Today’s Mortgage Market – An Informed Opinion

September 26, 2008

The following article was written by Eric Nelson, Broker/Owner of The Honte Group, a skilled and talented mortgage broker. Eric can be reached at enelson@thehontegroup.com or at 408-457-6052 if you have questions about getting a mortage today. This article was previously printed in the Almaden Times.

What goes up, must come down……

Sir Isaac Newton

If we didn’t know better, we would assume Mr. Newton was speaking about real estate and the volatile mortgage market. So, just what is happening and what does it all mean? Fannie Mae and Freddie Mac requiring a bailout, the investment banks also needing a bailout, perhaps you wonder when your turn will occur?

First, Fannie Mae and Freddie Mac are the agencies that oversee the purchasing of mortgages, and in turn these mortgages are sold as securities on Wall Street to investors. Investment banks such as Goldman Sachs, Merrill Lynch and Morgan Stanley are companies who converted these mortgages into investment vehicles which were highly profitable for several years until the real estate market hit its peak in 2006.

While riskier loans were being made, the fact that home values continued to rise allowed investors to sell if they got into financial trouble and still make a profit.
When market values leveled and then began to drop, the house of cards also followed.

First, it was the Sub Prime market that fell. Sub Prime mortgages are done for clients who do not have above average qualifications, typically below average credit or income.

Second, it was the speculators’ turn, with values dropping many properties became over encumbered and in turn chose to walk from the property when the equity was gone.

This began a wave of unprecedented foreclosure activity, and in turn began to sink banks like Indy Mac. Most banks saw their stock value drop to dangerously low levels and in turn became vulnerable to takeovers and mergers.

At some point, the news became so grim that the financial markets both in the U.S. and internationally reacted, with dramatic drops in stock and cash positions. This has in turn led to government intervention, first with the bailouts of Fannie and Freddie and then in a low cost loan to AIG, a major insurer of mortgages.

Conforming loan limits were raised, and lending standards became stricter overnight. Loans that offered payment choices without covering all the interest due were eliminated, as were the no income verification loans over $417,000.

Last week President Bush announced a $700 billion bailout for mortgages that are failing. The creation of another Resolution Trust Corporation was recommended to oversee the servicing and handling of the failing mortgages. This would appear to be the end of the road for government involvement due to the extreme cost of cleaning up this mess.

This is not the first time that we have seen banks over commit themselves with risky loans. In 1989, many Savings and Loans paid the same price as today’s banks are, either losing liquidity or going away all together. It took 3 years then, and is likely to be the same story now.

So, what does it all mean? Are there any opportunities with mortgages that could benefit you? Not surprisingly, Almaden Valley has mostly held its market value and mostly avoided the foreclosure bug. Loan delinquencies are far lower, and in turn open up more opportunity in the market place.

The financial market upheaval has led to interest rate fluctuations that have been mostly lower. The safe harbor loan of a 30 year fixed is back in vogue and many clients are seeing great flexibility in interest rates if they have good quality qualifications.

Market values all over the county have dropped, meaning you can purchase much more today than 2 years ago. In Almaden, there are still many reasonably priced homes for sale.

What’s on the horizon? With the presidential election just weeks away, there will be an impact on the market regardless of the winner. There will be considerable pressure on the new president to stabilize both the stock market and the real estate market.

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