Having A Volatile Mortgage Market
Having A Volatile Mortgage Market
Having A Volatile Mortgage Market
So what is going on with all the mortgage companies? Either they shutting their doors down or some of them stopped funding loans. For one, it all started with Alt-A mortgage loans and jumbo loans. Alt-A are loans which were made to borrowers whose credit score was not so perfect, that is right below 640 FICO, who were self employed, could not prove their income. Jumbo loans are loans that are above conforming limit of $417,000. Any loan amount that is below $417,000 is considered conforming loan and Fannie Mae and Freddie Mac, the two government backed companies are purchasers of these loans.
However; as you may have seen on TV, Alt-A loans and jumbo loans are loans that are causing problems as of right now as banks cannot sell these loans to open market, get additional funding to make new loans. So they are stuck. No Wall Street Investors are buying these loans and banks do not know what to do with its portfolios.
Subprime lenders, lenders that only specialized in Alt-A and jumbo loans could not find any investors to buy these loans and therefore liquidated their companies. So know the finger pointing starts!
Who is to blame? Banks for making these loans? Wall Street companies for buying and selling these loans even further? Or even customers that got those loans in the first place because they did not qualify for conforming loans? Or even mortgage brokers for pushing borrowers to get these types of loans.
There is no answer as who is responsible for these loans. It all started slowly with 1% loans and borrowers who started to default in a huge numbers. Than it escaladed to all non-conforming programs and jumbo loans. But there is no way to know as how far this actually spread. Yes, we are not done yet!
This may get even uglier down the road as additional adjustable rate mortgages will reset soon again and it is expected that most borrowers will default again. Fed however, took one action this week by injecting billions to open market.
So far it is slowly working. Still volatile trading as you have seen news reports all over, but Fed is trying the best. But, what if Fed just lowered the interest rate, would that fix the problem? Yes and No. This is a really tough decision for Fed to make and the injection of funds into open market showed that Fed is watching and trying to help. If Fed lowers the interest rate today and later in a month additional adjustable rate loans are resetting and more borrowers defaulting, we would have the same exact situation. The problem is no one knows how many of these adjustable rate loans will actually reset, no one know how many people will default on these loans. All we have are simply estimates.
But than there is market. Most of the big mortgage companies are traded on stock exchange that has been effected by the current conditions, and of course market will react right away to this situation. Investors get scared, start to sell quickly in every sector, and leaves you with Dow loosing 100 points easily.
Fed wants to wait until September meeting to either keep rate as is, or lower the rate. So far all indication leads that Fed may keep rates as is, but do not quote me on that.
So what is next for mortgage market? So far many banks have canceled many loan programs that dealt with jumbo loans and Alt-A loans to prevent any future risk. Some banks just simply closed its doors down without any notice. Some are still struggling and hoping that something will happen in the future to bring their portfolios back.
And above all, housing market just killed home prices and many people own more on their mortgage than their property is worth. But it not all over yet!
What you see on TV, news, etc. are banks that are mostly backed by Wall Street Companies. However many mortgage brokers work with private investors that can still do Alt-A loans and jumbo loans. Loan criteria or qualifications may have changes little bit, but it is still possible to get a loan.
Right now, everyone will wait what Fed will do and hopefully they will make the right move.
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