Beginning the story in chronological order, we have the chicken being played by the real estate industry and the egg by the mortgage lenders. The chicken is telling all who will listen that the industry will be in good shape as soon as the lenders begin lending in earnest again. The egg is just as adamant as the chicken when saying they will begin lending once the real estate market starts moving.
So what we have now, as Paul Harvey would say, is “The rest of the story.” Before we get into that, however, we notice that an ominous character looking much like the big bad wolf is lurking around the story, played by Fannie Mae and Freddie Mac. In as much as they are the predominant lenders today, they feel that you should be charged a “whole lot more” for no other reason than they can do it with ease. Now we have the cast, characters and scenario for a story that currently has no ending. But I am getting ahead of myself once again.
In the proverbial battle of the chicken and the egg, I am forced to go with the chicken in this case. Real estate cannot really improve and “start moving” without sufficient financing. The bulk of the financing we had was done through securitization of mortgage loans. A simplified overview: a lender would bundle a number of loans and sell them at the best yield he could find on Wall Street. Wall Street investors would get a fixed rate on their “bundled loans” and the lender would take his money and profit and start the process over again. Unfortunately there aren’t any bids for the most part on bundled mortgage loans, so that type of financing is not available at this time. This largely eliminates jumbo loans as a category for borrowers.
(See below). Fannie Mae and Freddie Mac finance conforming loans, and a small amount of jumbos known as conforming jumbos. The conforming jumbos are set to disappear at the end of the year as the stimulus bill that created them runs out on December 31.
Roger Schlesinger's Mortgage Minute is heard on hundreds of radio stations and daily on the Hugh Hewitt radio show and Michael Medved shows. Roger interacts with his hosts and explores the complicated financial markets in order to enlighten his listeners and direct them along their own unique road to financial freedom.