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2007-02-22 12:39:00

Money -- The Times, They Are A' Changin'

Steve Dexter, author of 'Rich in Debt'


Is it true that bank underwriters will tighten up, loans will be harder to get and the main game in town becomes seller financing like we had in the 1970s and the 1980s?

Lenders will lick their wounds and retrench, interest rates may rise and less loans are made as soft real estate markets will have a dragging effect on the national economy.

Economists estimate that slowing housing sales will slice a full percentage point off the national GDP. The buy/sell market becomes illiquid because the banks have to work their way through all the property they are taking back (REOs).

So will it be harder to get a loan? Maybe not. That tightening scenario doesn’t look to play out quite the same way this time.  Banks got money to lend because of the flood of mortgage money coming to an American debt market fueled by the worldwide savings glut. China, Japan, South Korea and other overseas investors have a boat load of our dollars tfrom investments in dollar denominated securities like Treasury Bonds and Mortgage Backed Securities (MBS’s).

Despite China holding a monetary weapon over the United States in the form of our IOUs, they have not lowered the boom and they continue to buy our debt. If that would ever change and they wanted to cash in, the damage to our economy would be devastating.
The good news for us is that Wall Street investment bankers can now assess risk more accurately than ever before.  As some lenders tighten up and pull back from the market, others jump in to fill the void. Many lenders are becoming more aggressive.

I write in my book Real Estate Debt Can Make You Rich that the variety and types of loans available to investors and homeowners have exploded! This Home Loan Explosion evidenced by this vast profusion of loan products is caused by three factors:

1. There is extreme competition in the secondary market place to generate more loans. In America we have the most sophisticated financial market the world has ever seen. After any loan funds on the mortgage bankers credit line, the vast majority of them are sold in large bundles on the secondary market. Those loans are securitized in $5-100 million lots and are bought and sold as fixed income products. If you invested in Ginnie Mae or Freddie Mac mutual funds you have money invested in home loans.

These investors continually assess the risk of how many of these loans are likely to become delinquent. Investment bankers like Fannie Mae Bank or Freddie Mac will aggressively create new loan products to meet new niches so they can stay in business. People having more choice in the type of loan tend to buy more property and refinance more often.

2. Fixed income investors have insatiable appetites.

There is much domestic and international capital pouring into mortgage products. Home loans secured by American real estate are perceived to be almost as safe as U.S. Treasury Bonds. U.S. Treasury Bonds, despite what you hear, are widely known as the safest investment in the world. So overseas banks invest heavily in them be cause the yield is 2-3 % higher than the Treasuries.

There has to be enough fixed income product to meet the wave of capital coming to our shores. New loan products are invented to satisfy the demand

3. The easy to reach market is already satiated.

Loans are becoming ever more specialized to target different segments of customers. People having the most popular 30-year, fixed-rate loan have already been reached. Since that market is limited, investors continually ask themselves, "What do home owners and investors need?"  and "What products will the marketplace bear with acceptable risk?"

(Steve Dexter is the author of Real Estate Debt Can Make You Rich. He is also a loan officer licensed in AZ, CA, CO, CT, DC, FL, HI, ID, MD, MI, MN, NV, OR, UT, VA, WA.)

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