There have been many recent headlines about a mortgage liquidity crisis, but what exactly does a mortgage liquidity crisis mean? More importantly, how does a mortgage liquidity crisis affect the average consumer. The next few paragraphs will explain the mortgage liquidity crisis and what you should know if you plan to purchase a home or refinance a home in the near future.

The best thing to take away from the term mortgage liquidity crisis is that crises by nature are temporary, and generally only affect certain segments of the market. If you are ready to own a home, or would like to refinance your home, speak to one of our mortgage professionals and determine whether or not your application would be affected and whether or not to act now or wait until conditions improve in the credit markets.

The mortgage liquidity crisis refers to the inability of mortgage lenders to sell closed loans in the secondary market. Lenders generally have a large line of credit to fund their mortgage loans. Once a package of closed loans has been sold, a lender once again has freed up their line of credit to fund a series of mortgage loans. If there are no buyers of the bundle of closed loans, the lender cannot make any more mortgage loans as they have no more outstanding credit to fund the loans.

The long and short of the mortgage liquidity crisis is that if you now want to borrow money against your home, your lender will try to reasonably verify that you can pay back the money you are borrowing. The value of your property will be scrutinized more closely as well.

Many loan programs that were previously offered such as no-income verification loans and "stated income/stated asset" loans are now proving unsaleable in the secondary market. This is because these loans performed poorly, which means people got loans that they could not afford and subsequently defaulted on these loans. With homes no longer appreciating rapidly to bail out those who can not afford their loan, these homes are being foreclosed upon.

The main mortgage markets that have remained liquid and stable are the markets for Fannie Mae/Freddie Mac Financing as well as the FHA/VA financing markets. Most lenders are gearing their current portfolio's to sell mainly to Fannie Mae and Freddie Mac.

After the closing, the primary lender may either hold the mortgage in its portfolio or sell it in the secondary mortgage market.

When primary mortgage lenders sell loans in the secondary market, they generally sell them as loans to an institution like Freddie Mac. They then use the proceeds of the sale to make new loans to other homebuyers in their community.

The primary mortgage market lender evaluates the homebuyer's ability to repay the mortgage, and if the lender's criteria are met, arrangements are made to make the loan. The transaction between the lender and the borrower culminates in what is called "the closing." By signing the closing documents, the lender agrees to fund the purchase of the home and the homebuyer agrees to pay the mortgage as negotiated. Once the loan is closed, the funds are transferred from the primary lender to the property seller through an escrow agent at closing.

The Secondary Market is where the loan is packaged and sold to various investors.

The mortgage liquidity crises stems from the fact that over the last five years lending standards dropped dramatically and many people received loans that will not be repaid due to the poor credit quality of the borrower. The mortgage market will have less liquidity going forward and will continue to raise lending standards to ensure that loans that are made will be repaid.

 

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