The head of our mortgage bank suggested I write a column on the challenges that the mortgage industry is facing and I agreed. I had one concern: I need to find out myself!
Not easy! The industry is suffering my greatest fear:" airplanes really can't fly, it's just that everyone in the plane thinks it can so it maintains through this positive energy". A bit crazy, but no more than what is happening in the industry. Everyone on Wall Street feels that every property in America is in danger of going into foreclosure and therefore they do not wish to buy the mortgage backed securities. No bids means eventually, no business.
Before I get into the underlying problems, and some ways to solve them I want to give some background. There are three main ways that mortgage loans get funded: GSE's, Portfolio Lending and Securitized Mortgage Pools. GSE's are Government Sponsored Enterprises such as Fannie Mae, Freddie Mac and Ginny Mae. These enterprises are sponsored by Congress and supply most of the money for the conforming loans in this Country. In fact Conforming Loans get their name from the fact that they conform to the rules of Fannie Mae and Freddie Mac. These loans are currently limited to a $417,000 maximum for single family residences except in Alaska and Hawaii where the maximum is $625,000. Duplexes, triplexes and four -plexes have higher limits.
Banks can portfolio (use their depositors money to fund) any type of loans they wish but I find that the loans they put into their portfolios are typically arms with fixed periods from 3 years through 10 years. They have their own underwriting criteria and are fairly specific as to the type of borrower they are looking for to be the recipient of their loans.
Securitized mortgage pools, made up of a wide variety of loans, are sold to investors generally through a Wall Street conduit. These loans can run the gamut from fixed to variable, from sub-prime to Alt A and prime loans as well. The pools are assessed for risk and are sold at corresponding interest rates: higher for more risky pools, lower for less risky mortgages. The big problem in the mortgage industry is in this area of loans. There aren't currently any bids as the investors are totally unsure of what is happening to the collateral: the underlying mortgages. How many foreclosures are there? Where are the biggest risks in terms of products and categories of borrowers. What should the pricing be for these loans and borrowers ? REALIZE that in the end it is what the loans will sell for to the investor who finances these mortgages that will determine the rates paid by the borrowers.
Roger Schlesinger's Mortgage Minute is heard on hundreds of radio stations and daily on the Hugh Hewitt radio show and Michael Medved shows. Roger interacts with his hosts and explores the complicated financial markets in order to enlighten his listeners and direct them along their own unique road to financial freedom.