Not surprisingly, real estate market factors put 6 companies on the list.
Of the 20 companies that Fortune Magazine included in its top 20 biggest losers, three banks, two GSEs, and one insurance firm made the list. That’s how sour the prospects of the real estate industry will be this year. Mortgage rates may be influenced by the Treasury’s intervention but that may not hold on too long when the market remains in flux.
American International Group led the list when its losses now amounting to $99.3 billion – that’s about the GDP of Slovakia. Fannie Mae and Freddie Mac made it to the second and third places respectively with a combined total loss of $108.8 billion. Citigroup is at the fifth spot with a $27.7 shortfall (that’s $14 billion in subprime mortgages), BofA-acquired Merrill Lynch follows with $27.6 billion and Regions Financial at rank 15 with $5.6 billion.
Thanks to the high foreclosure rate in major metropolitan areas that continue to collapse housing values, these companies are not just cutting jobs but trimming down previous plans of expansion during the housing boom. But what exactly is the industry going to endure during the coming months ahead given these companies’ drastic report cards?
First, AIG’s deals in REITS, fiduciaries and trusts have already been crippled no matter how the company tries to cover up the situation. We also suspect that the hardest hit clients are those who went for the insurer’s Standalone Professional Liability Insurance and Customized Professional Liability Insurance. It’s an already weak property market that caters to professionals who are on the brink of more financial losses.
Second, the GSEs may announce another increase in fees to offset their losses and meet the higher credit risks that they are facing. Fannie Mae can tap the Adverse Market Delivery Chare and Loan Level Price Adjustment once again to do this. Naturally, Freddie Mac will follow suit. Therefore, we’d have many real estate investors who’d be limited with affordable credit financing in a buyers’ market.
Lastly, banks and their affiliated companies will further reduce their construction and real estate loans. Since these are not immune to even the slightest effects of the recession, those who are applying for real estate loans will either have to squeeze in at the strict standards for borrowing or delay their plans of buying a home until the economy recovers.