An informational, interactive workshop hosted by Leilani Williams, Realtor with Capitola Realty and Tai Boutell, Certified Mortgage Planning Specialist with Santa Cruz Home Finance was a big success.
The event was held at the Scotts Valley Library and about 30 people attended to hear the details on what's going on in our mortgage and real estate markets. The discussion focused on the mortgage industry; where it came from, where it is today, how it got here and where to go next.
Tai explained that nobody holds a 30 year fixed rate mortgage, and that most loans are securitized and sold on Wall Street. Greed played a big part in the state of today's mortgage environment and the resulting hang-over will likely continue into 2008.
Holding a long term bond, like a mortgage, is very risky. This is not due to default, but the risk of interest rate fluctuations. For example, if rates increase, the value of the bond decreases. As banks have hundreds of millions of dollars in mortgages, that risk becomes too big, so they off load it by selling it to Wall Street.
It is interesting to note that all consumers own mortgages. Picture a clock, with the borrower at 12, the servicer at 3, the bank at 6, Wall Street at 9. After the loan closes and the borrower moves into their home, the servicer will manage the loan by collecting payments, paying property taxes and insurance and sending nasty notes if payments are late.
The lender will then take the loan and bundle it with other loans of similar nature and sell those bundles to Wall Street. Those bundles might be hundreds of thousands of loans. Wall Street, in turn, will securitize these bundles and sell them to investors. Who buys them? We all do.....they are in IRA's 401(k) plans, Mutual Funds, life insurance all held by us and investors internationally.
The yield on these bonds tends to be low, so investors began to realize that they could do much better, upwards of 12% returns, for subprime and Alt-A loans. These mortgages, though riskier, were performing beautifully. Why? Real estate values were very strong, and if a borrower was in trouble, they would do anything to protect the appreciation. Worse case, they could sell, and in a very short time, get their money out and make a profit.
When the music stopped, and values softened, defaults rose and investors started to get nervous. They began to ask for higher returns, but with loans already closed, that was not possible. So the banks started to loose profit as Wall Street lowered the amount they were willing to pay. There came a point that Wall Street stopped buying these loans all together, and left the banks holding the bag. Many, 150 so far, had to close their doors.
Just before all of this, due to so much money flowing into the market for these loans, underwriters lowered standards, like credit scores, down payment, income verification to move more of this money from Wall Street to Main Street.
Credit rating agencies also took a hard look at how they rated these investments, and when those ratings were lowered, Wall Street pulled back. All of this happened on July 30, 2007.
As risk/reward is being looked at again, lenders have tightened their guidelines for loans. The result is a reversion to the mean, and a fall back to underwriting guidelines of about 5 years ago.
As these changes filter through the system, and risk gets priced in again, Wall Street will began to buy mortgages again, thus providing liquidity to the mortgage industry.
OK, how does this apply to the home buyer and seller?
There are still great loans available, and due to lower sales prices, it is a great time to buy, explained Leilani. She also presented interesting statistics on the market today, as it compares to past markets in terms of sales volume. Mobile homes are hot, and condos are well priced. Work with a professional and it is quite possible that this could be the market to buy in, as it is now considered a "buyer's market."
The conclusion was that in the wake of a tightening credit market, there is money to be borrowed, and many loan programs to choose from. Additionally, as values continue to go down, this is a great time to be a buyers.