I was watching MSNBC this AM and their coverage on the "subprime mess". The talking head stated that the Fed is conducting a bailout by increasing the funds available to purchase Mortgage Backed Securities. He wasn't given an opportunity to explain himself as time expired, but I thought this an appropriate venue to explore that statement.
First, I find it interesting that we are even talking about subprime. This latest correction is due to the Alt A collapse, not just the subprime mess. This has increased the level of risk to Wall Street, REIT's and Hedge Funds, as well as many banks and foreign countries who hold these debt instruments. But it's not just a subprime thing any more.
But, the Fed allowing Fannie Mae and Freddie Mac to purchase more loans isn't necessarily relevant to the "bailout" picture.. It's like comparing apples and oranges. Fannie and Freddie offer what are called Conforming loans. These have strict underwriting guidelines with few, if any exceptions. Subprime and Alt A loans have a different set of underwriting guidelines. They are (were) able to fund loans that were completely outside of the scope of the Fannie and Freddie guidelines. True, many who were placed in these subprime or Alt A loans could have qualified for a conforming loan, but that's a topic for another blog.
What the Fed has done is made more credit available for the purchase of conforming loans. With the secondary market for Alt A loans temporarily drying up, there needs to be a channel for loans to be placed. THIS IS IMPORTANT!! Unless the Fed or Congress mandates that Fannie and Freddie relax their underwriting guidelines to take loans that were formerly only available through subprime or Alt A, we do not have a bailout. We have actually seen the opposite. Fannie and Freddie guidelines have tightened over the last few months to compensate for the increased risk. What they are doing is providing the ability for more mortgages to be placed with a conforming product.
Over the last few years we saw Wall Street programs that were priced very aggressive. Conforming programs could not compete on some of the riskier loan scenarios. Now, they are either competitive, or the only game in town.
My take? We are in a period of correction. Our greed has helped us get here and we will bounce back. The Fed doesn't need to, nor should it, bailout home owners or mortgage holders for bad decisions. They should ensure that there are avenues for new loans to be placed at affordable rates. But this does not mean that everyone who owns a home now should be able to keep their home. Many bought who shouldn't have. If a crime was committed, we have laws and a court system to deal with the bad players.
Strong borrowers can still get great rates and loans. Cheap money for risky loans is gone, but is that a bad thing?
Most importantly, we live in a free market system and we are seeing the effects. Our system allowed us to get here and the markets will correct themselves. Put on your seat belts and hang on. It could still be an interesting ride...
Larry Morris is a loan Officer with Equipoint Financial Network in Newberg, Oregon. He specializes in relocations and Sherwood, Oregon neighborhoods and Yamhill County as well as Reverse Mortgages. He is a Board Member of the Sherwood Chamber of Commerce. He can be reached at larry.morris@equipoint.com . His website is www.PDX-Mortgage.com . This material is copy protected 2007 by Larry Morris, Mortgage News that Matters. All Rights Reserved His opinions do not necessarily represent the views of Equipoint Financial Network.
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Great comments! My thoughts exactly all across the board. If only more mortgage professionals were educated on things and did their research, we would all be in a better place right now.
Thanks Sarah. It amazes me the mis-information that comes out of the media. Even Donald Trump stated taht the Fed reducing the Prime would ease the mortgage woes. Maybe for CC debt or Helocs, but not for ARMS or Fixed loans.
I"m not opposed to the government "bailing" out homeowners who are in trouble now. This will help the people and the market in general. I am opposed to the government bailing out these hedge funds and other Wall Street types that are the true root of the problem.
From what I understand there were quite a few of these firms marketing pools of non-conforming mortgages to retirement funds and such that they knew had bad mortgages in them (or at least extremely risky ones). These companies took the risk, now they need to reap their proper rewards.
Bob Mitchell
ValueList Real Estate Services, Inc.
the market will correct itself. i agree wholeheartedly!
no assistance necessary.
we can no longer write the 100% stated, less than 600 score.
good, it was a bad loan to begin with.
time to move on.
Bob - It's harder to help out the homeowner then we all realize. If the Fed bails them out it's our tax dollars. If they are left in their current loan then we are also subsidizing the lenders who bought the loans. If we move them to a new loan product and then then turn around and default on that loan we've created another mess. I could see the Fed stepping in and allowing anyone with an ARM and a perfect payment history prior to the ARM adjusting, and the ability to continue making the fully amortized pre-adjustment payment, to get an FHA or conforming fixed rate loan. Otherwise, I'm not sure. It's almost like waiving someone's credit card debt because they pleaded ignorance.
Jay - I agree. We're entering a season of more common sense lending.
Larry, your response to Jay is very well worded and is entirely basic common sense. I am looking forward to the day when common sense is what guides us. Until the rest of the class catches up, we mortgage pro's will need to be the voice of reason. We need to stand up - together - and make our voices heard above all of the other NOISE out there. I think I just found another topic to blog about! :-) Thanks again for your efforts and hard work.
THanks Sarah. I think you meant my response to Bob, but I understand what you mean. I also read taht the money that's been release wasn't earmarked just for the mortgage industry, so the talking heads got it wrong again....
Thanks for your "enlightening" comment DonJon. However, I have yet to see an unbiased, or expert, government. Many of the "solutions" our government is suggesting to solve this problem would create a bigger problem. Government is only an expert at growing big government. The market is correcting itself, but there is still a ways to go.
Almost all of the risky loan products have disappeared and most of the bad players have exited the marketplace. There will still be good people who have been hurt by this and that is unfortunate. But there were also a lot of very greedy buyers who thought they could make a killing in Real Estate. Blame can go around the table.
One of the things that isn't mentioned in the press, is that most of the "bad" loans were made under the rules set forth by this "unbiased" and benevolent government that you believe in. Now, the government is also making adjustments to their lax policies. Sure, some of the products were faulty, but they conformed to teh governments guidelines. Now we are to blame....
The biggest problem now is that credit has tightened so much that even good risks are having trouble getting a loan. But this to will change as the dust continues to settle.
Oh, we don't live in a democracy. We live in a Republic. "The People" have never been able to rule themselves. It can only lead to anarchy, or worse yet, a dictatorship..