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MORTGAGE MATTERS: EXCESS/EXCESSIVE REACTION.

Byline: JOSEPH BADAL

Excess/excessive reaction

Are you confused by what's happening in the residential mortgage finance markets? You're not the only one. I think that Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke were initially just as confused about the capital-markets meltdown meltdown

Occurrence in which a huge amount of thermal energy and radiation is released as a result of an uncontrolled chain reaction in a nuclear power reactor. The chain reaction that occurs in the reactor's core must be carefully regulated by control rods, which absorb
 that began in August as is the average citizen.

Well, let me offer a simple explanation for a very complicated problem: Excess leads to excessive reaction. It's just that simple.

Huge amounts of money chased higher yields available in the "scratch & dent" mortgage sector. Billions of dollars of loans were made to borrowers with damaged credit, or to perfectly credit-worthy borrowers who just couldn't afford the payments once their mortgage loan rates adjusted. Making loans to borrowers with dinged credit or to borrowers whose income didn't merit the loans didn't seem to be an unreasonable approach to many borrowers, lenders and mortgage security investors. After all, as long as housing prices continued to rise, what was the real risk? If a borrower got into financial trouble, he could just sell the property, pay off the mortgage, and walk away with cash in his pocket. Let me see a show of hands a raising of hands to indicate judgment; as, the vote was taken by a show of hands.

See also: Show
. How many of you believe that what goes up never comes down?

Why did so much money go into bad credit? Again, the simple answer is that credit spreads in high-quality mortgage assets had compressed. Because there was very little difference between short-term and long-term rates, lenders who borrowed "short" and lent "long" couldn't generate the interest-rate spread to which they had become accustomed. But there was a place where spread could be increased: the sub-prime lending arena.

There were plenty of borrowers with impaired credit Impaired Credit

The deterioration of a borrower's credit rating.

Notes:
Any weakening of a company's finances will cause an impairment of credit. Consequently, it results in a reduction of the credit offered by lenders.
 and/or insufficient income who wanted to ride the homeownership bandwagon. And, coincidentally co·in·ci·den·tal  
adj.
1. Occurring as or resulting from coincidence.

2. Happening or existing at the same time.



co·in
, there were a large number of investors in mortgage securities who wanted interest-rate spread regardless of the quality of the loans underlying the securities, so the alchemic environment was ideal. Insert real-estate brokers, mortgage lenders, rating agencies, and investment bankers Investment Banker

A person representing a financial institution that is in the business of raising capital for corporations and municipalities.

Notes:
An investment banker may not accept deposits or make commercial loans.
 between these two constituencies and the chemical chain became complete.

Hundreds of billions of dollars poured into mortgage-backed paper from foreign central banks This is a list of central banks.

Contents A B C D E F G H I J K L M N O P Q R S T U V W Y Z
, hedge funds hedge fund, in finance, a highly speculative, largely unregulated investment device. Originating in the 1950s, the funds "hedge" by offsetting "short" positions (borrowing a security and then selling it at a higher price before repaying the lender) against "long" , commercial banks, investment banks The following is a list of investment banks Financial conglomerates
Large financial-services conglomerates combine commercial banking and investment banking, and sometimes insurance.
, pension funds, insurance companies, etc. NINA loans (no income, no asset), POA loans (negatively amortizing pay option ARMs), and Piggyback piggyback

1. A broker trading in his or her personal account after trading in the same security for a customer. The broker may believe the customer has access to privileged information that will cause the transaction to be profitable.

2.
 HELOC HELOC Home Equity Line Of Credit  loans (home equity lines of credit representing much of a borrower's down payment) proliferated. I kept waiting for a NINJA loan to pop up - no income, no asset, no job.

The politicians want us to believe that real-estate brokers and mortgage brokers were responsible for the present environment of high loan delinquencies and foreclosures by duping Duping refers to the practice of exploiting a bug in a video game to illegitimately create duplicates of unique items or currency in a persistent online game, such as an MMOG.  consumers into buying and financing homes they couldn't afford. Sure, some of that occurred, but the vast majority of consumers who participated in creating the current situation entered home purchase and financing transactions with their eyes wide open This article contains links, text or other information that has been inserted due to a business arrangement by the Wikimedia Foundation rather than the usual Wikipedia editing process. It may or may not comply with all of Wikipedia's normal editorial standards. .

Real-estate booms, high-tech booms, stock-market booms, and every other type of boom are caused by two primary factors: an excess of greed and a colossal disregard for basic economic principles. And the market has a painful way of reacting to excess: excessive reaction. The shame is that perfectly innocent individuals and companies wind up paying a price, whether they had anything to do with the basic excess. Strong borrowers all over the country see their home values decline as the real-estate market weakens; some lenders are victims of the excessive reaction, despite having never made a sub-prime loan; responsible consumers, out of fear, curtail their spending, thereby damaging the overall economy; and on and on.

The present environment that was precipitated by excess in the housing and housing finance industries will eventually pass. Let's try to remember the lessons that were conceived this time around.

Joseph Badal is senior executive vice president, chief lending officer, and a member of the board of directors of Thornburg Mortgage, a leading single-family residential mortgage lender focused principally on the jumbo segment of the adjustable-rate-mortgage market. Contact him at lendingpartners@thornburgmortgage.com.
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Title Annotation:Real Estate Guide
Publication:The Santa Fe New Mexican (Santa Fe, NM)
Date:Dec 2, 2007
Words:667
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