Real Estate Insights

Most of you are already aware of the scare rippling through the stock market caused by the continues folding of lenders and hedge funds, and if you are not aware then you might want to see what CNBC’s Mad Money host Jim Cramer has to say about the situation: http://www.cnbc.com/id/15840232?video=452808336. 

Here is a quick recap of some of the shake up that has been happening in the lending world over the past few days...we have seen a lot of well known lenders, particularly in the Alt-A markets (jumbo loans and stated income programs), stop accepting new loan applications and even go out of business because they could no longer sell the loans they have been acquiring. For a current list of lenders who have recently folded go to http://ml-implode.com.  Because these lenders have been unable to sell their loans to the secondary mortgage market, we might be seeing the beginning of a credit crunch – that is, if no investors are willing to purchase these securities backed by Alt-A loans, then a.) the price of these loans will increase – interest rates will go up, which is the reaction we are seeing from Wells Fargo, or b.) possibly disappear altogether, leading to a “tightening” of credit.

Since, every bank and mortgage bank eventually sells the loans they originate and purchase in the form of Mortgage Backed Securities (MBS), banks need an outlet for the loans they originate or they will not be able to make any new loans and thus will not stay in business. Mortgage Backed Securities basically trade on Wall Street like bonds - treasury, corporate etc.  When a bank takes a MBS to the secondary market to sell, these securities are sold at a premium (more than the face value) or a discount (less than the face value) depending on the quality of the paper and the associated weighted average coupon (rate).  When the securities are sold at a premium, the lender will make a profit, and when they are sold at a discount, they will take a loss. This is how these mortgage lenders make their money.

Last week and into this week many lenders/banks had to sell their MBS at an unexpected discount, and in some cases didn't get bids at all, particularly on their Alt-A products, which is known to be risky and on the lower coupons (rates).  This has led to many lenders pulling their Alt-A products entirely and rate aggressive lenders (that may also be associated to high risk product – Wells Fargo) increasing their rates on these products.  Most of the lenders who have folded so far have been institutions who have relied on the ability to borrow money on margin and then lend out in the form of home loans with the expectations that they will be able to sell the loans in the form of MBS on the secondary market, make a profit and remain liquid enough to continue doing business avoiding having their margin loans called in.

This shift in the market place essentially means more vanilla type product (full doc conforming loans) will be desired by securities investors, while the demand for riskier Alt-A is diminishing. These products will still be offered by those banks with the means to lend out on their own money rather than borrowed money, but at higher interest rates the market will bear to take the risk on. So, we will be seeing higher interest rates than usual on less than A-paper and jumbo loans.

This leads us to the $6 million dollar question: HOW WILL THIS AFFECT YOU?  The affects, if any, will be noticed over the next six months or so and will be partially based on the reaction of the Fed to the current market hoopla.  But, however the Fed reacts, most homeowners will be fine as long they have loans with interest rates that are locked in for another couple years or so.

As long as we can weather the current storm then we should come out of this cycle in a better position.  Keep in mind that what seems to be the current market imploding on itself is actually just the mortgage market becoming more conservative and re-balancing as it was back in pre- housing boom era – prior to 2003. Lending guidelines were stricter and money was tighter. As money became loose in 2003-2005, more and more people were able to afford the purchase of a new home which was one of the major contributing factors behind the housing boom. Now that we are headed in the down cycle, everything just needs to re-adjust.

The people who may feel the affects the most are those in loans that will become adjustable in the next six months or so. For anyone needing a refinance, there is now a huge strain in the lending industry as money pools continue to dry up, interest rates are increasing, and underwriting guidelines are getting stricter. But do not panic, there are still plenty of lenders available who are more than willing to help homeowner’s refinance, so if you consider yourself in the later group and would like to know your options, please do not hesitate to contact me and I can go over your current financing and help you determine if you will qualify for a refinance.