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Mortgage Crisis & FHA
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Mortgage Crisis & FHA
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THE MORTGAGE CRISIS

● New FHA Loan Limits and Fed Rate Cuts May Help Mortgage Crisis 

As explained below, Federal Reserve Rate Hikes and the collapse of the Private Mortgage Backed Securities (MBS) Market played a major role in the Mortgage Crisis. The recent reductions of the discount rate by the Fed have lowered rates for adjustable rate mortgages (ARM's) significantly. In addition, the availability of borrowers taking advantage of the new FHA mortgage limits for high cost areas like California should begin to chip away at the inventory of unsold homes, allowing banks to sell the properties they took back in foreclosures. (REO's.) Because of the protections built into many of the MBS bonds, it may turn out that the private investors which hold these bonds won't sustain losses as severe as they had assumed in the panic which occurred in the summer of 2007. That panic eliminated demand for private MBS bonds, making it impossible for many borrowers to refinance and for many persons desiring to buy a home to qualify for a loan. For more information on the new FHA programs see www.NapaLandAndLoan.com or www.PrudentBorrowers.com.

●The Role of Federal Reserve Rate Hikes and Panic in the Private MBS Market in the Crisis 

Among the many factors which precipitated the present mortgage crisis was the constant rise in the Federal Reserve interest rate for lending to member banks. These increases led to corresponding increases in the rates used as indices for adjustable rate loans, playing a significant role in creating "payment shock," when initial fixed rates on adjustable rate mortgages expired.  For example, a borrower who took out an adjustable rate loan in July of 2003 with a three year fixed rate, adjusting to one percent over Wall Street Journal (WSJ) prime rate at the end of the three years, probably expected that the adjustable rate would be five percent in July of 2006.  That would have been one percent above the 4% WSJ prime rate in July of 2003.  What a shock to find out increases by the Federal Reserve led the WSJ prime to 8.25% in July of 2006.  For a $700,000 interest only loan, the payment in July of 2006 would have been $5,541.67, instead of the $2,916.67 per month the borrower expected.

Another unexpected factor was the collapse of the private MBS market in the summer of 2007.  The mortgage market for the last five years was increasingly financed by companies which turned large portfolios of mortgages into complex billion dollar bonds sold to multiple investor groups.  Until this securities market developed, most mortgage loans were either made by banks, allowed to make loans based upon a multiple of their funds on deposit, or were loans purchased by Fannie Mae or Freddie Mac, or guaranteed by the FHA.  When high subprime default rates panicked MBS investors, drying up the securities market overnight, little money was available for refinance or purchase loans above the $417,000 maximum for Fannie Mae and Freddie Mac.

As a result, until the financial incentive legislation passed in February of 2008, sellers could not sell because the jumbo (over $417,000) mortgage rates were too high and the low adjustable rates once available had disappeared.  Even lenders who foreclosed could not sell the properties (called REO's) once they had taken them back in foreclosure.  That is why the new incentive package loans, which just became available, present a tremendous opportunity for California homeowners to sell or refinance their homes, and for buyers to pick up bargains.  Since so called conforming loans (which can be sold by lenders to Fannie Mae or Freddie Mac or guaranteed by the FHA) will be available in amounts up to $729,750 in most San Francisco Bay Area counties, buyers will have the best opportunity to purchase a home which may be available for years, possibly ever.  Note, however, unless extended by Congress, the maximum conforming rate will go back to $417,000 on January 1, 2009. 

 

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