Mortgage News that Matters

I was watching MSNBC this AM and their coverage on the "subprime mess". The talking head stated that the Fed is conducting a bailout by increasing the funds available to purchase Mortgage Backed Securities. He wasn't given an opportunity to explain himself as time expired, but I thought this an appropriate venue to explore that statement.

First, I find it interesting that we are even talking about subprime. This latest correction is due to the Alt A collapse, not just the subprime mess. This has increased the level of risk to Wall Street, REIT's and Hedge Funds, as well as many banks and foreign countries who hold these debt instruments. But it's not just a subprime thing any more.

But, the Fed allowing Fannie Mae and Freddie Mac to purchase more loans isn't necessarily relevant to the "bailout" picture.. It's like comparing apples and oranges. Fannie and Freddie offer what are called Conforming loans. These have strict underwriting guidelines with few, if any exceptions. Subprime and Alt A loans have a different set of underwriting guidelines. They are (were) able to fund loans that were completely outside of the scope of the Fannie and Freddie guidelines. True, many who were placed in these subprime or Alt A loans could have qualified for a conforming loan, but that's a topic for another blog.

What the Fed has done is made more credit available for the purchase of conforming loans. With the secondary market for Alt A loans temporarily drying up, there needs to be a channel for loans to be placed. THIS IS IMPORTANT!! Unless the Fed or Congress mandates that Fannie and Freddie relax their underwriting guidelines to take loans that were formerly only available through subprime or Alt A, we do not have a bailout. We have actually seen the opposite. Fannie and Freddie guidelines have tightened over the last few months to compensate for the increased risk. What they are doing is providing the ability for more mortgages to be placed with a conforming product.

Over the last few years we saw Wall Street programs that were priced very aggressive. Conforming programs could not compete on some of the riskier loan scenarios. Now, they are either competitive, or the only game in town.

My take? We are in a period of correction. Our greed has helped us get here and we will bounce back. The Fed doesn't need to, nor should it, bailout home owners or mortgage holders for bad decisions. They should ensure that there are avenues for new loans to be placed at affordable rates. But this does not mean that everyone who owns a home now should be able to keep their home. Many bought who shouldn't have. If a crime was committed, we have laws and a court system to deal with the bad players.

Strong borrowers can still get great rates and loans. Cheap money for risky loans is gone, but is that a bad thing?

Most importantly, we live in a free market system and we are seeing the effects. Our system allowed us to get here and the markets will correct themselves. Put on your seat belts and hang on. It could still be an interesting ride...

This has been an incredible week. We have seen several more lenders go out of business and almost all of the others tighten their lending criteria. I have seen guidelines change several times within a week. Countrywide, the nations largest lender, has been on the ropes for the last few weeks.

While they are having issues, they are still one of the strongest players in the market and that's where I still send most of my loans. In Portland at least, it's business as usual for Countrywide.

In today's markets, Durable Goods Orders soared in July, scoring their largest gain in about a year. This report is volatile from month to month, so Bonds didn't react much on the strong economic news.

The New Home Sales report was better than expected. The monthly sales inventory came in at 7.5 months, which is less than last month's reading and well below March's reading of 8.3. Overall this is a pretty good housing report considering the present landscape in the lending industry.

Due to the events in the mortgage and housing sector, a number of economists believe the economy is moving toward a recession. My sources believe the Fed will soon begin to cut short-term interest rates in an effort to help the economy avoid this.

Bonds are trading in a sideways pattern along key levels of support. I am continuing to advise floating as long as the Bond remains above this solid floor of support.