Mortgage Payment Program

The Federal Reserve continued their long string of lowering rates and recently lowered rates again. The question I have been getting asked a lot lately is “Will this reduction lower mortgage rates and help with the mortgage crisis?” My answer to them is “Not so much.”

For those who watch mortgage rates closely have noticed that mortgage rates have actually risen slightly after of few of the recent Fed rate drops. Why? The rates that the Federal Reserve has been lowering are the rates at which banks borrow money. In a simple world, if the bank has access to cheaper funds that should mean that it trickles down to the consumers and drives down our cost to access funds in the form of loans. The mortgage market is much more complicated than that with access to funds, and the rates, driven mostly by Wall Street and their demand to buy and sell mortgage backed securities. This demand still remains low largely due to the still existing issues around declining home values and the still rising delinquency and foreclosure rates.

So, if the drop in rates by the Fed isn’t going to help the current mortgage and housing climate, what will? The best answer I can offer is time. At some point the inventory of houses will begin to shrink and home values will stabilize and the housing market will begin to recover. The silver lining? For those people who have equity in their homes – either from buying at a low point or paying down the principal balance faster – or cash to put down on a home there are a lot of bargains in the market to be had.

So, what’s behind the mortgage crisis? Who is to blame? The current mortgage crisis was caused by a series of things that all went wrong and in a chain reaction continued to cause problems throughout the entire industry. It is hard to find a single area of blame – instead errors were made by most of the players in the mortgage transaction. Here is just one example of many where things went wrong.

One of the biggest culprits to the current crisis was the use of reduced document loan programs – specifically the Stated Income, Stated Asset (SISA) products. The underwriting requirements for these products allow borrowers to state their income and asset but did not require the lender to confirm them with pay stubs and tax returns. This left open the possibility for loans to get approved for people who would not otherwise qualify for them. In many cases it was crafty Loan Officers who gamed the system by taking the application and filling in the income and assets required to get the loan approved. Sometimes borrowers were complicit in allowing this to happen so they could get the loan and in other cases the borrowers were unaware because they didn’t carefully review the huge stack of documents they were signing.

But these SISA loan products existed because there was a market place for them. Mortgage Insurance companies would insure them, the ratings agency’s would rate them high enough to be marketable, and Wall Street was buying and selling them. How could they possibly understand the true risk without having all the information necessary to assess it? Hindsight being 20/20 tells us they really couldn’t. But when everyone in the process was making money along the way, it is hard to shut something down that “seems” to be profitable. And in many cases they were making money again and again with many borrowers continuing to refinance to pull out cash and keep teaser rates as home values continued to climb. That is until values started to drop and they could not refinance any more. Today we see a lot of the SISA loans originated in the last three years going into foreclosure and a return to stringent documentation requirements on loans.