Economic uncertainty signals changing times
Sales of single family homes dropped 6.6 percent in June, and sales of existing homes fell 3.8 percent. Judging from the 3.4 percent growth rate, or gross domestic product, for the second quarter of 2007, it would conversely appear as if our national economy is firing on all cylinders. Especially so, if you consider that inflationary reports show moderate core inflation increased at a pace of 1.4 percent for the second quarter of 2007. There are many conflicting economic reports on the status of our economy. Unfortunately, these economic contradictions, combined with the financial shortcomings of some of the most well-known publicly traded companies in the United States, stemming from increased mortgage foreclosures and defaults, mean changes to all aspects of the mortgage industry. The mortgage industry is going through a period of change in all regards. The point of this article is to outline why and how the present day mortgage lending industry has changed. Lets first examine the secondary mortgage market. Problems within the secondary mortgage market can be illustrated by the $3.2 trillion hedge fund debacle of Wall Streets Bear Stearns Co. A portion of the hedge fund was comprised of millions of dollars of mortgages, of which many were sub-prime. The fund makes its money with monthly interest paid on all of these mortgages. Sub-prime mortgages often have much higher interest rates and yield much better returns for investors. This hedge fund scenario works well if the mortgage payments are made on time, but many of the mortgages went into default or foreclosure. When mortgages go into default, mortgage payments are not made, and Bear Stearns cannot pay its investors. This scenario illustrates a now greater risk associated with U.S. mortgage-backed securities. Risk associated with U.S. mortgages and U.S. mortgage-backed securities means less investment in these types of funds or a demand for liquidation from those invested in the funds. Less investment in U.S. mortgage securities, due both to increased foreclosure risk and better rates of return overseas, means less mortgage money available to consumers in need of a mortgage. The mortgage money that is available will have a higher interest rate due to less supply. Foreclosures and defaults present problems to the local market place in which they occur, but they also lead to higher mortgage rates across the board.Lets now look at the housing market aside from foreclosures and defaults. Home sales are in decline because it is more difficult for many consumers to obtain a mortgage. An increase, or even fluctuations, in interest rates certainly are to blame because higher rates can make qualification more difficult. More importantly is the fact that lending rules, regulations and guidelines are becoming much stricter. Lending guidelines are also changing because of the fear of mortgage default. If a loan is defaulted upon, the lender is ultimately going to lose money. Loan defaults can be traced back to the fact that many consumers should not have been sold their respective mortgages. They were sold these respective mortgages because lending guidelines were too lenient. Risky mortgages with lenient guidelines are a certain way to produce foreclosures. Both consumers and mortgage loan officers are to blame, and we are all in the midst of the restructuring right now. It effects even the most qualified consumer and most knowledge and experienced loan officer.The circumstances for both a mortgage loan officer selling a mortgage and a consumer in need of mortgage financing have become more difficult over the recent months and weeks. There are still opportunities, driven by specifics within the numerous and complex financial reports, for consumers to take advantage of interest rate drops. And, there are still advantageous loan programs being offered. But, now more so than ever, it takes an acutely educated mortgage professional to recognize both market fluctuations and loan program changes. Failure to recognize and comprehend either one of these factors can mean the difference between a consumers loan closing successfully and being fully denied. William A. DesPortes is a managing member of DesPortes, Selig & Associates, Professional Mortgage Services. He can be reached at 970-949-0653 or email@example.com.
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