Tuesday, August 07, 2007

What exactly is happening in the credit markets?

If you've been living under a rock, you may have no idea what we are talking about when it comes to the mortgate industry. We thought for those who are interested in real estate to give you the scoop on what exactly is happening in the credit markets:

Recent market updates have addressed what is happening in our market, but those were more directed to the good old stocks and bonds. We would like to shed some light on the bigger picture - our current lending marketplace. You have banks go under during the past few months. Over the past few days, a few other banks, prime and subprime, have frozen their pipes, and their future remains uncertain.

So what is going on? Here's the simple answer: Essentially, some banks are facing what we call a liquidity crisis. This means that they are holding loans on their warehouse lines that they cannot sell. Or at least sell them at profit. (A warehouse line is like a gigantic credit card, in which banks fund their loans and then sell them off to the investors in bulk.) So, when these banks are stuck with millions of dollars of un-sellable loans, what are they to do? Take a loss, and get them off their line. This loss, often times, is what shuts doors down on banks overnight.

(check out this article at Wall Street Journal http://online.wsj.com/article/SB118644741706689960.html?mod=loomia)

As for pricing… you have seen rates skyrocket and not follow any correlation to the bonds. Here is why: The price tags on certain products (arms, pay options, secured pay options, alt a, etc.) are tied to certain risk factors. The risk factor has increased recently, and this is due to the increase in defaults. Investors are demanding more return / higher yield for the increase of risk they are taking on. Thus, higher risk = higher price. What was once a monthly, or weekly, bulk trade / sale, is now happening almost overnight, which is why you see huge rate increases overnight.
This means you will see products that we have taken for granted GO AWAY for a while or eliminated by some lenders, such as Stated Income, Pay Options. No Ratio. No Doc. And some banks have already done this.

Please know that, whatever the market conditions, we are here for the ride and will be sure to keep you up to date on what’s been going on. If you have any questions or would like to get more information, please call us at 310-777-2858.