The screeching sound by Jordan Graham

The screeching sound of the mortgage industry, hitting the brakes

That screeching sound you hear is the mortgage industry hitting its brakes as hard as it can.

Every week brings the news of yet another mortgage company closing; and I'm not talking about single office brokerage firms -- these are publicly traded lenders whose stock prices have tanked, just like when the dot com bubble burst.

I've just finished reading an outstanding article on the subject by Gretchen Morgenson in yesterday's New York Times business section, which reads in part:

"On March 1, a Wall Street analyst at Bear Stearns wrote a surprisingly upbeat report on a company that specializes in making mortgages to cash-poor homebuyers. The company, New Century Financial, had already disclosed that a growing number of borrowers were defaulting, and its stock, at around $15, had lost half its value in three weeks.

What happened next seems all too familiar to investors who bought technology stocks in 2000 at the breathless urging of Wall Street analysts. Last week, New Century said it would stop making loans and needed emergency financing to survive. The stock collapsed to $3.21."

It seems that just as borrowers have been eager to overspend on housing, borrowing as much as they possibly can using mortgage products designed to extend their reach into debt even further, investors have been greedily funding these borrowers' habit, buying mortgage-backed securities based on these loans. Ms. Morgenson goes on to say:

"Investment manias are nothing new, of course. But the demise of this one has been broadly viewed as troubling, as it involves the nation’s $6.5 trillion mortgage securities market, which is larger even than the United States treasury market.

Hanging in the balance is the nation’s housing market, which has been a big driver of the economy. Fewer lenders means many potential homebuyers will find it more difficult to get credit, while hundreds of thousands of homes will go up for sale as borrowers default, further swamping a stalled market."

Getting technical, let me say that these mortgage-backed securities are mostly offered in the form of bonds. These bonds, like the mortgages on which they are based, are “promises to pay,” and investors gauge their risk by seeing what quality the bond rating agencies (like Standard & Poor’s and Moody’s) assign to them. As borrowers default on their loans, quality drops on the underlying securities that hold them. Morganson observes:

“Nevertheless, some investors wonder whether the rating agencies have the stomach to downgrade these securities because of the selling stampede that would follow. Many mortgage buyers cannot hold securities that are rated below investment grade — insurance companies are an example. So if the securities were downgraded, forced selling would ensue, further pressuring an already beleaguered market.”

How does all of this affect you? If you are trying to sell your home or are thinking of doing so this year, these market forces are going to work against you. On the other hand, if you’re buying a home – either as a personal residence or as a rental property – you’re in luck: With over 25,000 homes for sale in the Denver market (and many more coming soon, with the summer moving season and more foreclosed homes hitting the market), the next few months should give you great opportunity.

If you’re not interested in buying a home, it seems to me – all else being equal – that these market pressures are going to help keep interest rates low. Just last week I quoted someone 5.750% on a 30 year fixed rate mortgage (whereas a typical 5-year ARM coming out of its fixed interest rate period today is shooting up to 7.42%), so if you’re one of those clever people who took advantage of the crazy low ARM rates a few years ago, now is a great time to refinance into a fixed rate loan.

By Jordan Graham

Permission to republished by Jordon Graham Copyright 2007

Mortgage Terms

• Advance This is the money you have borrowed plus all the additional fees.

• Base Rate In UK, this is the base interest rate set by the Bank of England. In the United States, this value is set by the Federal Reserve and is known as the Discount Rate.

• Bridging Loan This is a temporary loan that enables the borrower to purchase a new property before the borrower is able to sell another current property.

• Conveyance This is the legal document that transfers ownership of unregistered land.

• Disbursements These are all the fees of the solicitors and governments, such as stamp duty, land registry, search fees, etc.

• Early Redemption Charge / Pre-Payment Penalty / Redemption Penalty This is the amount of money due if the mortgage is paid in full before the time finished.

• Equity This is the market value of the property minus all loans outstanding on it.

• First time buyer This is the term given to a person buying property for the first time.

• Freehold This means the ownership of a property and the land.

• Land Registration This is a legal document that records the ownership of a property and land. This is also known as a Title.

• Leasehold This means the ownership of the property and land for a specified period, which may be sold separately from freehold, which may be owned by another person.

• Legal Charge This is a legal document that records the data of the rightful owner of a property or land.

• Loan Origination Fee A charge levied by a creditor for underwriting a loan. The fee often is expressed in points. A point is 1 percent of the loan amount.

• Mortgage Deed This is a legal document that stated that the lender has a legal charge over the property.

• Mortgage Payment Protection Insurance This is a form of insurance that ensures that the current mortgage payment will be paid if the borrower provs unable to do so.

• Private Mortgage Insurance This is a form of insurance the lender has the borrower take for loans over 80% of the appraised value. This will pay the lender only the owed portion up to 80% on a defaulted loan.

• Sealing Fee This is a fee made when the lender releases the legal charge over the property.

• Subject To Contract This is an agreement between seller and buyer before the actual contract is made.