Home Mortgage Weblog

Have you ever wondered how mortgagers raise money to lend to homeowners? Or once they exhaust their funds, how do they raise more capital to continue being in business! One of the most common ways lenders raise more capital is by selling their existing loan portfolios to other organizations.

In effect, a loan that you took from a lender may actually no longer be vested with the same party. This may sound confusing, but in reality, lenders usually sell their loan portfolios to government backed organizations like Fannie Mae, Freddie Mac and Ginnie Mae. These organizations in turn usually sell consolidated portfolios further to investors. This way, lenders are able to raise more capital and provide more loans and keep increasing their business.

The presence of a government backed organization in the middle serves as a semi-regulatory authority. In case of defaults or required resetting of schedules, these organizations play the role of looking after the interest of the lender as well as the borrower.

While, this maze governs the process of transference of the loan portfolio from one party to another, the responsibility of collection of payments or dealing with defaulters is still vested with the company that has issued the loan to the customer in the first instance. Now, with the realty market expected to go into recession, loan defaults are expected to increase. A larger number of defaults will affect the entire chain of companies in the mortgage maze and exert a downward pressure on their bottomlines.

Though there is a lot of talk about a dip in the US realty prices, it is yet to show up in the price data. Latest results show that realty prices are still robust. Median home prices in January 2006 were steady at $211,000.

Latest results from the Office of Federal Housing Enterprise Oversight (OFHEO), the U.S. agency that monitors mortgage lenders Fannie Mae and Freddie Mac, average realty prices in the residential sector grew a robust 13 % through the fourth quarter of 2005. The growth in the top 10 markets was higher at 18 % for the same period.

The OFHEO report also segregates the country into areas that are experiencing robust growth vs regions with flattened prices. Prices on the coasts and in the growing areas of the West and the South were soaring, while they were flat in the middle and the northern regions.

In the high growth regions like Arizona, prices appreciated by 35 %, Florida 27 %, California 21 %, Washington 18% and New Jersey 16 %. Growth in Phoenix was at a high of 40 %.

Some states that experienced growth of lower that 5 % include Michigan, Ohio, Nebraska, Indiana and Kansas.

Realty prices are expected to start their southward march soon and the US Fed’s next move on interest rates will largely govern the velocity of the decline. Analysis of the price data reveals that while prices in some regions had shot up substantially, the increase in other regions was moderate. In the likely scenario of a dip, prices that had grown too rapidly will experience rapid declines. On the other hand regions, where prices had grown moderately are likely to experience stagnation or a moderate dip.

To read more on this topic, click here.

There are clear signs of the USrealty market entering the bear phase. January 2006 data reveals that sales of new homes dropped 5% and sales of previously owned homes dropped 2.8% in the same period. Evaluating the two figures in tandem reveals that current homeowners, who in a rising realty market might have sold their existing home to upgrade to a larger one have restricted that activity. Now, they are trying to hold their existing property. Hence, activity in the seconds’ sale market is on the decline. At the same time more expensive loans are diminishing the demand for new homes.

Reportedly, more than 500,000 new homes have stayed unsold for over five months, longest in a decade. Builders are announcing new schemes to galvanize sales, including free kitchen upgrades and swimming pools. However, customers are not very responsive to these offers and the bear phase seems to be tightening its grip.

The sustained rise in realty prices was mainly driven by extremely cheap home loans. Such loans, with very low interest rates meant low monthly payouts for homebuyers and people took preference to owning homes rather than renting them. However, with the US Fed having raised interest rates consistently, the low rate regime has come to an end and owning a home is no longer as easy. This has led to a flattening of demand for homes and is exerting a steady downward pressure on prices.

Thus, the bear phase in the US realty market is a result of sustained rise in interest rates. It is expected that the US Fed might increase interest rates further in the coming quarter. This news is causing great discomfort to the US realty market and tightening the bear’s grip.

To read further on this issue, click here.

Mortgagers lend money to customers for acquiring homes, but they do not continue to hold these loan portfolios for the entire term of the mortgage. If they did, they would run out of capital to lend more. Most of these loans end up being clubbed and issued as bonds, which helps mortgagers raise more capital and continue being in business.

These mortgage bonds are now becoming risk prone due to an uncertain realty market. If realty prices begin to fall and the property market collapses, loan defaults will go up. An increased number of loan defaults will lead to a loss in the face value of the bonds and will lead to higher than expected losses for bondholders. According to the latest report by the Bank of International Settlements (BIS), ‘extension of loans to households with less than perfect credit histories had exposed investors to higher risks’.

The higher level of risk, resulting from a spree of lending to customers with less than perfect credit scores as well as exotic type of loans, was till now was not evident because of a strong appreciation in property prices. However, with the prices expected to cool, the overexposure is becoming more evident.

With interest rates having risen substantially and expected to rise further, homeowners may be unable to afford higher payouts leading to defaults.  This coupled with lower realty prices will not allow mortgagers to recover sufficient capital from the sale of these properties and mortgage bondholders stand to loose substantially under these circumstances.

The slowing realty market in the US has already started leading to a slowdown in the jobs market. According to a new report, almost 40% of new jobs created in the last four years were due to the booming realty markets. The year 2005 ended with a record 9.8% of total jobs in the realty sector.

With realty sales declining considerably in the last five months, the pressures are beginning to show. Washington Mutual has reportedly closed 10 mortgage processing centres and fired 2500 employees. Another large company, Ameriquest has reduced its workforce by 1500. Home sales are expected to shrink by 8% this year after their spectacular growth in 2005. Jobs in fields related to housing are also going to face the brunt. These include appraisers, real estate brokers, mortgage brokers and home construction workers, home insurance agents amongst others. This could send shock waves through the job market and the economy.

The realty sector boom had attracted a large number of people from diverse professions like investment banking, marketing, hotels and construction. Now, with home sales on the decline, that trend is set to reverse.

Given the fact that the realty sector was contributing substantially to total employment, its tapering growth does not bode well for consumer spending, which is a driving force for economic growth in the US. It is imperative that other sectors are able to absorb people who are loosing employment opportunities in the realty sector in order to maintain the nation’s consumer spending boom.

If your profession is related to the realty business, you must have already experienced the ensuing sluggishness. It is best that you start to seek involvement in other sectors and not land yourself in trouble.

To read more about this issue and sectors that are likely to absorb some of these people, click here.

Nearing retirement? Worried about how to maintain your lifestyle in the coming years? You have worked hard all your life to make the home you own; now let your home work for you, while you enjoy your years of leisure.

There is a great product on the market for you. Your home can actually give you both lump sum money and regular income through a product called ‘The home equity conversion mortgage’. Some of the key requirements to be eligible for this product are that first of all you need to be over 62 years of age. Secondly, you should not have any outstanding mortgage on your home. All taxes and insurance pertaining to your home must also be fully paid up. In this mortgage, instead of you paying the mortgager, the mortgager will pay you. Also, there is no fixed timeframe for the closure of the mortgage.

If the value of your home is say $600,000, you can actually raise a lump sum of $50,000 and get an additional monthly income of $800 every month or even more depending upon the exact value of your home. Moreover, the capital raised through this mode can be used for any legitimate purpose like children’s education, a vacation or purchase of a new property or for daily expenses. After your death, your heirs have the option of either refinancing the debt or selling the property and cashing out on the balance home equity.

To read further on the home equity conversion mortgage, click here.

The realty mortgage industry is abuzz with the news that 50 year mortgages may be launched soon. This is possible as the US government has resumed the sale of 30 year bonds after a gap of nearly five years. As of now, financiers had been basing interest rates on 10 year bonds. The new 30 year bonds will allow mortgagers to offer longer term loans.

Longer term loans imply that the customer has a longer payback period and his monthly outflows will be lower. This means that a customer can borrow a larger amount for the same outflow on a 50 year loan vis a vis a 25 year loan. Experts are of the opinion that these 50 year loans will never last their full term, with customers converting them to 30 year mortgages midcourse.

This basically translates to the fact that if you cannot afford the monthly instalments of a 30 year loan at this point of time, it may be a good idea to take a longer term loan with lower outflows now and to convert it to a 30 year mortgage once your income level rises.

While taking a 40 to 50 year mortgage, customers should bear in mind that the total interest outflows over this period will be much higher as compared to a 25 to 30 year mortgage. Thus one should use this route with caution and plan to reduce the repayment period to a 25 to 30 year mortgage after a few years.

Mortgagers of Katrina hit customers provided them repayment relief so that they were not unduly harassed by payment pressures in their time of misery. This relief period varied from three to six months.

In some cases, customers have received monies from their insurers, but have yet not started paying their mortgages as they are undecided on their future course of action. They are uncertain if they would like to continue living at their storm hit homes or if they want to resettle in a completely new location.

Most mortgagers are working with customers individually to chalk out their repayment schedules. This approach adopted by some mortgagers has come as a timely blessing for customers. It will also work well as a customer retention strategy for the mortgagers as they will gain substantial equity with their customers through their gesture.

To read more on this topic, click here.

Mortgage applications across the US are on the decline. The latest survey conducted by the Mortgage Bankers Association reveals that the mortgage applications declined 7.3% during the third week of February 2006. The corresponding index fell from 619.3 in the second week of February 2006 to 574.1 in the third week of February 2006. The index of home purchases declined 7.9% to 391.7, ebbing to its lowest levels since December 2005.

The key reason for this decline is home mortgage interest rates that have crawled up significantly leading to higher monthly payouts for customers. This has dampened the demand for realty and home mortgage loans.

Interest rates are expected to increase further during the year, which will act as a further decelerator for the already dampened realty markets.

To read more about this, click here.

According to a recent recommendation by the Federal Commission, tax rebates on mortgages need to be eliminated, especially for the upper income brackets. It recommends that the rebates be provided to lower income home buyers. It makes a comparison of home ownership structure to that in the UK and Australia and finds it to be similar.

The logic of this recommendation is that those who can afford larger homes do not really need the rebates as they fall in upper income brackets. Effectively, a tax rebate is akin to a subsidy and it should be provided to those who need the support. Thus, tax rebates should be provided to those in the lower income brackets only.

The Commission points out that if no deductions are permitted in the UK and Australia, the deduction structure in the US also needs to be revamped.