Mortgage Meltdown of 2007
Mortgage meltdown.... Lenders in trouble.... Loan problems... What????? You might be saying. What meltdown, there’s no mortgage meltdown…is there? Depends on who you talk to but I think it’s not so outlandish to use that term when medium to large financial mortgage lenders go bankrupt or leave the mortgage industry on almost on a daily basis. A mortgage meltdown but be a good term to describe what is going on.
In recent weeks we’ve seen small and large non-prime lenders (mortgage companies that lend to people that have less than perfect credit) have their world turned upside down. These lenders are having serious trouble. Here is a basic rundown of how these sub-prime lenders operate. They start off with a “warehouse line” (a “warehouse line” is a line of credit from a large bank like Bank of America or investment bank like Merrill Lynch) of hundreds if not billions of dollars. These lenders go out a find people to lend this money to. After these lenders close a loan, they’ll package that loan with hundreds if not thousands of other loans and sell them on the “secondary market” [similar to a stock exchange where sellers (mortgage lenders) sell their mortgages to buyers (pension funds, hedge funds etc.)] for a profit. After selling for a profit, the lenders will then take that money and payback those loans they received in the first place.
It all worked very nicely for the last 5 years but that all came to end in 2007. The packaged loans selling on the secondary market were no longer selling for a profit and soon were selling at a steep loss. These lenders were also facing ”buy-back” problems (buy-backs are when an investor who bought loans on the secondary market requests the lender to buy-back a loan due to fraud or missed early payments) and these lenders had little or no money to buy-back these bad loans. As a result, lenders closed their doors. In less than 3 months, over 30 lenders have left the mortgage industry or filed for bankruptcy. The lenders that remain have serious credit flow problems and have introduced serious restrictions on who they will lend to.
Another term to describe what is going on is a credit crunch. What ever the term you find most appropriate to describe the current problems facing the mortgage industry is really not important. What is important is that 20%-30% of he total home loan volume ($600 billion) in the U.S. mortgage industry has seen significant changes in recent months. Easy money is gone and this will cause a lot of people to loose their house and reduce the number of people that are able to buy a new home. In most respects the industry is returning to a more normal means of operation which will enable the long term health of the industry and the real estate market.
Kevin O’Connor
Mortgage Consultant
www.koloans.com
800.550.5538
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