Real Estate's Fault Line

There is plenty of blame to pass around concerning who is at fault for the real estate bust that is making headlines almost every day in major publications, nightly news and coffee shop chit chat.

I’m going to boldly be a complete pansy and just spread the blame around to everyone.
· Consumers: Know the terms of your loan! Can you afford the monthly payments? Is your loan going to adjust? If so, when? What is the margin? What is the cap? Know your worst case scenario!
· Mortgage Brokers: Keep your buyer’s interests and welfare the number one priority! Very simple. Ask some questions. Educate buyers on loan products. Be a resource!
· Wall Street: Don’t demand loans that aren’t proven performers!!

Whoa! How on earth does Wall Street fit into the mix? Here is how the loan process works.
1. Loan officers take loan applications and send them in to mortgage companies/banks which underwrite (review) the file & fund the loan. At this point, the consumer has closed on their home and the loan process is completed, right?
2. Not even close! Most banks are not portfolio lenders. In other words, most banks bundle millions/billions of dollars in loans sell them as mortgage-backed securities.
3. At this time, the new owner of the mortgage can use the securities as collateral to issue bonds for financing other deals! Homeowners pay the interest that covers interest.
4. These securities are rated by risk groups (tranches) for investors. Riskier loans pay more.
Now you can really see where the demand for risky loans came from. A LOT of people made a ton of money. Mortgage brokers, banks and Wall Street Investors.

The problem occurred when homeowners were unable to make payments for various reasons. Suddenly, the money needed to pay bond interest is not there! At this point Wall Street starts slamming doors closed. Mortgage companies have no one to sell their loans to and lack the capital to hold onto billions upon billions of dollars in mortgages. Doors close! Companies disappear over night.

People who were eligible for loans 9 months ago can’t even come close to qualifying today. What does this mean for Denver??

We have a huge inventory of homes on the market right now. We have fewer eligible buyers. The worst is not over in the housing market! We’re looking at a couple more years of slow real estate.

Time Magazine recently did a nice article on Denver real estate. Check it out.
http://www.time.com/time/magazine/article/0,9171,1653635,00.html