Kitsap Real Estate Blog

Announcements by Fannie Mae and Freddie Mac Will Impact Availability of Home Loan Financing In Kitsap County

If you read the news or absorb it from other media you a re likely aware that something called the secondary mortgage market supplies the funds for our home loans. So what is the secondary mortgage market?

When you borrow money to purchase or re-finance a home loan the company you initially deal with is called the originator. They originate the loan you receive. Most often, that company sells that loan to an investor who then collects hundreds and thousands of loans into pools. Then that company or in many cases others financial firms create a new security instrument (bonds) secured by a possessory interest in the loans. This is called a mortgage backed security. The pool of loans is held by a trustee (usually a trust department of a large bank). The trustee manages a mortgage servicer who then collects the payments form the mortgage loans and transmits the interest and principal to the trustee for disbursement to the people who purchased the bonds (bondholders) secured by the pools.

Bonds are sold to different kinds of investors in what are called tranches. These investors are seeking shorter and longer term maturities and yields. In this way the cash flows of all of the different loan payment terms are collected together and paid out in a form different form the manner in which they are paid in. Truly, these securities created by the bond indentures are rather marvelous examples of financial engineering.

When constructed upon loans with sound underwriting they provided a large, stable source of investing second only to the US Treasury securities market. That is, they did so prior to the 2005-2007 meltdown.

You see, the massive rise of national savings accumulated in countries like China and India created unprecedented masses of capital in the world that sought safe places to go. In 2005 The United States had a savings rate of 2% and accumulated savings of $158 Billion not including the value of real estate or stocks held as investment or home. China’s savings rate was 50% and $1.0Trillion. The Indians were saving at a rate of about 26% of income. It is not difficult to imagine how these thrifty populations and especially their governments, accumulated sums of capital that created an imbalance in the supply and demand of capital and safe vehicles in which to invest.

Well, times have changed and the poorly underwritten US home loans created to fill the unprecedented demand for securities eventually lead to the meltdown in the secondary mortgage market. When private investors indicated they were no longer interested in poorly constructed securities by, well, not buying them this put a little hitch in the giddyap of mortgage money supply. We probably all remember what happened next. Money supply goes away. No one can borrow money to buy houses. The roller coaster comes to a halt. Home sales volume plummets. New home builders go out of business. Banks take back sub-divisions. Lehman Brothers, Bear-Stearns and AIG go bust and the federal government ride to the rescue with the troubled asset relief program or TARP.

So, just what was TARP again? Well, the Federal Reserve created $1.3Trillion of new money out of thin air and used it make “open market” purchases of secondary mortgage market securities and treasury securities. They bought mortgage backed securities bonds in part through the government sponsored enterprises (GSE’s) like Fannie Mae and Freddie Mac. The FHA became the largest purchaser of newly originated loans and the federal government stepped back to watch private investors return to the capital markets.

Guess what?

The private investors haven’t returned yet. In 2009 and through the present in 2010 the GSEs purchased more than 90% of loans purchased and Moody’s noted since Q307, the Fannie and Freddie reported seven consecutive quarterly losses totaling $86.9Billion and $63.7Billion, respectively. So what, you ask, for Kitsap real estate?

A month ago Fannie Mae thought its forecast for mortgage funding would rise 2.8 percent in the first quarter of 2010, but now they’re saying it could drop 17.2 percent. On top of that they slashed their forecast for new loans for the year from 1.97 trillion in 2009 to 1.31 trillion in 2010.  That’s a 33% drop, one third less.  “I still don’t think investors and the media at large have grasped the variety of consequences that a year over year drop in mortgage volume in 2010 will bring. Just think about all the lost jobs and income or how many times ‘mortgage banking revenue’ has driven bank earnings,” warns mortgage industry analyst, Mark Hanson.  “A $1 trillion origination year would be down about 66% from the bubble years average and 75% from the peak.”  The fact that mortgage rates are so ridiculously low right now, and yet loan volumes and refinances are not gaining, is not a good sign.
Could this mean that less money will be available for home buyers for the rest of this year? Will congress renew the first time home buyers tax credit scheduled to expire on April 30, 2010? What will it mean that new home construction is at records lows for the entire time that the government has been collecting that information, reducing the supply of housing coming into the market? What does it mean that 17% of the “supply” of foreclosures in Kitsap County have entered pending status in the last 30 days?

I am not a genie so I can’t tell the future with any certainty. However, I would not waste what could be the perfect storm of low home prices, low mortgage rates, relative abundance of mortgage money and an $8,000 tax credit to go by the wayside.

Anthony Cota of Sound Lending is a good fellow to contact to see if you can get a home loan today before things change. You can call him at 877-312-5100.