Here is Shawn’s first article – I’m publishing it for him since he emailed it to me but expect to hear more from him soon.
By Shawn E. Wolcott
I have been saying to my associates and co-workers in the mortgage industry for the last two years that higher rates are needed to save the industry. Yet the response I always got was ??are you kidding me?. you must be crazy?you?re nuts??
My rationale two years ago was simple: rates were far too low considering the layer after layer of risk that being packed into loans. A borrower who gets a high loan to value loan represents a higher risk to lenders, which is well known. But when you add into the equation lower credit scores, higher debt to income ratio?s, ARM loans, limited or no income documentation, and overall a lack of detail to underwriting standards, you have added layer after layer, after layer of risk to both borrower and lender. Much of this risk was not properly reflected via higher rates.
Had the industry increased rates on all loan transactions, (yes I?m talking about sub-prime, Alt-A, and conforming loans) you would have seen a rather significant drop in demand by buyers, thus slowing down construction, and slowing the crazy appreciation that occurred in many areas. All of these three factors would have lead to a gradual and gentle decline in the market and an eventual soft landing.
Higher rates are needed to increase the flow of capital into the housing market. A major component we hear regarding the ?credit crunch? involves the lack of capital coming into this specific market from investors. The industry and mortgage backed securities (MBS?s) are now seen as high risk, so to offset that risk, you must increase rates and thus the return to investors. Additionally, many of the investors ? specifically the international market – who have been burned on MBS securities; such as the CDO?s and SIV?s, now view Wall Street in a different light, and not to be trusted.
The only way to get the foreign investors back into the MBS market is to offer quality driven, traditional, MBS securities at a higher rate. Higher rates will increase capital into the market; it will help those companies experiencing trouble with funding loans, and keep a competitive market that will still be able to provide low rates by historical standards.
Higher rates are not always a bad thing.Click to See the Latest Mortgage Rates»