Many years ago a borrower would visit their local savings and loan to obtain a mortgage. The Loan Officer at the bank would approve the mortgage and fund it with money pooled by its depositors. This system worked well until the bank lent to the extent of its deposits, at which time customers were turned away until the available pool grew again.
FNMA and GNMA were established so that banks could sell the notes created when they lent to home buyers. The goal was to provide cheap mortgage money to prospective homeowners and high quality bonds for the investment community. The bond or Mortgage Backed Security (MBS) takes mortgages with similar risk characteristics and pools them together. As such the purchaser knows ahead of time the rate of return, much like a certificate of deposit.
During the recent Real Estate boom underwriting guidelines were relaxed giving way to a whole new menu of products, some of them very risky. For example, the 100% non owner occupied loan with questionable credit. When housing prices rise rapidly, the basis for the mortgage, the property, could be sold to cover loan amounts and foreclosure costs if a default occurred. The cycle worked well until the price of homes stopped escalating in 2006.
The strong demand cycle for MBS’s caused the guidelines to expand into an unknown risk formula. Now that the performance is known to be unacceptable, more reasonable underwriting standards are back in place. As of today’s date, liquidity on all fronts is opening, and Mortgage Backed Securities meeting higher standards are being traded again. Halleluiah!
Jason Fox / President
Luxury Mortgage Group
Direct Phone Number 702-444-0400 x1
Tags: · · mortgage backed security pools · mortgage industry basics · positive mortgage news ·
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