Let's Play "Who Doesn't Want To Make A Mortgage"

Added January 19, 2009 by Ilyce R. Glink

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Summary: If investors won't buy packaged loans from Fannie Mae and Freddie Mac, they don't have cash to buy loans from lenders. Then, lenders won't have cash to give you a mortgage to buy your house. With no one to give out home loans, the entire housing market grinds to a halt.

As I write this, the mortgage market has had a rough few weeks -- some might say the ride has been more stomach-churning than anything a big roller coaster amusement park has to dish out.

But it isn't just the sub-prime lenders who are in trouble. Countrywide is the largest independent mortgage company in the country.

Here's how the mortgage market normally works: If you want to buy a home, you shop for a mortgage at Lenders A, B, and C. You decide that Lender C offers the best deal, a good loan program, mortgage interest rate and points. And, they promise to close in 6 weeks or less.

So you apply for a mortgage. The mortgage company takes your application, cashes your application check and sends out an appraiser to make sure the property is worth at least what you're paying for it.

Provided everything checks out, and you have enough cash for the closing, you close on the property. The mortgage company turns around and resells your loan to a variety of investors on what is commonly known as the secondary mortgage market.

Fannie Mae and Freddie Mac are the big players on the secondary mortgage market and they buy loans that are for $417,000 or less, also known as conforming loans.

They pay the mortgage company the amount of the mortgage plus another fee on top of that and then turn around and package maybe 5,000 or 10,000 of these loans together and resell them to other investors who are looking for a stable investment with a steady rate of return.

Because that's what U.S. mortgages are supposed to have -- a rock steady rate of return with just a tiny percentage of loans being paid late or going into foreclosure.

What happens when no one wants to buy your mortgage?

The whole mortgage market freezes up. If investors won't buy packaged loans from Fannie Mae and Freddie Mac, they don't have cash to buy loans from lenders. Then, lenders won't have cash to give you a mortgage to buy your house.

And then what happens? The entire housing market grinds to a halt.

Admittedly, we're not seeing everything slow down and there are plenty of mortgage companies that have enough cash on hand and can afford to keep mortgages in their own portfolios until the liquidity crisis eases up.

But you can really see who doesn't want to play by checking out the loan offerings at BankRate.com.

A recent check of mortgage pricing discovered that if the average rate is 6.25 percent for a 30-year fixed rate mortgage, Bank of America is offering just over 7 percent and Countrywide is at 7.1 percent.

That's one way to discourage business.

But in some ways, borrowers looking for jumbo loans (amounts over $417,000) have it worse. Even if you have good credit, there are very few investors willing to buy jumbo mortgages at the moment, so interest rates have jumped up to anywhere from 8 to 13 percent.

Right now the stock market is having an adverse reaction to the credit crunch. Home buyers and sellers are nervous. While the liquidity crisis (which experts have said would never come to the U.S. residential market) came on very quickly, it could take months to unravel and calm the home-buying waters.

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