Mortgage Rate News

For those concerned about the mortgage market, and the possibility of 2 million foreclosures by 2009, some hope is being peddled by the Bush Administration and the mortgage industry. The Wall Street Journal reports on the possible mortgage market fix:

The plan, which could be announced as early as next week, would represent the biggest public commitment yet by the administration, which has begun to take some heat over the lack of major initiatives to tackle the spiraling mortgage problem and has been looking for ways to stem the fallout from the crisis. As Deborah Solomon and Michael M. Phillips report, members of a coalition of big financial institutions in the mortgage market told U.S. Treasury Secretary Henry Paulson and other regulators Thursday that they are on track to announce by year’s end new industry guidelines for restructuring troubled mortgages.

However, one of the ideas floating around is an introductory rate for those who want to refinance out of their ARMs. Yes you read that right. One of the mortgage market fixes is to offer an introductory rate that will reset after a period of time. Isn’t that part of the problem we’re facing already?

In any case, one hopes that the mortgage market fix will be a true fix, and that it will help not only hold off some of the foreclosures, but will fix some of the problems inherent in the mortgage industry today. Problems that the House Anti-Predatory Lending Bill isn’t going to fix.

But it isn’t prudent to get one’s hopes up. So far, government attempts to fix the mortgage mess have been feeble and close to useless, and the mortgage industry is unwilling to make the changes necessary on their own.

Tags: mortgage industry, mortgage market, home mortgage loan, mortgage market fix,
House Anti-Predatory Lending Bill, mortgage blog, Bush Administration

On Tuesday, I wrote that one of the reasons that the credit crisis might continue is due to the fact that many banks have billions of dollars in undisclosed and underdisclosed risk. One of the investment products that carries this risk is what is known as collateralized debt obligation (CDO). I’ve received some questions about these CDOs, and thought I’d take a minute to address them.

Collateralized debt obligation

A CDO is an investment product. But it is an investment backed by debt. This means that a CDO can contain combinations of loans, bonds and assets that have collateral. Basically, banks have been investing in them, and not truly disclosing their risky nature. Because with debt, especially loan debt (and subprime loan debt has made up a great many CDOs in recent years), there’s the risk that the borrower will default, meaning that the risky investment is a loss, rather than a payoff.

With the subprime lending crisis, a number of CDOs went south, and that resulted in some of the more spectacular losses by financial institutions that had invested in them, leading in turn to the stock market downturn and continued volatility over the past couple of months.

What this means in the wider economy

The popularity of CDOs as investment vehicles is troubling because it reveals how much our economy relies on debt to keep it solvent. It is important to note that bigger mortgages and home equity loans have become the norm, and apparently, this uncontrolled debt, is largely what the recent economic boom has been built on.

What this means for the future, as borrowers start to collapse under the weight of the debt that has been supporting the economy, can be seen if something isn’t done.

Tags: home equity loans, mortgage blog, home mortgage loan, collateralized debt obligation,
CDOs, investing, subprime lending crisis

One of the issues with the subprime lending crash is no doubt some of the lending practices employed by financial institutions. But that is not the only doubtful practice that is affecting the financial sector, especially in terms of losses. Fortune Magazine on CNN Money has another story of doubtful practices including investing in debt:

Earlier this year, for example, Merrill Lynch, Citigroup and Bank of America gave almost no indication that one particularly toxic debt product — CDOs, or collateralized debt obligations — could be the source of billions of dollars in losses.

Those losses came to light this fall, blindsiding shareholders and pummeling banks’ stock prices.

So, it’s not just subprime lending that is causing problems among mortgage lenders. Other types of debt investment are hitting the stocks hard as well. So, even though a recent Citigroup deal appears to be helping the financial sector right now, some of the fundamental issues that led to the subprime mortgage mess, and the additional issues that could lead to the next credit crisis, have yet to be addressed.

Band-aids like “investor confidence” and “cash infusion” are being used to help buoy the stock market and even to try and slow the decent into recession for the economy. But unless fundamental changes are made in how credit is viewed and handled are made, the credit crisis is likely to continue.