This is a Historic time and unfortunately not many people clearly understand what's taking place. Even the so called "Experts" are trumped about the events that are unfolding and how to deal with it. I have been inundated with calls wanting information as to what is going on.
As many are rudely finding out, there is a major Liquidity crisis in the lending market and it's primarily caused by Risk Tolerance adjustments by the end purchasers of the mortgage backed bonds. So what does that mean? Let's break it down.
Currently, 95.00% plus of all Loans created by Lenders are sold in the secondary market to investors. Even government agencies such as Freddie Mac and Fannie securitize and sell their loans on the open market. The mortgages are pooled in to large packages and bonds are created which are sold to hedge funds, foreign countries, pension funds and investors of all types.
As we all know, over the last 5 years underwriting criteria for all loans have gotten very aggressive. Now the "Perfect Storm" in lending is upon us. Defaults in the sub prime mortgage market, higher delinquency rates across the board in all loan types and a perception that real estate prices will not continue to go up has spooked the Bond buyers. As a result, all Non-conforming loans which is defined by all loans that are not driven by a standard set of guidelines as determined by Freddie Mac and Fannie Mae which includes Jumbo loans, Alt A, No income loans, Negative amortized loans, high leveraged loans etc.. are all hit very hard by the recent problems.
Investors or end buyers of Mortgage backed bonds have stopped buying at the lower rates that were previously being offered because they feel the risk of investing in mortgages has risen dramatically. Because of the major change in risk, investors have adjusted the reward they want. For example, what they were buying at 6.0% they now are wanting 8.00% or more.
As a result, Lenders that originate and fund these types of loans have stopped doing loans on these product types because they can not sell these loans on the secondary market and don't want to be stuck with these loans. Bank of America, Wells Fargo, Washington Mutual and all other top tier lenders have dramatically changed their guidelines and/or completely pulled out of these types of markets.
So what's next and how do we deal with this? The markets have clearly over-reacted. This is a temporary crisis which will correct in time but it will take some time. Unfortunately, there will be a lot of loans in the market which will have no where to go. Over the next few days, I will be tracking where this all shakes out. There are still loans available in the market but finding them will be more difficult than ever.
Hope this helps shed some light on what's taking place. Please don't hesitate to call/write with questions or concerns.
Article provided by Gregg Busch, Senior Vice President at First Savings Mortgage Corporation, (703) 883-9580, www.GreggBusch.com
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