I don’t fully understand the mortgage lending problem going on. Can someone explain it to me or send me a link explaining it?
Bank and other lending was very loose 2005-2006 especially since mortgages were being underwritten and packaged by Wall Street and big banks and sold as securities to investors.
These securities were very attractive because the yields for other fixed income investments were low. Investor money was chasing higher risk for marginally higher premiums.
In order to keep originating new mortgages to feed these securitizations, mortgage lenders kept creating looser and looser structures (hybrids, negative amortization, teaser adjustable rates, interest only) and lending to less creditworthy borrowers. For the borrowers, money was easy to come by as home values continued increasing everywhere, justifying sometimes outrageous loans.
So, home prices cooled. People were left having to hold their homes and pay their mortgages, but many couldn’t afford them as asjustable rates were adjusting higher or, people just overstepped their limits. As defaults started rising from the mortgages originated in 2006, people started to realize that there was going to be a fallout.
Investors in those mortgage-backed securities were nervous and realizing that alot of those securities might be worth less than originally thought. Prices of the securities declined in the markets. Some funds went out of business.
Then, mortgage originators who were lending subprime were facing margin calls as fewer banks were lending to them to underwrite these loans, which were no longer popular to the investors. Some of these companies went bankrupt.
Now, they are feeling it in the stock markets too. So, some debt laden borrowers are losing their homes, some financial institutions have gone out of business and some investors are losing money and housing doesn’t seem to be picking up again.
i recently left the mortgage indusrty after 11 years at a top 5 (out of about 22,000) lender. it was scary to see some of the loans get approved. when i started at the mortgage company back in ’96 i once got yelled at for looking to get a loan approved that the borrower had 25% down payment, had credit scores of about 800 and had 50k left in investments after he closed. the debt to income ratio was 41 when the recommended max was 38. my supervisor told me he’d "make the exception this time".
when i left the company this past April the reigns were just starting to get tightened on approving riskyloans that were previously approved with no downpayment, a minimum of $500 into the transaction from the borrowers, no reserves (additional money in the bank) 590 credit scores and a debt to income ratio of 50%!!!
the mortgage industry brought it on itself by approving these outrageous scenarios and approving people for loans they could not afford. the company i worked for did not permit overages and high commissions for the loan officers. were were on a minimal base with flat fees of $60 per loan for registering and & $100 for closed loans.
from what i understand is that these high risk loans are less than 10% of the total loans getting approved and that only about 15% of that 10% are loans that are defaulting.
some real estate agents are partly to blame as well by trying to push buyers into larger purchase price homes to get higher commissions. i donlt know how many times agents told me "if you don’t approve them i’ll take them to someone i know that will".
i used to tell my borrowers that they were approved at a 50 back ratio (sometimes as high as 65) but the recommended max was 40 debt to income and asked if they realized that after taxes their take home pay is roughly 65% of their income and they do not want to have to eat ceareal for breakfast, lunch and dinner.
References :
The big buyers of mortgages are nervous… and the trickle down makes it harder for mortgage lenders to sell their loans, and thus they are tightening up on what they’re willing to approve for you the consumer. http://www.choicefinance.net/
References :
Bank and other lending was very loose 2005-2006 especially since mortgages were being underwritten and packaged by Wall Street and big banks and sold as securities to investors.
These securities were very attractive because the yields for other fixed income investments were low. Investor money was chasing higher risk for marginally higher premiums.
In order to keep originating new mortgages to feed these securitizations, mortgage lenders kept creating looser and looser structures (hybrids, negative amortization, teaser adjustable rates, interest only) and lending to less creditworthy borrowers. For the borrowers, money was easy to come by as home values continued increasing everywhere, justifying sometimes outrageous loans.
So, home prices cooled. People were left having to hold their homes and pay their mortgages, but many couldn’t afford them as asjustable rates were adjusting higher or, people just overstepped their limits. As defaults started rising from the mortgages originated in 2006, people started to realize that there was going to be a fallout.
Investors in those mortgage-backed securities were nervous and realizing that alot of those securities might be worth less than originally thought. Prices of the securities declined in the markets. Some funds went out of business.
Then, mortgage originators who were lending subprime were facing margin calls as fewer banks were lending to them to underwrite these loans, which were no longer popular to the investors. Some of these companies went bankrupt.
Now, they are feeling it in the stock markets too. So, some debt laden borrowers are losing their homes, some financial institutions have gone out of business and some investors are losing money and housing doesn’t seem to be picking up again.
References :
The current situation has a couple of causes:
Over the past 6 months the number of people unable to make their mortgage payments has increased (they’re still a very small percentage of people with mortgages, though). Many of these folks have been people with blemished credit (called sub-prime borrowers). Because of this, the people who invest in mortgages (most lenders sell their mortgages to investors) have stopped investing in sub-prime mortgages, causing many sub-prime lenders to go out of business.
Other foreclosures have been caused by people who took out an Adjustable Rate Mortgage (mortgages that have a very low interest rate at first, then their interest rate goes up depending on current rates) and then weren’t prepared to make the higher payments when their interest rate started adjusting up. ARMs can be a good tool to use in many circumstances, but most people recommend refinancing your mortgage before your rate adjusts.
This has also caused a tightening of credit standards, making it nearly impossible to get a mortgage if you don’t have good credit. Today the market is even feeling a little skittish about mortgages from people with good credit, but that is irrational and probably won’t last long.
The good news is that if you have good credit, and your loan amount falls below 440k you should be able to get a mortgage without any problem. If you look, you can even find programs that will allow you to buy a home with no money down.
If you have an adjustable rate mortgage – refinance before it adjusts if at all possible.
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