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.

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