Pensacola Real Estate

Chandra Toop on the "Liquidity Crisis"

It's all over the news and the papers, the "liquidity crisis" in the mortgage industry.

You may have even heard about dry closings where loans didn't fund and loan products disappearing or changing causing buyers to no longer qualify. Everywhere I've been this last week I've had people asking me,"What the heck is going on ? ? ?"OK - I'll do my best to explain in layman's terms a pretty complicated process to help you understand what's happening. ...

There are two types of mortgages: Conforming loans are your FHA, VA & Conventional. They conform to certain guidelines set out by the government sponsored entities Fannie Mae and Freddie Mac and the VA and Dept. of HUD. Non-Conforming loans are everything else. These are the "Sub-Prime" loans for folks with credit issues, "Alt-A" loans for borrowers with good credit but other special needs such as stated income and/or assets, no downpayment, etc, and "Bank Portfolio loans" which is when the bank lends it'sown money.

The problems started earlier this year when sub-prime loans started having higher delinquency and foreclosure rates. As the year progressed...the Alt-A market began seeing delinquencies rise as well. Alt-A is where the problems are now. Hang in there with me - it'll start to make sense in a few minutes.

How the mortgage industry works: With the exception of Bank Portfolio loans, all other loans are sold regardless of who the customer is making their payments to.

#1 Customer gets loan from mortgage bank or broker.
#2 Bank or Broker sells that mortgage to secondary market investors likeFannie Mae, Freddie Mac and other institutions.
#3 Secondary Market investors package these mortgages as "securities" orbonds which are then sold on Wall Street to individual investors, mutual funds and others.

It usually takes around 60 days from the time a loan closes for it to reach Wall Street, which is an extremely important point to remember - keep hanging in there with me.

The banks that made the Alt-A loans set the rates based on what they were accustomed to the Wall Street investors paying for them, and built in a small profit for themselves. Wall Street investors started getting nervous about the amount of risk they were taking [with Non Conforming loans - Alt A, etc] and demanded higher rates. The big problem for the banks is that once a loan is closed they can't go back to the customer for more money [ie. higher interest rates or increased origination fees underwriting fees, etc], so rather than selling the loans at a small profit [as they had hoped to do] they were forced to take huge losses -on every loan [presumably because investors were willing to pay less for the loan than the lenders expected, which resulted in a loss of money on each loan rather than a small profit on each loan]!

Think about this . . .Thousands of loans, millions of dollars of losses per day! For 60 days! Remember that's how long it takes to get the loan to the investor after closing so the banks have 60 days worth of loans they've already made that they have to sell at a loss. The bank very quickly uses up the reserves it has - then has to decide if it can afford to borrow enough money to stay in business for the next 60days and if so - is that a smart business decision?

That, my friends is a "liquidity crisis". That is why so many lenders have closed down or cut back and why programs for your buyers [the more creative programs, more risky programs, programs which are less stringent on buyer's financial condition] are disappearing by the hour .

There is so much more to this. You need to know what kinds of financial institutions are or will be affected. You need to know what factors affect interest rates and what direction they'll be moving in. Those things I'll have to save for later in the week or first of next because this has been long already. Be sure to read the FAQ attachment - it's very helpful. Feel free to share this email and if you'd like for me to come by your office to talk to the group just let me know and we'll get something scheduled.

If you have buyers that need my assistance - I'm just a phonecall away. Peoples First is not one of the lenders at risk so I promiseI'll be here tomorrow, and next week and next year (Lord willing - as Papawalways says).

Contact Chandra of People's First Community Bank at 850-916-8105.

posted by Tom @ 6:42 AM