The Long-Term Impact of the Mortgage Crisis
The past week saw more symptoms that the mortgage crisis is likely to drag on:
- Stocks in mortgage financers Fannie Mae and Freddie Mac took a tumble, as investors questioned their long-term viability
- The problems of Fannie Mae and Freddie Mac are already evident to mortgage borrowers in the form of higher fees, tougher approval standards, and higher interest rates
- Mortgage experts warned that the impact of so-called “liar loans” has yet to fully play out
- Not surprisingly, with these and other woes, mortgage application volume continued to slip
For prospective homebuyers, these symptoms of long-term consequences of the mortgage crisis signal that waiting for the storm to blow over may not be the best strategy.
Fannie and Freddie Continue to Struggle
Basically, what Fannie Mae and Freddie Mac do is insure mortgages. This, in turn, gives mortgage lenders more confidence and allows them to make more loans. As the mortgage crisis has proven, too much confidence can be a dangerous thing, but taking away the safety net of insurance would mean that the availability of mortgage loans would become drastically limited.
As natural as it may be to feel hostile toward a government bailout of private companies, some solution – either a true fix for Fannie Mae and Freddie Mac or a new and healthier substitute for them — is necessary for the health of the mortgage market. In the long run, one way or another, the country at large is going to end up paying for their mistakes.
In the meantime, new borrowers are already paying for those mistakes, in the form of higher fees and interest rates, not to mention tougher lending standards.
Liar Loans Come Home to Roost
Against this backdrop, mortgage industry professionals warned that the fallout from “liar loans” – mortgages granted with no documentation of income or asset claims — has yet to be fully realized. Not surprisingly, it turns out that a disproportionate number of these borrowers may not actually have the means to make their mortgage payments. As much as it may be hard to feel sympathy for either side of these deals — the borrowers who lied on their applications or the lenders who relaxed their standards in exchange for higher fees — this is another example where the damage extends beyond those directly involved. These foreclosures add further downward pressure on the housing market, and take more capital out of the mortgage market.
An interesting perspective on the collateral damage the mortgage crisis can do to innocent bystanders comes from Florida, where a high percentage of foreclosures on condominiums means that some condo associations are having trouble collecting their fees. For the remaining condo owners in those buildings, this means higher fees and/or a reduction of services.
Mortgage Applications
With all this going on, it’s no surprise that mortgage applications declined again this week. The 1.5% decline that was reported for the week doesn’t really tell the story. What’s striking is that mortgage application volume is down 34.2% from a year earlier. Counterintuitive though it may seem, this might actually be the best time to shop for a mortgage. Home prices are still down, and the news suggests that the mortgage climate may get worse before it gets better.
Tags: borrowers, fannie mae, foreclosure, freddie mac, housing market, interest rates, lenders, mortgage, mortgage application
