Fannie and Freddie had a big fall.

So, here we are with the long foretold* disaster unfolding around us. But told-you-so points are like expired lottery tickets. What does one actually do?

Well, as the doctor might say, where does it hurt?

If you are a homeowner, the headlines might not be relevant. Case-Schiller-Weiss shows vertiginous drops in value. Unfortunately the index is based on sales following earlier sales. If the earlier sale was inflated by, say, $50000 cash back to the buyer at close of escrow and the subsequent sale was a foreclosure that might explain some of the apparent fall. Median home prices, nationwide, are off about 10% from their peak (as of Fall, 2008).

If you didn't buy at the peak, if you can afford your payments and if you don't have to move, relax and enjoy your home. If you do have to move, you will still probably get a multiple of what it was worth ten years ago.

If you bought at or near the peak, 2005-07, you might consider a property tax appeal. If you were foolish enough to borrow on creative mortgage terms, long term fixed rate loans are still pretty cheap. Refinance now and be glad when rates go up, which eventually they will.

Let's say you have mortgage loans on your books. Are they current? Are they plain vanilla fixed rate? Were most of them written before 2005? If yes, relax. Defaults will probably go up a little with the recession, but relatively speaking you should do fine.

In the more likely event that one or more of the above do not apply, you know you're in trouble. If it's Other People's Money, you might start a job search before the numbers get too awful. Of course for many, this advice is a little belated.

Let's say that you own a part of some sort of mortgage backed security. Chances are that whoever sold it to you has taken my advice, above. The company that sold it to you probably no longer exists. This becomes a question of fractional interest valuation. At this point of the cycle, the sum of the parts is probably worth less than the whole. If you don't want to try to assemble the parts, at least get to know their owners so you can act together. I've seen more than one case where the sale of a foreclosed property was derailed by an inability of those who owned the loan to make a timely decision. The next offers were lower.

Basically, even if the loans underlying your paper are pretty bad, the hold-to-maturity/workout, value is probably better than you can get in the market. A cocktail napkin type analysis indicates that with a 5 year workout, 20% return 100% default, and bad initial underwriting the workout value of a hypothetical loan is about double the $.22 on the dollar that Lehman got.

Meantime, there are salvage tactics. One is to pursue the appraisers who wrote the original wallpaper. Yes these were mostly individuals, but many may still be licensed, in business and insured. Remember that even if you suspect fraud, the recoverable cause of action is error. The general standard of appraisal training and practice has deteriorated to the point that there should usually be one or more significant errors in the appraisal behind any defaulted loan.

That assumes that you can dig that far. If all you hold is a derivative security pursuing the underwriter might provide some emotional satisfaction but probably little relief. Maybe you can get together with the other shareholders to obtain access to the underlying files. And, if you all get together you can also probably agree to appeal property taxes. Not a big deal, but money is money.

In the words of a French fraud investigator, "Money is rarely lost. It frequently changes pockets." If you are in the enviable position of having sold into the bubble, some of that money might be in your pocket. This is an excellent time for some selective shopping. D.R. Horton was recently reported to have sold entitled California lots for something under $40000 per parcel. In the same article they were reported to have sold a parcel for 25% of their 2005 acquisition price. Agreed that land yields no income and this problem is still likely to be long and painful, but countercyclical real estate investment has often worked before. It just is not for the faint of heart, or those with shallow pockets.

It might be a bit early to be buying retail or office, though.

* The Seven Percent Solution, so far, crash and AVMs or Manuscript found in a Time Machine