A New York Mortgae Planners View:

Hi Guys

It seems that the mortgage meltdown is imminent and unavoidable. Reputable lenders closing right and left like Greenpoint who just announced that they will shut down their operation for new applications but keeping their commercial branch open.

Another lender that shut its doors last week was First Magnus, a Great alt A Lender with great Products. What is sad about it is the way mortgage brokers and realtors on the front end are feeling the squeeze. Especially painful is when you already got your approval and it is scheduled to close in 24 hours and then you hear the lender is shutting their doors and will not honor their prior commitments.

It seems almost like betrayal, a company going under and taking their profit with them and ignoring the poor borrowers and brokers who are desperately looking out for their closing.

But knowledge of how the secondary market operates will shed some light and give us some answers as to why lenders that go out of business behave that way.

When a ABC or first Magnus originated a mortgage, the way it worked was They produced a commitment based on the standard guidelines. Then closed the loan using their warehouse line of credit, and after 2 weeks or a month took their entire pool of loans and went to the secondary market and sold their loans for a profit and then Paid back their lines of credit which they have with various creditors who are them self's mortgage lenders. What happened was, that when ABC got their loans together and brought them to the secondary market, the investors Didn't wont to buy them especially if they where low rates for a No doc like 6.5% or Interest only on a 1,200,000 loan. Their excuse was that the real estate market is declining, home equity is going down, and default's and foreclosure rates are up. And it will end up being that the lender has no security, since equity in houses are going down the loans against those properties is now greater that the house value. In the event of foreclosure, the investor who purchased this loan will not see his money back. So when ABC came to the market the investors argued for higher Rates. But since the Loan where already Funded by ABC's Line of credit (which by the way hade to be repaid right?) the couldn't sell it for their full value but for a discount price.Therefore they couldn't pay back their lines the full amount ending up losing Millions of dollars. The straw that broke the camels back was the creditors of those lines called in their margins. Now what do you expect ABC do with The Loans They have in process which are still in commitment stage and not yet closed ?. Or even the loans that did closed today or yesterday but they still didn't fund at the low 6.5 % Rate. Should they fund them and loose additional Millions of dollars? Hell No. So they had no choice but to reject them and to close shop.

But countrywide and the like, who are big Depository Banks and Financial Institutions who had the capital withstood the storm and shelled out the difference and stomached the loss. But that didn't come by so easy, they where squeezed into a tight Liquid Crisis. that could have resulted into a situation that if large group of depositors where to take out their money  for a short time from their accounts, countrywide would have hade a real issue. At any other day a case like this plays' out, Banks will borrow from each other and pay interest on that loan and the usually have a short window to payback like 24 Hours. This is called the discount window or discount rate. But in the current liquidity squeeze that many banks found them self's in a situation like that would have been too much to bear. Therefore The Federal reserve board of New York and San Francisco stepped up and applied with the Board of governors of the Federal Reserve, to lower the discount Window from 6.250% to 5.750% and additionally to extend the term of the loan from overnight, to 30 days. So that large banks like countrywide can borrow from the feds at lower rates and Payback in 30 days and in the mean time catch up on their liabilities to other banks and to remain liquid in this time of need.

How complex is the lending sector and what great back up systems are available in the US by our government truly amazing! But what this is telling us is, that when the market is going through a credit tightening and guidelines change, banks will need to have more equity and more liquidity to keep afloat. But as far as mortgages are concerned they are here to stay. Yes it is changing and change is good, just like it changed in the past and we hope that it does in the future.

I hope that this clarifies a little about what's going on out there, and especially now is important to be working with a Mortgage Planner who has a finger on the pulse of the market, and not just any Mortgage Broker who only offers low rates but offers no Market Knowledge!

Talk with you soon

Sincerely

Joel Silberstein