By now we are sure you are well aware of the recent changes in the real estate financing industry, as well as the allegedly bleak outlook that has been portrayed in the media. We'd like to take this opportunity to shed some light on the current market and to address any concerns. The future is simply not nearly as grim as depicted in the press.

How did we get here?

Most mortgages are bundled together by lenders into securities and subsequently sold to investors.

• Over the past couple of years, housing grew at an unprecedented level. So too did the demand for seemingly low-risk, high-yield mortgage-backed securities.


• As the markets heated up and investors became comfortable with the volume of these securities, investors continued to buy–even while credit standards became more relaxed. Additionally, lenders put systems such as automated underwriting into place to expedite the approval and funding of mortgage loans.


• Even though these mortgages were originated and approved using an automated underwriting module, and even though many of the loans were issued to borrowers who did not document their income or assets, rating agencies continued to assign strong ratings to these securities.

In the first quarter of 2007, there were substantially more defaults in sub-prime mortgages. The risks related to these types of loans were not adequately factored into the pricing of mortgage-backed securities.
When sub-prime mortgage defaults increased, underwriting systems came under greater scrutiny. Basically, the due diligence that should have been done before these loans were purchased by investors in the secondary market is being done now, out of fear that the securities they purchased may not perform as well as they previously believed.
All of these factors–risk, exposure and overly optimistic ratings have contributed to, as one commentator described it, "an unprecedented run on the secondary markets, similar to an old-fashioned run on the banks." All the non-government investors have pulled out until the markets stabilize. In other words, not as many investors are buying what the lenders have to sell.

Some facts about today's market:

1. Mortgages that meet the conforming guidelines of government lending programs are not affected by this temporary cessation of funds.


2. Institutional banks, such as Chase, Citibank, Wells Fargo and HSBC, are still approving and funding jumbo loans. They are funding these almost exclusively to their own balance sheet (not selling into the secondary market), but with much more restrictive credit guidelines and at higher rates (because the price at which they will be able to sell this paper on the secondary market is still unknown).


3. Private banks and savings banks that fund loans with their own portfolio or balance sheet are largely unaffected. At this point, it's essentially "business as usual" for these lenders, which continue to offer jumbo loans at extremely competitive rates, again, with no significant changes to their guidelines or pricing.


4. The U.S. Federal Reserve Bank and Central Banks around the world are very aware of these issues and have injected over $100 billion into the markets, often by buying mortgage securities, to provide stability and aid the return of orderly capital markets.

A word on interest rates

There is a popular misconception that the market shift has caused rates to skyrocket. This is not the case. While there has been a slight increase as compared to last year, rates are still quite low in terms of historical standards.
This holds true for both conforming and jumbo loans, provided that the loans are placed with an appropriate lender.

• For conforming loans, 30 year fixed rates tend to be more favorable than adjustable rate mortgages in most cases.
• For jumbo loans, adjustable rate loans are still an attractive option.
• Even though rates are low, the market is quite volatile. Qualified buyers should act now to ensure the lowest possible monthly payment on their mortgage.

Now more than ever, it is critical for a buyer to work with a mortgage professional that has access to all the lenders in the market and can seamlessly transition a client’s loan from one to lender to the next, as pricing and parameters change for the better or worse. While the media is portraying the worst-case scenario and industry commentators are playing the blame game, we feel it is important to give you some true insight into the current state of the market. We will continue to keep you posted as changes occur in this dynamic environment.

"As real estate prices deflate in much of the country, apartment sales in Manhattan continue to rise. ..." New York Times Sunday, August 19,2007