Liquidity and Securitization
Posted at 11:14 AM, Oct. 8, 2007
Submitted by: Edward Fallon, Carteret Mortgage Corporation
Why is it that buyers who were readily approved less than a year ago find themselves unable to get a mortgage? The
answer lies in the problems the mortgage industry is experiencing with liquidity and securitization.
In 2006 subprime mortgages accounted for about 20% of the mortgage market, a big increase from just a couple years
before. Equally important, though, are Alt-A and Jumbo mortgages. Alt-A is defined as having credit between Prime and
Subprime, but also includes "No Doc" loans that increased dramatically over the past few years. Jumbo loans exceed the
conventional conforming loan limits set by Fannie Mae and Freddie Mac. Alt-A and Jumbo accounted for roughly 20% and
10%, respectively, of the overall mortgage market in 2006. Add these numbers up and it accounts for 50% of the buyers
in 2006.
Presently, a mortgage company's ability to sell off these types of loans in severely constrained. That is the
liquidity problem you hear about on CNBC and other business news outlets, or at least part of the liquidity problem.
Programs were eliminated with little or no notice, guidelines were severely tightened and rates skyrocketed overnight.
It caused major lenders to implode, unable to fund loans because they were unable to sell the loans they already made.
This will continue to be the case until securitization returns. Securitization is how individual mortgages are
pooled together and securities representing interests in the pool are issued (mortgage backed securities), and how
money flows into our industry. A conforming loan, or even an FHA or VA loan, is not impacted by this because
investors trust the more rigid underwriting standards of the agencies. Due to the poor performance of securities
backed by Subprime and Alt-A mortgages, most investors have retreated from buying mortgage backed securities.
Securitization will return, sooner rather than later, but longer term consequences will remain and impact all
types of loans.
- Underwriters will become more stringent and this will result in more conditions on loans. The mortgage industry had gotten away from examining every detail of the loan which is a good thing in many ways. Current market conditions compel mortgage lenders to become more stringent in complying with every aspect of the loan decision. Expect more letters of explanation, requests for additional bank statements, last minute requests, etc. Let's help ourselves out and prepare the buyer for this, and make sure the loan officer takes a complete and thorough loan application.
- Appraisals with be more thoroughly scrutinized. Many lenders feel burned, to some degree, with inflated appraisal values the last few years. More importantly, they are concerned with the possibility of home values declining in some areas. So the underwriter is more likely to look at the comparables used by the appraiser and how he or she arrived at the value. It may mean that a lender will not allow maximum financing in some areas. Appraisal values will become increasingly important so work with the appraiser to have him or her understand how you arrived at the value.
- The wider difference in interest rates between "No Doc" and full doc loans will remain. The investors that buy these loans now see the increased risk that results when we don't document someone's income. That difference was somehow minimized over the past few years. No more. If you can't document your income, you will pay more of a premium and be required to have a larger down payment.
- Rates don't matter if you can't get the loan approved. The importance of a knowledgeable loan officer, backed by a good support staff and reasonable underwriters, will become more important. My proof of this is the number of horror stories I have heard over the past 45 days involving mortgage problems, many of which could have been averted if handle properly from the beginning.
Many of us remain optimistic about the local real estate market for good reason. The impact of the problems besetting
the mortgage market will not impact us as severely as it has states like California and Florida. That doesn't mean
there won't be challenges, but if we identify these challenges, we can work to overcome them.
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