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Sep 16
2008
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September 17, 2008
In recent weeks mortgage rates have been dropping. This is great news for buyers, but only buyers with impeccable credit. Within the last week mortgage rates have dropped below 6% making it a great time to consider buying a house. But, the “Devil is in the Details” and the Devil in this case is finding a lender willing to loan you the money to buy.
Lenders do not want to take risk anymore. Taking excessive risk on sub-prime loans is what started this mess in the first place, so the pendulum is now swinging the other way where lenders have become very conservative and are requiring ever higher credit scores, larger loan down payments, and more stringent income verification checks.
More than three quarters of U.S. banks have tightened credit standards in the last 4 months and are now only lending to the most credit-worthy borrowers. According the Rankrate.com the average 30-year fixed-rate mortgage in the U.S. was 5.78 percent on September 15th, down .30% percent from a week earlier.
On Tuesday the Federal Reserve is scheduled to meet and many believe with the current meltdown in financial markets, the Fed. may lower its key interest rate to 1.75 percent from 2 percent which may reduce mortgage rates further.
Lehman Brothers Holdings Inc., the biggest underwriter of mortgage-backed securities, filed for bankruptcy on Monday. The implosion of the sub-prime market has snowballed in recent months and so far this credit shakeout has cost financial firms more than $500B in mortgage-related write-downs and losses and the shakeout is still continuing.
Some mortgage companies are going out of business. Since the beginning of 2007 over 100 mortgage related companies have shut down their lending operations, closed altogether or sold their businesses to get out of the mortgage market. Many of these lending companies packaged groups of loans as securities and demand for those mortgage back securities has completely dried up. Those mortgage backed securities and derivatives are the root cause of the financial market’s meltdown. There are currently somewhere around 9000 banks in the US and it is estimated that consolidation resulting from this credit crisis may cut that number in half in the coming years.
By tightening credit and lending standards, lenders are being more conservative and taking less risk, but this also has the unfortunate effect of limiting the ability of many first-time home buyers to enter the market. Fewer consumers can get loans, and housing inventory sits vacant for want of a buyer who can meet the more stingent qualification requirements.
Yesterday, the federal funds rate soared as high as 6 percent, triple the Fed's target, as banks hoarded cash. That spurred the Fed to pump $70 billion into money markets through repurchase operations, the most since September 2001.
To boil things down, the U.S. financial system is in a pretty pickle right now. There is a glut of houses on the market and prices are dropping. Banks and mortgage companies have tightened lending requirements because they have taken a beating on their previously more risky lending practices which started all of this. The government is trying to put sufficient funds into the system to maintain liquidity for lending, but it is going to take at least well into 2009 or longer for the financial markets to work their way out of this mess and for the housing markets to rebound.
