping they will get some consideration since the government regulators talked them into buying the shares in the first place.

Problem is, with such a massive collapse in the preferred shares (which has less seniority than senior debt and subordinated debt holders) there may not be much money left over for preferred shareholders.

The Chaos Will Spread
As you know, there are numerous large companies in financial trouble.  So if the government bails out Fannie and Freddie, what about a bailout for Detroit?  In fact, recently, the Wall Street Journal reported that lobbyists for Detroit’s Big Three were already presenting their bailout package to U.S. congressmen and it comes at a cost of $25 billion!

What about the U.S. airlines?  They’re bleeding cash right now.  What about the thousands of local governments that could be forced to cut essential services like waste collection or even homeland security?

What about brokers like Lehman Brothers, now searching high and low for a foreign entity to bail them out?

What about big banks like Sovereign Bank I mentioned above?

Where will the government draw the line?  How will it justify bailouts for some private companies and not others?

A Government Rescue May Be Useless Anyway
The quantities of Fannie and Freddie bonds outstanding and needing government support are so massive.  According to the Federal Reserve’s recently released Flow of Funds agency – and GSE-backed securities – mostly issued by Fannie and Freddie – total a whopping $7.6 trillion or $2.4 trillion MORE than the entire amount of Treasury securities outstanding.

These debts are held around the world and can be dumped at any time in any amount.  No one in government can control dumping these shares.  U.S. commercial banks hold $1 trillion.  Insurance companies hold $518 billion.  Brokers and dealers own $268 billion.  Foreign investors hold the most - $1.5 trillion!

All it takes is for these investors to liquidate 10% of their holdings and the avalanche of supplies on the market would sink their value regardless of the government’s bailout efforts.  This would, in turn, drive the value of Treasury bonds into a tailspin never seen before.

Tough Choices Will Likely Be Made
The government will not allow the U.S. Treasury bonds to collapse, so tough choices will likely be made…

• The U.S. government will stop bailouts somewhere along the line
• Let some of America’s largest banks, brokers and other companies fail
• Abandon prior rescue efforts to save the U.S. government from becoming insolvent

What You Should Do To Protect Yourself 

• Get your assets - savings, money tied up in financial stocks, etc., - into safer banks and other safe havens. A previous post gave you a link to check on bank safety ratings.  I can also email you the Weiss Report with the "X" list of the Strongest and Weakest Banks and Thrifts in the U.S.. 
• If your local banker is saying, “NO” to your commercial loan request, contact me to take advantage of my Loan Packaging and Electronic Submission Service that has a database of commercial lenders still able and eager to make loans. 
• Consider investing in commercial property that produces monthly income like apartment buildings and that enjoys forced appreciation.  You need to BUY “right.”   That means buying at a good price; knowing how to improve cash flow; and buying in markets that I call “Bargainville.”  I have some recommended guides to help you buy “right” in the Be a Better Investor Section.

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