I’ve been thinking about writing a Blog post on the Mortgage Market for a while but when a newsletter arrived in my mailbox from my friend Carol Taylor of @ Home Lending of Ventura I decided to print her well written concise report on what has gone on and where we’re going.
She wrote, “As you are all aware the mortgage industry is experiencing very challenging times. I'd like to share with you what is really happening in the capital markets and what the future holds.
The last time our Industry saw a similar event occur in the capital markets was in 1998. Lenient lending standards had combined with a weaker economy to produce enormous losses in sub-prime loans. A capital markets liquidity crisis subsequently resulted that lasted for several months. Once that liquidity crisis subsided - just as the current one will -we witnessed the most important and sustained rally in interest rates, credit markets, and housing values in the history of our industry. From 1999 to 2006, unprecedented home price appreciation and a very strong economy encouraged more creative mortgage products and loosening of credit standards. The capital markets were happy to oblige our industry and invest in these loans as world-wide demand increased for financial assets with good returns. In fact, demand for mortgages became so much greater than supply that the yields received for all types of mortgage risk were reduced to levels never before seen in the capital markets.
These new investors in mortgage credit risk - with names like "CDOs" and "Hedge Funds" - began using increasing amounts of leverage to maintain their returns as yields fell. In far too many cases, these investors were inexperienced in the U.S. mortgage market and did not have the resources to properly assess the risks they were taking.
Last year it became clear, that the performance of some of the riskier loan types was quickly deteriorating. This trend was most pronounced in sub-prime loans, but was also true for some Alt-A loans. As a result, many of the highly-leveraged investors who had invested in riskier mortgages began to take losses. Over the past several months, that trend has worsened, several high-profile hedge funds collapsed and many other investors have also been wiped-out. An important part of the mortgage lending "food chain" has been effectively eliminated.
While this was unfolding, many lenders were slow to respond to the situation and continued to produce massive amounts of riskier loans at prices that did not reflect the growing liquidity risks in the secondary markets. With no way to sell bonds to investors and the originator supply continuing to flow, Wall Street dealers who are the intermediaries between originators and end investors - lost their ability to provide liquidity. Not surprisingly, finding themselves unable to sell the loans made at "old" prices. As a result, prices paid in the capital markets for all mortgage types - even "prime" loans - are falling. In short, we are watching elephants trying to fit through a keyhole.
While most of the credit losses have been contained to sub-prime and Alt-A, even prime markets are feeling the liquidity crunch. There has been a "flight-to-quality" away from even prime mortgages and into Treasuries. As a result, Treasury yields and mortgage yields have become decoupled as investors sell mortgages in order to buy Treasuries.”
Carol’s report continues by saying that despite the current problems there is some good news, and that new is that there are still lenders out there who have not suffered tremendous losses and are well positioned and re-focused on new product and feature development that is less credit intensive. She concludes by saying that 100% financing is still available and stated income products are still viable.
For more information you can call Carol Taylor of @ Home Lending at (805) 650-6333.