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What is happening in the Mortgage Market?

by Team for YOUr Dreams

Submitted by Tim Burrell - Wall Street's Dow Jones Averages lost 387 points yesterday, primarily due to worries about mortgage backed securities.  What is happening?

A French Bank suspended a fund that was made up of mortgage backed securities, because it could not figure out what the value of the fund was.  The fund had a significant amount of sub prime mortgages in it, and they were worried about the increase in default of the sub prime mortgages.  This lack of confidence quickly spread, and the financial communities became worried about investing in funds that are made up of sub prime mortgages.  For example, the value of the stock of Countrywide Financial fell 8.2% in Friday morning trading.

What does all this mean?  Many lenders need to sell the loans they make in order to get cash to make new loans.  One place they sell them is to funds that purchase large quantities of loans, then sell investments in the fund, primarily to insurance companies and those firms that have to provide for the payments on pensions.  When investors do not want to buy into these funds, it is harder to sell the mortgages, and the lenders have a hard time raising cash, particularly small lenders.

This is why American Home Mortgage filed for Bankruptcy protection and laid off all its employees, after they could not raise cash for new loans.  Their stock lost 97% of its value.  Two leveraged hedge funds from Bear Stearns "went bust" and a third has run up big losses.  In order to give banks enough liquidity, the Federal Reserve has been pumping billions of dollars into the banking system.

While this is a disaster for small lenders, the larger banks are able to just keep more of the loans they make as they do not need to sell as high a percentage of the loans.  Some buyers have had the miserable experience of having a loan approved with a small lender who could not fund the loan when it was time to close the sale.

How does this change the market?  The investors want security, so they are focusing on buying only loans that are backed by the guarantees of Freddie Mac and Fannie Mae, quasi-governmental agencies that insure certain mortgages.  Since the limit for these loans is $417,000, it is harder to sell Jumbo Loans that are over this limit.  As a result, the interest rates on Jumbo Loans have changed dramatically, with the market still being in a state of flux.  What makes no sense is that the default rate on Jumbo Loans is at near record lows, according to the Wall Street Journal.  So, the Jumbo Loans are not a risky investment, as there are few defaults, but they are being penalized because you cannot get Freddie or Fannie to guarantee them.

How did this happen?  There is a huge demand for investment grade debt, as the pension funds have to make payments to a world that is getting older and living longer after retirement.   The pension funds used to invest in Bonds from corporations.  In 1992, over 70% of debt earned a rating of investment grade, and the pension funds could just invest in those debts.  But, the quantity of investment grade debt has decreased, so that Standard and Poor's found  that 49% of new debt issues in 2006 was below investment grade, commonly called Junk Bonds.  So, the pension funds had to find other investments.  Wall Street packaged mortgage back securities featuring sub prime loans and other debt that were put into the fund in layers, called tranches.  The logic was that by bundling together large numbers of investment, there is little risk of a major loss if any one loan defaults.  The first layer was comprised of the riskiest loans, and the last layer were the most secure.  Since the last layers were supposed to default only after the first layers, these last layers were considered investment grade.  The pension funds bought the idea, as they had to put all their money to work.

What will happen next?  I predict that the large banks will get stronger, and swallow those small ones that do not go out of business.  I hope the loan limits for Freddie and Fannie guarantees are raised, so there is more liquidity in the lending market if more loans qualify for their guarantees.  Some Senators looking for re-election coverage will hold a hearing to further hurt the mortgage market, as the threat of restrictions on sub prime loans was a major impetus to this problem.  It was going to be a little problem for sub prime borrowers as interest rates rose and property values did not continue to soar.  It became a big problem when these borrowers could not find new loans to re-finance out of their bad ones.  So, they defaulted, and the defaults have caused this loss of confidence, leading to an increase in difficulty in getting financing.  Next time you see Senators grandstanding with threats of regulations in an industry they do not understand, run for cover.

Staging a Raleigh Home to Sell

by

Submitted by Tim Burrell:  One of the latest phenomena in Real Estate is staging.  Staging a listing can involve hiring a professional to take out your furniture, put in furniture to match the house, arranging highlight props to accent the imagination, and generally redecorate to be as appealing as possible to the buyer.

Intellectually, I find it objectionable.  You are not buying the furniture and the props.  So, having the seller spend money on things that are not for sale to the buyer is not rational.  The Realtor should be talented enough to help a buyer imaging the potential of a house, and the buyer should  be able to mentally arrange their own furniture in the house.

On the other hand, the quality of Realtors rarely gets to the height that they can instill an image in the buyer's mind.  Also, over 90% of buyers have no ability to visualize potential.  So, emotionally I find staging appealing, as you can create the image for the buyer and let them visualize the house in an appealing manner.

If you would like to see an example of excellent staging, get to know Laura Kistemaker by clicking here.  Her firm, Staged Right!, is an excellent example of professional staging talent, and good business practices.  They do what they promise, shows up on time, do excellent work in an expeditious manner, work with your suggestions, and give you more than you expected.  To see a checklist of do's and don'ts, as well as before and after examples, click here .

So, intellectually, I do not like the fact that I have to do the buyer's and buyer's Realtor's work for them.  But, emotion is what sells properties.  So, emotionally, I can see the value of staging a property to get the image to the buyer of what the home can be. 

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Photo of Team For Your Dreams, Inc. Real Estate
Team For Your Dreams, Inc.
REMAX United
7721 Six Forks Road, Suite 110, Raleigh, NC 27615
Raleigh NC 27615
919-846-3272
919-812-5111
Fax: 310-347-4041