Because Wall Street was the ultimate financier of the subprime and other risky mortgages, when they decided to no longer provide funds to buy these loans in huge packages, that segment of the housing loan market dried up almost overnight.
Repurchase agreements were part of the sales agreements of the loans. Thus, if a borrower was late in paying on their loan or stopped paying, the mortgage company originating the loan was required to buy it back. Since the mortgage companies did not have the credit lines or funds to buy even a small volume of non-performing loans back (2-7%), over 100 companies closed their doors or filed bankruptcy.
So what happened to the investors who had bought these loans? Do they lose all their money or get the security for the loans or what? The government “bailouts” discussed are not for the homeowner, they are for the large institutional or securities investor. It doesn’t look like there will be a bailout; it doesn’t look like there will be new high risk instruments for Wall Street investors. Thus doom and gloom in the media, less money for loans, scared buyers and a stagnant market.
New ideas were announced today wherein banking institutions will provide funds so that the mortgage backed securities market will have investor confidence.
How will this affect our local housing markets? With more stability in the mortgage market, more funds will become available to borrowers to fund their housing purchases or refinances. The loans may be at higher interest rates because the interest rates will be related to risk. There might even be more use of private mortgage insurance (which can add .375-.5% to the basic interest rate).
With the stabilization of the lending products, more buyers will have the confidence to proceed with their loans, thus start buying again. After all, the best time to buy is in a “buyer’s market”.
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