But possibly the bigger news is that S&P said that it would change its methodology for ratings hundreds of
billions of dollars in residential mortgage-backed securities, and review its ratings on hundreds of billions of
dollars in the more complex collateralized debt obligations based on those subprime loans. It is expected that a
lot of debt will be downgraded to junk status and may have to be sold at fire-sale prices. Therefore many
pension and hedge funds that once thrived on the high returns they could get from investing in subprime junk
are expected to lose a lot of money. The effects of the US market shock have been felt around the world with
German and Japanese debt markets rallying from the news and expectations for a Fed overnight rate cut this
year have moved back up to 22%.
Lastly, FHLMC forecast that U.S. home sales in 2007 will decline to their lowest since the start of the five-year
housing boom in 2001 as mortgage rates and foreclosures increase. Are we having fun yet?
What are mortgage brokers doing to decrease the number of loan repurchase requests? Although this isn't much
of a surprise, according to a poll by Inside Mortgage Finance, 63% are now using automatic desktop underwriting
systems, 60% are doing VOE's, and most others have beefed up verifications, credit checks, documentation, and
quality control measures.
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