"Crisis" Mortgage Market

Good afternoon everyone.

There's no doubt that you have heard about the current "Crisis" in the mortgage market. So that you'll be better informed, I've summarized some of the information passed to me from a class I attended today.

The problem began when delinquencies for subprime mortgages began to increase over the last several months, and real estate values began to drop in some markets.

The majority of all mortgage loans are sold after they are originated and placed into mortgage backed securities.  The securities are "stripped" and resold into CMO's (collateralized mortgage obligations). This is good as it puts liquidity in the market which allows lenders all over to offer loans at low rates and good terms for the borrower that they would not otherwise be able to offer. The bad thing is that if there is ever a problem with the liquidity (the ability to sell) of those CMO's, then the negative effect is immediate and global.

Currently, investors are not buying these CMO's secured by ALT-A and subprime loans and lenders that do non-agency type securities do not have the cash to fund more. That is what all the bad news is about.
Lenders will see underwriting tightened and rates increased in the coming weeks. I hope this information will be helpful.