Why Mortgage Rates Went Up and What To Do About It

Well, here goes.

1. Nobody wants the loans.
2. Nobody has the money to buy the loans

It's that simple.

Because of the increased refinancing in the last month or so, there has been a large amount of new mortgages that are working their way through the Fannie Mae and Freddie Mac pipeline that need to get sold.

The way the system basically works is that if you go to a mortgage broker, they wholesale a loan to a mortgage banker or bank that sells a group of loans to Fannie or Freddie who then securitize the loans to investors. The investors pay for the loans and then Fannie and Freddie give the money back to the banks or mortgage bankers and so on. It's very green! We keep using recycled money!

The problem is that the ultimate buyers wer lied to so badly, they are scared to buy the new paper! Even though Fannie and Freddie have made getting a loan harder to get than and invitation to have tea with Queen Elizabeth the First (and she is dead!).

But on the other hand, the buyers don't have as much money as they used to invest. The less employees, the less money in pension funds to invest. See what I mean!

Now, a solution. 

Currently, the government for years have been insuring and gauranteeing FHA and VA loans. My idea would be for the U S Government to be the mortgage business.

The idea is to have licensed, certified, checked and rechecked mortgage originators who will follow guidelines set by the government with one set of underwriting criteria (including 100% loans to those that deserve it).

The loans would be approved by the governement's underwriters and then the US would fund the loan and then sell off the loans to the secondary market (if they wanted to). 

The loans would be 100% insured by the payment of a .25% insurance fee that goes into a pool to pay for the bad part of a loan that goes to foreclosure.

Notice something missing? Yes, the mortgage bankers and banks. They are the ultimate middle-men that we jsut don't need. They add about 1/4% in rate to a loan and you don't really need them.

Servicing of a loan can be handled by a company hired by the new governmental agency.

Also if a company like Bear Sterns that pops up later wants to do things themselves, they can do what they want. But with the standing of the government, it will be hard to compete and sell the loans unless the rates were fabulous!

This is just the beginning of the details and discussion. What do you have to say?