The mortgage Industry's Woes, What Does It Mean?

Well... my previous forecast while calling for tightening of guidelines and a resulting vicious circle of too much inventory and not enough buyers has just gotten worse.

What exactly is going on?

Let me start by explaining the hierarchy if the mortgage lending industry. You purchase a home and apply for a mortgage from your local broker or bank. They close the loan through a wholesale lender who funds the loan with their money. The wholesale lender then packages your loan with a bunch of other like loans and sells them to a Wall Street firm or if they are large enough they securitize them themselves and sell them as such in the marketplace. In either case they get their money back plus a small premium over what they paid your broker or bank. Now these mortgage backed securities (MBS) are purchased by large asset funds created by the large wall street firms to give their large personal and corporate clients a place to invest their cash, and believe me, there is plenty of cash out their to be invested!

Got it?

Now youve got billions of dollars worth of these exotic loans like pay option ARMs, Stated income, No Doc, etc. at high loan to values ( 95% - 100% ) that were made over the last 5 years sitting in these big asset funds. Now these loans start to adjust, some as little as 2-3% above the original note rate but a lot more are even higher like the case of some pay option ARM's(6-6.5%) above the low rate option.

Now it doesnt take a rocket scientist to figure out what happened next, right? You guessed it, housing prices stabilized or went down and folks couldnt refinance their way out of the loans so they defaulted and foreclosures rose! Here is where the vicious cycle comes in, the more loans that defaulted, the tighter the guidelines got because the secondary market ( Wall Street ) wouldnt buy these riskier loans and then more loans defaulted and the guidelines got tighter, and so on, and so on.

Back to our friends with the large asset funds that are chock full of these types of loans.

Those loans that defaulted are no longer making their payments and if no payments are being made, no interest is being paid (which is the funds source of income from these loans) so these loans have no value, they are non performing assets. On top of that the market no longer accepts these types of loans so the funds cant even sell the loans that havent defaulted yet! Oops!

Now this is a somewhat simplified version, I could get into more complexities but, for the purposes of this forecast and the broad audience it reaches, I think you all can get it.

O.K. what does all this mean to you the consumer? Quite simply, you will have to have more skin in the game ( down payment or equity ), document your income and your assets and have a middle credit score of at least 620 (680 or higher will get you a better rate).

Oh, youll still be able to get a stated income loan but it wont be for anymore than 80% of value and you will have to have the assets commensurate with your stated income as determined by the lenders guidelines.

As for the pay option ARMs, theyre dead and dont hold your breath waiting for their return!

Expect these conditions to exist for the next 12 to 18 months. Values across the country should stabilize or begin rising by then.

But hey, if youve got the bling there are going to be some good deals out there as people will be willing to unload their properties at a lose rather than go into foreclosure.

As with any other part of our economy the consumer always pays the price so, if you are looking for a mortgage you will probably pay a rate that is a .250% - .375% higher than if these conditions did not exist.

My advice if you have an adjustable mortgage that has gone up recently, go into conservative mode and try not to take on any new debt. These conditions will smooth out in the next year to a year and a half, and in that time you probably will only see one more rate increase that should be smaller than the last one.

Thats as complex as it gets folks!

Warm Regards,

JT

I am a 15 year veteran of the mortgage origination business whose experience spans large financial institutions to Brokers. I have seen so many people(in positions that one would associate with intelligence) get led by slick talking originators into over paying for a mortgage!

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Stop acting Based on Misunderstandings about What's Going on and Accomplish 20 Times More

Organizations are hobbled by false beliefs that have always rested on faulty evidence. Those false beliefs waste resources, time, and effort by focusing attention in unproductive and counter productive areas and activities.

Here's an example: For most organizations, good ideas are 20 times more likely to come from outside the organization than within. Yet most organizations assume that almost all good good ideas will come from within and focus time, attention, and resources accordingly. It's like trying to grow strawberries in the the shade; those sun-loving plants won't do well if you believe they prosper best in the shade.

The misunderstanding-of-the-facts stall (a bad habit that reduces results) is particularly harmful because some of your best people already realize that you are operating on faulty assumptions. Since actions based on those assumptions are folly, these key employees are losing faith in the future of the organization and the quality of its leadership. Soon, you may find recovery from your mistakes is made more challenging as your most talented people seek other opportunities.

Misleading Beliefs: The Danger of False Assumptions Abounds

How is a misunderstanding-of-the-facts stall different from a disbelief stall? A disbelief stall is based on something that was once true, but no longer is. A misunderstanding-of-the-facts stall is based on a perception of the situation that was never true. Here are some examples of harmful misconceptions:

The future can be accurately forecast.

Competitors will stand still while we make rapid progress.

Agreement among colleagues means that issues are understood.

Customers will continue to make the decisions in the same ways they always have.

All long-held assumptions and beliefs should be questioned. Ask yourself:

Is it really true?

If it isn't true, why do people believe it to be true?

What's needed to persuade people to change their beliefs?

Titanic Misconceptions: A Stitch in Time

The fate of the Titanic illustrates several dimensions of the misunderstanding-of-the-facts stall. It was an obvious misunderstanding of the facts to believe that the ship was unsinkable and to provide too few life boats for the passengers and crew. We have learned from that error. Today, we've learned from the Titanic's experience and all liners are required to have enough life boats for everyone.

The actual sinking related to a different misunderstanding of the facts, one about the weather. Normally, icebergs in the North Atlantic would have been found floating far north of the Titanic's path on that frigid night in April 1912. The captain disregarded a report from another ship that icebergs had moved to a more southerly latitude. Why? He believed that icebergs never traveled that far south during this season. If the captain had double-checked with other available sources of information, such as other ships and shore stations, he might have gotten a confirmation that icebergs were loose in his area in time to slow down and avoid the sinking. None of the 1,503 deaths would have occurred had the ship slowed down in the iceberg-infested seas, or, better still, had the captain chosen a more southerly route where there were no icebergs.

The ship's contact with the iceberg was made worse by a command to turn away from the looming iceberg. It's anyone's instinct to avoid a collision. In this situation, that instinct was based on a misconception. While many would have suffered broken bones and some would have died from injuries during a head-on collision, the Titanic would probably not have sunk after such a collision. Few of its watertight compartments would have been breached. Because the ship turned, the iceberg slashed along the entire length of the ship on one side, resulting in almost half the watertight compartments being breached. If all those compartments filled with sea water, the Titanic would sink. None of its designers had ever considered the possibility the ship would sideswipe an iceberg along so much of her length.

Once struck, another misconception sealed the ship's doom. No one checked soon enough to see how severe the damage was. Subsequent investigations have shown that the total area breached in the ship's side was less than ten square feet, across many different "watertight" compartments. With fast action, rescue crews could have placed mattresses and waterproof liners over enough of the gashes in the least damaged compartments to have kept the ship afloat until rescuers arrived.

Passengers also didn't want to take their chances with an early life boat in the North Atlantic, feeling they were safer on board. Many of the life boats were launched without a full complement. Many other life boats couldn't be launched later because the ship was listing so hard on the side where the iceberg struck its sideways blow.

Once the Titanic was in peril, misunderstanding of the facts once again weighed in to create unnecessary harm. The captain of the Californian, a nearby ship large enough to rescue everyone aboard the Titanic, was alerted by the watch that Titanic was launching distress flares. The captain decided these pyrotechnics must be some kind of celebration and sailed on. All this captain had to do to avoid this mistake was to wake up his radioman and ask the Titanic, "You're not sinking, are you?"

The lesson to be learned is that we can change course and avoid icebergs that can mortally damage our organizations. We don't have to steam at top speed through treacherous waters without enough life boats simply because we misunderstand the dangers.

Copyright 2007 Donald W. Mitchell, All Rights Reserved

Donald Mitchell is CEO of Mitchell and Company, a strategy and financial consulting firm in Weston, MA. He is coauthor of six books including The 2,000 Percent Squared Solution, The 2,000 Percent Solution, and The 2,000 Percent Solution Workbook. Free advice for accomplishing 20 times more is available to you by registering at =====> http://www.2000percentsolution.com

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