NEW THEROY REGARDING SUBPRIME MELTDOWN PUBLISHED
HOME LOANS, INDUSTRY NEWS
August 7th, 2008
A U.C. IRVINE study, published July 30,2008, points to a credit market shift in 2003 as a reason fo
r the run-up in home prices starting in 2003. Up to now, critics have pointed the finger at loaning money to borrowers with less-than-perfect-credit as the main culprit in the unsustainable inflation of home prices that eventually caused the burst of the real estate and lending bubbles. Now it is believed the considerable pullback by government-sponsored enterprises (GSE’s) including FANNIE MAE and FREDDIE MAC in 2003 caused the credit market to switch to riskier, more aggressive loans. The pullback was caused by political, regulatory and economic factors including accounting irregularities that eventually led to resignations by senior officers which caused these two entities to slow their lending volume.
The vacuum was filled by private funding, in the form of asset-backed securities and residential mortgage-backed securities as the prevalent source of mortgage capital. This new credit environment fostered looser underwriting standards and increased tolerance for riskier, high-yield loan products. We are all familiar with the interest only, adjustable-rate mortgages with low initial “teaser” rates, loans that did not require income verification and non-owner occupied investor loan products. The easy money lending market, where just about anyone with a heartbeat could borrow money, led to record increases in mortgage volume, pushing home prices skyward with momentum characteristic of a bubble.
The researchers also determined that interest rates did not significantly affect house prices. This finding defies conventional wisdom that ties mortgage rates directly to the monthly cost of housing and an effect on purchase prices. The lesson to be learned is government can have a major role in shaping financial markets in the future. Prior to 2003, rising home prices could be explained by economic fundamentals, such as low unemployment rates, increases in income and population growth. During these times FANNIE MAE and FREDDIE MAC issued and purchased conforming, conventional mortgage-backed securities providing a stable source of funds for lenders.
If you have any questions about this or any real estate matter please feel free to contact me:
530-224-6767 or 530-941-7492
BRAD GARBUTT
REALTOR/BROKER
REAL ESTATE PROFESSIONALS GMAC
TWENTY FIVE YEARS LOCAL EXPERIENCE
