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Current State of Mortgage Financing...What's Going On?
Anyone watching or reading the financial news over the last few weeks has seen a
lot of angst and consternation over the state of the mortgage industry. In fact, one
of the larger lenders in the US, American Home Mortgage, was forced to shut down
operations recently. But why? What is happening, what does all this mean to you
and most importantly... what should you be doing do right now to make sure you
are protected?
Here's the scoop.
Over the past several years, many loans were made to homeowners with somewhat
non-traditional or "non-conforming" situations, be it a poor credit history, inability to
document income, or any number of factors that do not fit within the traditional
"box" for home loans. These loans are often called "Sub-Prime", or "Alt-A", meaning
that they were somewhat riskier in nature than A credit, prime, or traditional loans.
Another type of "non-conforming" home loan is one where the credit and income
might be perfectly fine, but the loan amount is higher than $417K, which is the
current maximum loan that can be done using pools of money from mortgage giants
Fannie Mae (FNMA) and Freddie Mac (FHLMC). If the loan amount is higher, it can
certainly be done - it's called a "jumbo loan" - but the end money comes from
private institutions, not from the large government sponsored entities of Fannie and
Freddie. Most non-conforming loan product rates popped significantly higher
recently. Here's what happened.
The end investor for Subprime or Alt-A loans will charge a premium for taking on a
pool of these loans, because they know that traditionally, they might have a higher
rate of default and delinquent payments within that risky pool. But lately, default
and foreclosure has been on the rise - partly due to the fact that with credit
tightening and a soft real estate market, many troubled homeowners are unable to
refinance or sell in order to get out of trouble. So now, these end institutions are
demanding a much higher "risk premium" for taking on these pools of loans, as
they see the rates of default are climbing higher. Since these institutions are
purchasing these pools of loans sometimes months after the borrower has actually
closed at a given rate, this increase to the risk premium means that instead of
paying $101K for a $100K loan that will bear interest, they may only be willing to
pay $95K for that $100K mortgage to account for the risk. Multiply that times
thousands upon thousands of loans...and you have millions upon millions of dollars
in loss for the company trying to sell the pool at a much lower price than they were
expecting. This is called a "liquidity crisis", and is exactly what happened to
American Home Mortgage - there was no mismanagement, but they simply got
caught holding too many "hot potato" loans, forced to sell them at massive
losses...and eventually they had to make the decision to close the doors and stop
the bleeding.
Further, even when a lender is able to take some losses, they may be subject to a
"margin call". This means that as their losses and risk premiums increase, the value
of their loan portfolio decreases. As the value decreases, the credit lines that are
secured by those portfolios begin to issue margin calls as the value of the asset
that they are secured on is now diminished. This is exactly like margin calls in the
Stock market. If you have a loan against a Stock that is losing value, you will get a
"margin call" and need to pay down the loan, as the underlying Stock is losing too
much value to be considered adequate collateral any longer. So for the big
lenders, as their portfolio is losing value due to increased risk premiums and
losses...the margin calls start coming in, and they are required to pay down their
balances. In turn, this means that they have less availability to fund their new loans,
which then exacerbates the problem.
In response to seeing this situation play out in the demise of American Home
Mortgage, lenders of other non-conforming loan products increased their interest
rates dramatically almost overnight to be better prepared - and likely over-prepared
- for increased risk premiums down the road. Even though loans above $417K are
not presently suffering from increased delinquencies like the Subprime and Alt-A
loans are, these rates popped higher as well, because they are being purchased
by smaller private entities that can't afford to take on any margin of risk.
What happens next?
The major damage is probably already done, and the present situation will likely
settle out over the coming year. Lenders will stop pulling products off the shelf,
and the rates on products that have moved so significantly higher now should trend
lower down the road as delinquency rates stabilize.
But here are a few important things YOU should do right now:
ONE: Even if you are not presently in the market for a home loan of any type,
make sure that your credit standing is as solid as possible. Many people in the
market for a home loan didn't expect they would have a need, and didn't plan in
advance to ensure their credit would qualify them for the best possible financing.
With no immediate need for a home loan, time is on your side... why don't we take a
few minutes together and just make sure you are prepared, should a need arise
down the road? Call or email Georgia Custom Mortgage right away.
TWO: If you are in the market for a home loan, or know someone who is -
understand that now is the time to be working with a real qualified professional who
can keep you informed of changes in the market and get your loan funded quickly.
Now is NOT the time to be playing the risky game of trying to scour the entire nation
to find someone who promises to save you a paltry amount on costs, or deliver a
rate that seems too good to be true.
Your home and your financing are just too important, and times have changed. We
are here to help and advise during these volatile times - and would welcome calls
from you, your friends, family, neighbors or coworkers.
Anyone watching or reading the financial news over the last few weeks has seen a
lot of angst and consternation over the state of the mortgage industry. In fact, one
of the larger lenders in the US, American Home Mortgage, was forced to shut down
operations recently. But why? What is happening, what does all this mean to you
and most importantly... what should you be doing do right now to make sure you
are protected?
Here's the scoop.
Over the past several years, many loans were made to homeowners with somewhat
non-traditional or "non-conforming" situations, be it a poor credit history, inability to
document income, or any number of factors that do not fit within the traditional
"box" for home loans. These loans are often called "Sub-Prime", or "Alt-A", meaning
that they were somewhat riskier in nature than A credit, prime, or traditional loans.
Another type of "non-conforming" home loan is one where the credit and income
might be perfectly fine, but the loan amount is higher than $417K, which is the
current maximum loan that can be done using pools of money from mortgage giants
Fannie Mae (FNMA) and Freddie Mac (FHLMC). If the loan amount is higher, it can
certainly be done - it's called a "jumbo loan" - but the end money comes from
private institutions, not from the large government sponsored entities of Fannie and
Freddie. Most non-conforming loan product rates popped significantly higher
recently. Here's what happened.
The end investor for Subprime or Alt-A loans will charge a premium for taking on a
pool of these loans, because they know that traditionally, they might have a higher
rate of default and delinquent payments within that risky pool. But lately, default
and foreclosure has been on the rise - partly due to the fact that with credit
tightening and a soft real estate market, many troubled homeowners are unable to
refinance or sell in order to get out of trouble. So now, these end institutions are
demanding a much higher "risk premium" for taking on these pools of loans, as
they see the rates of default are climbing higher. Since these institutions are
purchasing these pools of loans sometimes months after the borrower has actually
closed at a given rate, this increase to the risk premium means that instead of
paying $101K for a $100K loan that will bear interest, they may only be willing to
pay $95K for that $100K mortgage to account for the risk. Multiply that times
thousands upon thousands of loans...and you have millions upon millions of dollars
in loss for the company trying to sell the pool at a much lower price than they were
expecting. This is called a "liquidity crisis", and is exactly what happened to
American Home Mortgage - there was no mismanagement, but they simply got
caught holding too many "hot potato" loans, forced to sell them at massive
losses...and eventually they had to make the decision to close the doors and stop
the bleeding.
Further, even when a lender is able to take some losses, they may be subject to a
"margin call". This means that as their losses and risk premiums increase, the value
of their loan portfolio decreases. As the value decreases, the credit lines that are
secured by those portfolios begin to issue margin calls as the value of the asset
that they are secured on is now diminished. This is exactly like margin calls in the
Stock market. If you have a loan against a Stock that is losing value, you will get a
"margin call" and need to pay down the loan, as the underlying Stock is losing too
much value to be considered adequate collateral any longer. So for the big
lenders, as their portfolio is losing value due to increased risk premiums and
losses...the margin calls start coming in, and they are required to pay down their
balances. In turn, this means that they have less availability to fund their new loans,
which then exacerbates the problem.
In response to seeing this situation play out in the demise of American Home
Mortgage, lenders of other non-conforming loan products increased their interest
rates dramatically almost overnight to be better prepared - and likely over-prepared
- for increased risk premiums down the road. Even though loans above $417K are
not presently suffering from increased delinquencies like the Subprime and Alt-A
loans are, these rates popped higher as well, because they are being purchased
by smaller private entities that can't afford to take on any margin of risk.
What happens next?
The major damage is probably already done, and the present situation will likely
settle out over the coming year. Lenders will stop pulling products off the shelf,
and the rates on products that have moved so significantly higher now should trend
lower down the road as delinquency rates stabilize.
But here are a few important things YOU should do right now:
ONE: Even if you are not presently in the market for a home loan of any type,
make sure that your credit standing is as solid as possible. Many people in the
market for a home loan didn't expect they would have a need, and didn't plan in
advance to ensure their credit would qualify them for the best possible financing.
With no immediate need for a home loan, time is on your side... why don't we take a
few minutes together and just make sure you are prepared, should a need arise
down the road? Call or email Georgia Custom Mortgage right away.
TWO: If you are in the market for a home loan, or know someone who is -
understand that now is the time to be working with a real qualified professional who
can keep you informed of changes in the market and get your loan funded quickly.
Now is NOT the time to be playing the risky game of trying to scour the entire nation
to find someone who promises to save you a paltry amount on costs, or deliver a
rate that seems too good to be true.
Your home and your financing are just too important, and times have changed. We
are here to help and advise during these volatile times - and would welcome calls
from you, your friends, family, neighbors or coworkers.