Every week brings the news of yet another mortgage company closing; and I'm not talking about single office brokerage firms -- these are publicly traded lenders whose stock prices have tanked, just like when the dot com bubble burst.
I've just finished reading an outstanding article on the subject by Gretchen Morgenson in yesterday's New York Times business section, which reads in part:
"On March 1, a Wall Street analyst at Bear Stearns wrote a surprisingly upbeat report on a company that specializes in making mortgages to cash-poor homebuyers. The company, New Century Financial, had already disclosed that a growing number of borrowers were defaulting, and its stock, at around $15, had lost half its value in three weeks.
What happened next seems all too familiar to investors who bought technology stocks in 2000 at the breathless urging of Wall Street analysts. Last week, New Century said it would stop making loans and needed emergency financing to survive. The stock collapsed to $3.21."
It seems that just as borrowers have been eager to overspend on housing, borrowing as much as they possibly can using mortgage products designed to extend their reach into debt even further, investors have been greedily funding these borrowers' habit, buying mortgage-backed securities based on these loans. Ms. Morgenson goes on to say:
"Investment manias are nothing new, of course. But the demise of this one has been broadly viewed as troubling, as it involves the nation’s $6.5 trillion mortgage securities market, which is larger even than the United States treasury market.
Hanging in the balance is the nation’s housing market, which has been a big driver of the economy. Fewer lenders means many potential homebuyers will find it more difficult to get credit, while hundreds of thousands of homes will go up for sale as borrowers default, further swamping a stalled market."
Getting technical, let me say that these mortgage-backed securities are mostly offered in the form of bonds. These bonds, like the mortgages on which they are based, are “promises to pay,” and investors gauge their risk by seeing what quality the bond rating agencies (like Standard & Poor’s and Moody’s) assign to them. As borrowers default on their loans, quality drops on the underlying securities that hold them. Morganson observes:
“Nevertheless, some investors wonder whether the rating agencies have the stomach to downgrade these securities because of the selling stampede that would follow. Many mortgage buyers cannot hold securities that are rated below investment grade — insurance companies are an example. So if the securities were downgraded, forced selling would ensue, further pressuring an already beleaguered market.”
How does all of this affect you? If you are trying to sell your home or are thinking of doing so this year, these market forces are going to work against you. On the other hand, if you’re buying a home – either as a personal residence or as a rental property – you’re in luck: With over 25,000 homes for sale in the Denver market (and many more coming soon, with the summer moving season and more foreclosed homes hitting the market), the next few months should give you great opportunity.
If you’re not interested in buying a home, it seems to me – all else being equal – that these market pressures are going to help keep interest rates low. Just last week I quoted someone 5.750% on a 30 year fixed rate mortgage (whereas a typical 5-year