Sub-Prime Mortgage Fiasco and What it Means to You - Part II

In March, I wrote a brief synopsis of my expectations regarding the sub-prime market fiasco and its effects on the economy, housing and mortgage markets. While I was correct in my assessment, I underestimated the effect on the credit market, and hence mortgage rates.

Rates have risen steadily in the past 3 weeks across all product sectors, particularly Jumbo mortgages (those above $417,000) and alt-a, or limited documentation loans. The reason is uncertainty in the market. Conforming loans (those under $417,000) have an implied guarantee of the government through Fannie Mae and Freddie Mac which have kept rates relatively low. Jumbo, alt-a, sub-prime, and Home Equity Loans (HELOCS) do not. Jumbo mortgages are up almost 1%!

Investors who purchase these nonconforming loans in the secondary market are fearful of the unknown, and are waiting for the other shoe to drop. The same dispersion of mortgages across the world to global investors which has served to keep rates low by spreading risk, has now come back to haunt mortgage rates as these same investors do not know if there will be further foreclosures and mortgage defaults that are as yet unreported. They also worry that the problems will creep up from the sub-prime mortgages into alt-a and prime mortgage products, as HELOC default rates have also risen. As investors half a world away in Dubai, Hong Kong, London, and other areas keep reading about sub-prime woes and its effect in hedge funds and international bank, their fear intensifies, and they perceive a heightened risk in investing in any mortgage backed security. As a result, banks and mortgage companies have to keep raising there rates until the reward is high enough to offset perceived risk.

The credit crunch has had an unexpected effect on mortgage companies as well. American Home Lending, a top 10 national lender shut it doors abruptly and declared bankruptcy. This was not a lender with a tremendous amount of sub-prime loans. Independent mortgage companies are at risk of not having their credit lines funded (which is the money borrowers receive at closing), and there are daily reports of borrowers having their loans pulled days before closing. Just this morning Country Wide and Washington Mutual said difficult mortgage market conditions are likely to hurt operations in the near term.

So what does this mean to you?

1. If you are beginning to look for a mortgage, utilize the services of a larger major bank. This may sound self-serving as a loan officer for Chase, but large banks have the balance sheet and resources to hold there own mortgages if there is no secondary market, and do not have to worry about their credit lines being funded.
2. If you have a pre-approval from a mortgage company or mortgage broker, get a back up pre-approval and application from a major bank.
3. If you are near closing on a mortgage, make sure that the funds will be available, and who is funding the loan i.e.: a major bank.
   
   As always, I welcome your comments.