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Posted by Laura Vestanen on 3/18/07 6:36pm
This text was copied from posts by Charles CA in March 2007.
Please ignore the misspellings. Charles is HIGHLY intelligent. English is his FOURTH language.
Read and learn!
LV
The programs to buy and sell loans were introduced by the Federal Government sortly after we entered the Great Depression. A lot of people lost everyting they had in the depression. It used to be that mortgages were renewed ach year. Once a year you wold go sit down with your banker and you would discuss your crops or you business and see how everything was going and then your banker wuld renew your mortgage for another year. Back in those days everything was hard money and the bank literally financed your property from the assets of the bank wich ws actually the savings of their customers. When the run on the banks ocurred there were no deposits and so the banks had to call their loans because they had to pay that moneyack to their depositors, if they were not able to then they were bankrupt (the origin of the term). Ther federal governement stepped in and bailed out what it could. Out of the depression we got a lot of excellent deals like the FDIC and HUD and FannieMae and Freddie Mac. That was the beginign of the secondary mortgagemarket.
Traditionally the federal goverment through its programs ran the secondarymortgage market. The banks would make property loans based on the criteria set by the secondary market. Traditionally one had to have a down payment which was cushion in case one defaulted on the mortgage and when the bank acumulated enough mortgages it would package them together and send them in to the federal government and then in turn would sell them to large corporations, historically nsurance companies and then the federal government would get its money back and make it available to the banks to lend more. For many years that worked very well.
Well enter the modern age and there were some very spart individuals who said well if the feds can do this we should be ableo do it better and so there was a new secondary mortgage market based on stock corporations and traded on the stock exchanges around the world. The lenders were not banks and they became very aggressive in their lending practices bcause of the increasingly greater funds available as the stocks grew in price. The banks still made loans but they wold not make loans to people wo cold not afford it those went tothe aggressive companies who made up products like the 80/20 loan, the 125%LTV loan, the various ARMs and some even more creative products. The business changed and to cover their potential financial losses which were considerable there was the rise of PMI or private mortgage insurance, wich insured the lender in the case of defaults. So now the scene was set, corporations were overextended and didn't pay much attention to the paper they were buying from the lenders and the lenders were under pressure to invest the ever-growing pot of funds that was being set in their laps. Lenders started telemarketing and trying to palce more and more loans and as the pol of traditional loan customers started to have all the loans they cold use the lenders went to non-tradtional markets: people who really didn't have the funds nor the personal parctices consistent with good fiscal management. LOs started to go to SISA (Stated Income and Stated Assets loans) and then would lie on the applications, after all it was "stated" and not "verified" and one cld state whatever they wanted. Of course a lot of people never read the small print about actually having told the truth. As the discoveries were made that the loans weren't worth the paper they were written and becasue of the slowing economy the major players started having an increase in defaults. New Century was one of the first casualties but others followed and as the defaults increased investor confidence decreased and the stock prices fell and the margins got worse and very soo what turned out to be a house of cards is now collapsing.
The fallout is going to be extensive right now we are seeng the finger pointing goingon but eventually the fingerpointign is goin to turn to prosecution and soon a lot of people willl be reaping the rewards of what they sowed. And so it goes.
That is where PMI comes in. Private Mortgage Insurance is paid by the borrower and protects the lender in case of default. Interestingly enough there seems to be no lack of buyers for these foreclosed homes at least on the West Coast, I understand that the heartland has a different situation. The REO brokers in California are making a lot of money right now and the trading is ot and heavy. REO=Real Estate Owned and means the foreclosed upon real estate owned by the lender. For federally chartered lenders there is a ratio of loans to foreclosed homes that they must maintain and so some have incentives to sell quickly. Just as an aside even with the meltdown in the sub-prime mortgage area the appreciation for real estate has maintained its pace on the West Coast. The only thing that has changed is that homes are on the market longer than they were last year. People will tell you that prices are dropping but that is not correct. What has happened is that there was so much pressure on home sales last year that some people still are suffering from whiplash and continue to adjust their prices up but they are not selling for the original asking price. One has to be careful because there are real estate agents who are not particularly comfortable with the appraisal process. When you get a CMA from a real estate agent it is a Comparable Market Analysis which basically means that they look at the MLS and see what is on the market and tell you that is what your home will bring. The fallacy in this market is that the market is nflated and the true comparison should be in the sold listings and most real estate agents are not ambitious enough to go looking for recent sales. So if you are askiong your agent to determine a market value for your home you really shoujld ask where his price came from. If you compare apples to apples you will see that in Southern California the market continues to appreciate at about the same rate as last year.
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