What is the "liquidity crisis" and why does it exist?
Across most of the country, Fannie and Freddie currently purchase loans of $417,000 or less from lenders, and repackage these so-called "conforming" mortgages into securities sold to investors. Investors generally trust that these securities will be repaid, in part because they are backed by the government-sponsored entities, so there's been little interruption in consumers' ability to obtain conforming loans at low rates. Until the Economic Stimulus Package was signed into law, loan amounts over $417,000 were typically held onto as "portfolio loans" by banks or sold off as mortgage backed securities to Investors and Wall Street as "Jumbo Loans." Investors and Wall Street have recently gotten a sour taste in their mouth, experiencing higher than normal levels of default, due to poor underwriting practice, risky loans and a weakening real estate market. The result has been the "liquidity crisis" we are currently experiencing, whereby Investors and Wall Street have virtually put a halt on the purchasing of mortgages over $417,000, explaining why interest rates are currently so much higher for consumers on "Jumbo" loans. Typically, rates are a quarter of a percentage point higher on "Jumbo" loans, but are now roughly 1.625% higher for a 30 year fixed.
The "Sleeping Tigers ", waiting to pounce on the Mortgage Industry
Sleeping Tiger 1
Sleeping Tiger 1 consists of a percentage of bad "jumbo" mortgages(over 90 day delinquent),which are currently sitting on the books of banks with loan amounts over the existing conforming loan amount of $417,000, that will ultimately be sold to Fannie Mae and Freddie Mac under the new Economic Stimulus Package of 2008 (HR5140). The Economic Stimulus Package of 2008 is a bill, which President Bush created and signed into law on February 13th, to help the "liquidity crisis" we are currently experiencing in the mortgage industry, allowing banks to sell loans from "high-cost housing areas" to Fannie Mae and Freddie Mac at the higher loan amounts (up to $729,750) through 2008, to "free up" capital and write new loans.
Several banks approved and funded loans in the second half of 2007, intending to sell the loans off to Wall Street to "free up capital" for new loans, while retaining the rights to "service the loan", by collecting a percentage of the monthly mortgage as a profit. However, once the majority of Wall Street investors pulled the plug on purchasing "jumbo" loans, the banks were stuck with them! I don't care what bank you are and how much money you have on hand, when it comes down to it, the banks only have so much money of their own to lend out on real estate.
Then came the abundance of foreclosures and short-sales...
The foreclosure process is very expensive. Some sources have estimated it to cost banks upwards of $50,000 to go through the process, in addition to the losses anticipated by receiving less money than is actually due on the property. By no means does the bank want to take and hold property. Their business is that of making worthy investments that return interest on their activities.
I have spoken to several homeowners across the United States having not made a mortgage payment on their home in several months, without even a hint of danger, negativity or the placement of a Notice of Default from their lender! You would think they would be going through the foreclosure or short-sale process right now, but that isn't the case. Why?
Here is my theory...
If a bank has a bad mortgage that is "sitting on their books" with a borrower living in the home that hasn't made the mortgage payment for 3-4 months, and the President has just signed into effect the Economic Stimulus Package, which will now allow Fannie Mae and Freddie Mac to purchase mortgages that were originated as far back as July 2007...why would the bank want to place a notice of default on the borrower, making the file look bad, when they can simply sell off the mortgage to Fannie Mae and Freddie Mac to "free up capital" and remove their hands from a bad loan?
The result is Fannie Mae and Freddie Mac purchasing loans that are now backed by the government-sponsored entities. What happens if they had no idea the file was bad and now they are stuck with a bad loan? That's right...It's you and me, Mr. and Mrs. Taxpayer, which will ultimately need "subsidize" and "bailout" their problems!
Think its farfetched theory? I don't think so at all, but only time will tell.
Sleeping Tiger 2
In a great Bloomberg.com article, written by Bob Ivory, Joe Lents is a "homeowner" in Florida that that has a $1.5 million Washington Mutual mortgage against his property and Mr. Lents hasn't made a mortgage payment since 2002! The bank placed a notice of default against him from the outset and Mr. Lents took the bank to court, contesting that, "he doesn't think the bank holds a valid lien against the property." The judge requested original documentation from the lender to uphold Washington Mutual's claim, but WAMU has been unable to provide the original documentation requested by the court. Many other judges across the United States have been inundated with such issues as well, with many courts siding with the homeowners until the banks prove they hold a valid debt against their properties. To this day, Mr. Lents remains in the home, not making mortgage payments.
What went wrong? As I've mentioned in past articles and referenced the "Mortgage Implosion" website, over 260 lenders have gone out of business since 2006. In the midst of selling notes between each other and poor clerical practices, it should be interesting to see how "sleeping tiger II" plays out in the court systems across the U.S., as delinquent homeowners make desperate attempts to keep the roof over their head while behind on payments. According to Rick Sharga, executive vice president for marketing at RealtyTrac Inc., the Irvine, California-based seller of foreclosure information, 1.5 million homeowners will enter the foreclosure process this year, with half of them actually being repossessed by the banks.
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