“Unlike the past private secondary mortgage market disturbances, which have lasted a couple of weeks or something like that … our industry and Indymac has to be prudent and assume that this disturbance, which seemed more comprehensive and serious, it could take more time to correct itself, “Mike Perry, executive director of home loan specialist Indymac Bancorp, said.
After Indymac as mortgage lenders offer loans, often package for sale to institutional investors as mortgage-backed securities. If the loans conform to the rules of government-sponsored enterprises such as Fannie Mae.
Fannie Mae, these organizations can buy them. If the loans are not adjusted, which are sold in the private sector, secondary market to other investors such as hedge funds and insurers.
The private secondary mortgage market “is not working,” Perry wrote in an email to Indymac staff, which was posted on a Web site managed by the company on Thursday.
At present difficult trading even AAA rated private parts of mortgage-backed securities. Only mortgages that conform to the rules of the government-sponsored enterprises (GSeS) as Fannie are currently commercial, Perry said.
That account was confirmed by Scott Valentin, an analyst mortgage company Friedman, Billings, Ramsey.
“We are hearing securitisations have frozen,” he said in an interview. “Nobody wants to bid on these things and then discover that loans are not worth anything tomorrow.”
Down dramatically
The private secondary mortgage market has not completely closed, according to Andy Chow, portfolio manager at SCM Advisors LLC, a $ 14 million San Francisco-based investment firm specializing in fixed income and structured financial markets.
The spread between bids and offers has been expanded in the last week, but trade continues to produce for AAA rated mortgage-backed securities, said Chow.
However, the volume of activity has been drastically reduced and is currently not possible to complete a securitization of the so-called Alt-A mortgages, also said Chow. (Alt-A mortgages are offered to most creditworthy borrowers to subprime loans, but often have adjustable rates and sometimes require little or no documentation of a home buyer’s income).
The largest, AAA rated parts of Alt-A securitizations can be sold, but there are no buyers for the lowest rated bit, he said.
“That is 5% to 7% of the capital structure that can not be sold,” said Chow.
That’s a big problem for mortgage originators, since they are based in part in the process of securitization to replenish the money they need to continue to make new loans.
Mortgage authors may take place in loans. But that requires a lot of cash and large investment banks that have provided the so-called warehouse funding have been pulling back in recent months, Valentine explained.
Call Congress
That is a problem currently facing Indymac, Perry said on Thursday.
“We can not continue to fund $ 80 to $ 100 million through loans to $ 33 billion balance unless we know we can sell a significant portion of these loans in the secondary market,” wrote Perry. “And now, with the exception of GSeS Mae … Ginn and the private secondary market is not working.”
In response, Indymac is originating more loans that conform to the standards of Fannie Mae and the other GSeS, Perry said.
U.S. Senator Christopher Dodd, D-Conn., Perry telephoned this week to ask whether Congress can help U.S. mortgage industry, Perry said.
“I also have spoken with the President of Fannie Mae this morning and have traded calls with the President of Freddie Mac,” wrote Perry. “Fannie Mae’s President (s) told me that they are” willing to strengthen and assist the industry. ”
These concerns led Countrywide Financial to issue a statement late Thursday that sought to allay concerns about its ability to finance its day to day operations.
The company noted that its main mortgage business has access to almost $ 50 billion of “highly reliable” short-term funding as a cushion. See full story.
Increased interest rates
The disruption of the mortgage market is likely to mean some homebuyers pay much higher interest rates to obtain a mortgage, Perry and SCM Chow said.
The cost of not doing body mortgage loans is approximately 102 cents to 100 cents on the loan, estimated Chow. But at this time authors can not sell mortgage loans of 103, he said.
For selling prices, the loans will have much higher interest rates, he added.
“So I think through a very substantial increase in interest rates that home buyers will pay,” said Chow. “If home buyers are loans that do not conform to Fannie or Freddie, given the current market circumstances, will have to pay at least 100 basis points more.” (A basis point is one hundredth of a percentage point).
That will have a major impact on the housing market in California, Florida and other places where housing prices are very high, he said.
“In these areas, if home buyers do not have much money as a down payment, loans will be too large to comply with Fannie and Freddie standards,” said Chow. “This means that people will pay much higher interest rates.”
Indymac Perry said that many large mortgage creators announced “significant additional” increases in interest rates this week.
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