Description

The past several weeks have been a rollercoaster ride for the mortgage market. The lights are
out in some lending institutions while others have drastically amended their lending guidelines.
Over the next several weeks and months we should see more lenders and Brokers with office
space clear from wall to wall. But what is causing all of this upheaval in the market? To understand
the effect it is important to understand the cause and history of the recent market, its stages
and how the real estate industry has played a role through the cycle and into the near future.
After the stock market crash in 2001, investors were looking for the next great place to store
their money. With the Fed aggressively lowering the short-term rate (see graph pg.2) and the
stock market being the last place for investors the transition came to real estate. Soon after
mortgage rates began coming down partially due to the large amount of cash on hand with the
banks new loan programs were created providing an opportunity for less than qualified buyers to
purchase homes and speculators to come out in full force, the rest is history. Practically every
individual had an opportunity to purchase a home even with little to no money out of pocket.
From mortgage brokers, to real estate agents to the media, it was a great time to buy a house and
“why rent when you can own” was the rhetoric heard throughout.
But what was the progression of the mortgage industry through this period? The history of our
cycle begins with Wall Street viewing mortgages as stable and high returns buying bulk loan
packages for the various funds. Lending institutions recognized an opportunity to provide loans
at a lower rate by selling in the secondary market to Wall Street instead of holding in their portfolios,
making a profit and then having the ability to fund more loans; this strategy was done
over and over again. Lending institutions competed with each other to issue loans to borrowers
lowering rates and guidelines to get out their money. Guidelines lowered creating an opportunity
for less than qualified borrowers and investors to obtain easy financing. This influx of
money into the mortgage market wouldn’t be complete without a run-up of real estate demand
and therefore prices. Over the real estate boom from 2002-2005 an unprecedented number of
buyers entered the market for such reasons as 1) affordability, 2) real estate stability, 3) speculation
or investment, and of course 4) timing or lifestyle for family. Money was cheap and we
knew it; why wouldn’t we want to take advantage of this opportunity?
Now we are seeing mortgage companies going out of business and lenders drastically changing
their guidelines, programs and approval process (see matrix pg.2) due to the fact that Wall Street
halted the purchase of loans in the secondary market after many months of defaulting mortgages,
less than appropriate profit from lending institutions and fears that the worst is not over. In
Santa Clara County the foreclosure rate is up with almost 600 homes sold at auction year to date.
Approximately 80% of these properties went back to the bank because there was not enough
equity to make for a viable purchase. Lenders will now face the reality of holding their loans in
their portfolios instead of just pushing them off into the market because Wall Street is precautious.
Most people will agree that you watch your money better than your neighbor, so naturally
if you were loaning your money you will be more cautious. This compounded with the fact that
the lenders will not have as much money to loan; funds will now go
Mortgage Market Shakeup
Inside this issue:
Mortgage Market
Shakeup
1
Mortgage Market
Shakeup (cont)
2
August, 2007
RE Special Update
N i c h o l a s F r e n c h , B r o k e r A s s o c i a t e , C R S
Nicholas French
Broker Associate, CRS
4906 El Camino Real #2
Los Altos, CA 94022
650 773 8000 (cell)
650 961 2338 (office)
650 961