We've been hearing a lot lately about a "meltdown" in the mortgage industry. First, this is a media-hyped gross exaggeration of what's really going on. The best thing to do is remain calm and get professional advice from somebody you know and trust, who is really equipped to explain the situation.
Let me explain how all this works, then what I foresee as happening in the future.
First, the life-cycle of a mortgage loan:
A customer decides s/he needs a loan. The loan is prepared by a loan originator. That loan is underwritten by an investor (the bank.) The loan closes and is funded by that bank. Now, the bank holds the debt. The bank then packages that loan, along with a bundle of other loans recently closed and goes to Wall Street (generally) to sell that bundle. The Street buys it and resells it to other interests... say, a foreign country, an insurance company, etc. Those entities then basically sell it back to investors (could even be you or me.) That's how the process works.
The problem:
Because the banks became so lax in underwriting standards that recently, when the music finally stopped, Wall Street decided not to buy any more nonconforming bundles. THAT is what left the investor/bank with a lot of debt, unable to sell, with all cash now tied up, and created what we hear as "the liquidity crunch."
Solutions:
First, you need to understand the difference between conforming and nonconforming loans. Let me oversimplify. Conforming is, first, a loan of $417K or less. It is also one where the borrower has good credit, verifiable repayment capacity, assets, down-payment (or equity)... a fully documentable transaction. EVERYTHING else, generically, is nonconforming. This includes Stated Income, Subprime, Jumbo (anything greater than $417K), 2nd mortgages, etc. Obviously, this nonconforming thing is a big chunk of the market.
With that, I think the market will soon react by learning how to properly segment nonconforming products. As a case in point - Jumbo loans are typically given to fairly well-to-do borrowers who have good income, assets, etc. Right now, those loans still get jumbled in with all the other "higher risk" loans. This doesn't seem right. In fact, I would almost think that fully documented Jumbo loans are perhaps even a better market investment than many conforming loans. I think we will see a breakout in jumbo pricing for those good borrowers. The market just has to figure out how to package and resell it. Some banks/investors are already showing signs of figuring this one out.
The next issue is interest rates. Recently, interest rates on conforming loans have been going down. This is because of the uncertainty in the economy and how it has affected Wall Street investment. Wall Street Equities and the Bond Markets compete for the same dollar. As money moves away from equities and into bonds, interest rates on mortgages tend to go down. The opposite is also true. The other thing that will affect mortgage interest rates is the direction of the Fed Prime lending rate. This one is not as easy to understand. Currently, the market is anticipating a drop in the Fed Prime next week. If this happens, it will send a comforting message to the Equities market and money will most likely want to move there... from bonds. In this case, this would mean upward pressure on mortgage rates.
So, there you have it. To learn more about how all this may affect you, either as a consumer, or as a professional in the industry, please check out my other recent blogs or contact me.
Greg Polashock is a Real Estate Home Mortgage Loan Consultant and Certified Mortgage Planning Specialist with Cherry Creek Mortgage and resides in Castle Rock, in Douglas County Colorado. He can be reached via email at Greg@GregIsFinancingSolutions.com, by phone at 303-887-0672 or on the web at http://www.gregisfinancingsolutions.com/.
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