Posted on: 28th May, 2008 05:34 am
In case you have not heard the senate finance committee has just finished approving a bill that will pump $300 billion dollars into mortgage markets! Yes this bill is a similar version to the bill the House passed earlier this month. The main difference is that the “white house†is in agreement to the modifications that where made to the senate bill. Anyways, what all this means is that all branches of government are in agreement to getting into law a bill that “limit foreclosures, create affordable housing and revamps oversight of two of the mortgage market's biggest players Fannie and Freddie,†in short elected officials are attempting to show they did something to help people in trouble before the November election.
As an economist here is an analytical opinion of how this will filter through markets. When the government does this it is known as ‘economic stimulus†and has a positive affect on kick starting a faltering economy. The good news is that they are using the mortgage markets as the channel to send the economic stimulus into the market place. This is excellent for people in the mortgage industry!
Basically, now would be a good time while everyone else is asleep to start contacting potential refinance clients. Who are the prospects? They are individuals who have mortgage debt-to-income ratio of more than 31%, who would like a loan for 90% of the appraised value of their home. If they are upside-down in their home no worries the program requires lenders to eat the difference. That’s right the lenders eat the difference! Lenders are willing to do this because this gives them a “floor†as to how much exposure they have on the loan. All in all from an “economic prospective†this will be great for home owners, lenders and our economy.
As an economist here is an analytical opinion of how this will filter through markets. When the government does this it is known as ‘economic stimulus†and has a positive affect on kick starting a faltering economy. The good news is that they are using the mortgage markets as the channel to send the economic stimulus into the market place. This is excellent for people in the mortgage industry!
Basically, now would be a good time while everyone else is asleep to start contacting potential refinance clients. Who are the prospects? They are individuals who have mortgage debt-to-income ratio of more than 31%, who would like a loan for 90% of the appraised value of their home. If they are upside-down in their home no worries the program requires lenders to eat the difference. That’s right the lenders eat the difference! Lenders are willing to do this because this gives them a “floor†as to how much exposure they have on the loan. All in all from an “economic prospective†this will be great for home owners, lenders and our economy.
Hey cliff.
This is really for our economy. Hope this bill at least the delinquent borrowers. Now one thing is why would the "lenders eat the difference"?
This is really for our economy. Hope this bill at least the delinquent borrowers. Now one thing is why would the "lenders eat the difference"?
Very, Very good question!
The reason is right now lenders (i.e. large financial institutions) have on their books/balance sheets large numbers of “mortgage backed securities†of which they do not know how far the price will fall. Every time they have to “write-down†(i.e. lower the price/value) of these assets it requires a specific amount of capital/cash. When they do not have enough capital you have a situation like we had at Bear Stearns where investors notice and essentially cause a modern day “run on the bank.â€
If the lenders eat the difference then they get a new “mortgage backed security†with what would be called a “price floor†in other words unlike today where they do not know how far the price of the “mortgaged back security†could fall. So what the government will have essentially done is put a back stop for lenders which will instill confidence in the lenders to once again lend more freely.
Hope this answers your question :D
The reason is right now lenders (i.e. large financial institutions) have on their books/balance sheets large numbers of “mortgage backed securities†of which they do not know how far the price will fall. Every time they have to “write-down†(i.e. lower the price/value) of these assets it requires a specific amount of capital/cash. When they do not have enough capital you have a situation like we had at Bear Stearns where investors notice and essentially cause a modern day “run on the bank.â€
If the lenders eat the difference then they get a new “mortgage backed security†with what would be called a “price floor†in other words unlike today where they do not know how far the price of the “mortgaged back security†could fall. So what the government will have essentially done is put a back stop for lenders which will instill confidence in the lenders to once again lend more freely.
Hope this answers your question :D
