Bankruptcy & Foreclosures

I like to use my blog space to point out the affects of the subprime mortgage mess on individuals. While we’re all feeling the weight of the situation in our daily lives, Bear Stearns could very well have been hit the hardest by the collapse. On Friday the word was that Bear Stearns would be receiving an emergency loan from JPMorgan Chase backed by the Federal Reserve.

As of today word has been announced that a deal is being formulated in which JP Morgan Chase may purchase Bear Stearns for $2.2 billion. While this Wall Street firm buy out may not have much of an affect on you personally, this news only further strengthens fears that we are in trouble collectively.

What does affect each and every one of us is the news that investors are suddenly turning away from mortgage-backed securities issued by government-sponsored enterprise (Fannie Mae and Freddie Mac). In the opinion of many, it is these government backed loan programs credited in preventing the real estate market from completely crashing.

So what does this mean to the individual consumer? It could very well make it harder for people, even those with favorable credit history, to get a mortgage. Those individuals who could still get a home loan face higher rates, stricter terms, and additional conditions. As the prices of mortgage-backed securities fall, yields rise correspondingly, which means higher mortgage rates.

The concept of rising defaults and delinquencies freezing up the subprime market is nothing new and that’s because up until recently, borrowers with good credit could still get conventional loans thanks to the fact that investors continued to buy securities backed by Fannie Mae and Freddie Mac. After all these were still viewed as relatively safe investments due to the governmental backing.

Recently things have changed. Investors aren’t quite so quick to buy up these securities once Fannie Mae and Freddie Mac reported a combined $6 billion in losses for the fourth quarter. Unfortunately, all the Fed can do at this point is to continue to slash interest rates. Many argue that this tactic isn’t helping matters (after all, the lowest rate in the world means nothing if an individual cannot get a loan). Hopefully news in the early portion of the week will be more positive.