So there has been a lot of talk about the mortgage crisis over the last week. I wanted to write a short summary of what is going on.

Earlier this summer, we had changes in sub-prime lending. Basically before the changes, if someone could wander into a mortgage office, they could probably qualify for a loan. So people with bad credit had a pretty easy time getting qualified for home loans. Not surprisingly, a lot of these people didn't pay and defaulted on their loans. This led banks to 'rethink' their policy on sub-prime loans. The rethinking went along the lines of "Hey maybe if you have a history of credit problems, we shouldn't give this person a loan".

To be honest, I think it's a good thing. Why? Not so much because I care about banks but because I think it doesn't benefit people to give them loans they really can't afford. They get a house they can't really afford and struggle to make the payments for 2 years and then get foreclosed on. It would be better for the banks to turn them down than to get them into these weird loan programs.

To make matters worse, it's a little harder to negotiate with lenders these days. A lot of these sub-prime loans became part of mortgage backed securities. Basically the loans were wrapped up in a package and sold. The problem with this is that back in the good old days, you could go talk to your lender about a payment plan if you ran into problems. But now there is no one to talk to. Your loan is part of a huge financial instrument.

There is still quite a bit of nervousness in the financial markets that a lot of these loans are not going to be paid off. This is hurting a lot of the banks that own these loans because borrowers are defaulting and the loans are difficult to resale. It's also hurting new home builders. Why? Because people with bad credit generally go to new home builders who arrange easy loans.

What was the effect on the Austin real estate market of the sub prime fallout? For the most part, it hurt the suburbs and the new home builders. Central Austin for the most part has weathered the storm.

So what happened last week with jumbo loans? First, jumbo loans are loans that are larger than 417k. Wells Fargo pulled out of the jumbo loan market. Well OK, they didn't exactly pull out of the jumbo loan market. What they did was raise the rates on credit from 6.8 to 8 percent overnight, in effect taking themselves out of the market. There is a misconception that everyone pulled out but currently the only major player to pull out has been Wells Fargo left.

What does this mean for Austin? It's hard to tell. This will probably have a bigger effect on real estate markets in California and Florida where due to high prices and a prevalence of 0 down loans, there is a high percentage of loans over 417k. In Austin, with lower prices (195k average) and more people putting 20% down, this should have less of an effect.

Ki Gray is a realtor with Austin MLS.