Mortgage News
Current State of Mortgage Lending
This is to clarify the current volatility being experienced by the mortgage industry?
This is a historic time in the mortgage industry. I have spoken with several mortgage industry veterans that say they have never seen anything like we are experiencing today.
Here is a little background on how the mortgage industry operates. Most lenders are not like banks where they bring in actual deposits and lend the money back out to their customers at higher rates. Most of today’s lenders lend money to consumers and sell the loans to investors on the secondary market or Wall St. These loans are safe and backed by real estate so they are easily sold to mutual funds, pension plans and investors in other countries. Interestingly the money we borrow to buy our homes comes from us when we invest the money we earn. So for example a lender funds a $100,000 loan at 7% interest rate. The investor buys that loan for $101,000 so the investor is happy because they are now receiving interest income of 7% and the lender is happy because they have sold the loan and made a profit of $1000.
Now fast forward to the current situation.
When a lender funds loans they group many loans together and sell them to investors on the secondary market called pools worth millions of dollars. Since the housing market has slowed and delinquency rates have increased the investors are looking much closer at non-conforming loans and have adjusted their “risk tolerance,” in other words investors that purchase non-conforming loans want more reward (higher interest rate) for their increased risk. In simple terms, that means a week ago the investor that wanted a 7% interest rate to purchase a specific non-conforming loan may now want an 8% rate to purchase that same loan. Compounding the problem lenders are not sure exactly what rate the investors will want to purchase these loans. The “Liquidity Crisis” is created when the investor wants a higher rate of return the lender is forced to discount the mortgage. So the $100,000 loan from the example above will be sold for $95,000 instead of $101,000. Now the lender, not only misses out on $1,000 profit, they loose $5,000 to sell the loan. Looking a one of the nation’s large lenders this example happens thousands of times each day. So lenders have to make the decision to keep loosing money, if the can afford it (liquidity), or close their doors and stop funding loans.
What has brought this on is the explosion of non-conforming loans that have been funded in the last two years. This included Option arm loans, stated income, no income, and high loan-to-value second loans. To show you the magnitude of the non-conforming loans over 33% of all loans funded in the last two years have had an interest only component. So all loans that will not meet the conforming guidelines for loan amount, credit, and income requirements saw dramatic rate increases on Friday August 3, 2007 as lenders attempted to protect themselves and estimate what rate of return the investor would require. Other than the Alt-A and exotic loans that fit this criteria, jumbo loans were also affected (loans over $417,000). We have not seen increased delinquency rates on jumbo loans but they are purchased by private investors so they were included as well.
This reaction by the lenders was necessary for them to protect themselves against funding loans they could not sell. As the credit markets stabilize over the coming months the mortgage industry will begin to settle. They will have a better idea of what the investors will require to purchase loans. Rates on some programs will return to more normal levels. Many lenders have begun eliminating select non-conforming loan programs from their product offerings. The majority of the programs being eliminated have been reduced documentation type programs and option arms.
I have several ideas on how to restructure loans that have been affected by these sudden changes. I still have a wide variety of loan programs to help clients. This is a time to be working with a true mortgage professional. This a difficult time in the mortgage industry and you have to stay informed and on top of this very dynamic market to inform you clients and keep them calm.
This is a developing story and I am monitoring it very closely. If you would like more details please give me a call.
Larry Iest
Hemet Mortgage
951-929-6405
Copyright Hemet Mortgage 2007
