What the hell happened?

As the dust of the collapse of the 10th largest mortgage company in the United States starts to settle (http://money.cnn.com/2007/08/03/news/companies/american_home.reut/index.htm) the mortgage industry is being faced with its greatest change in lending policies in years. As fast as you can hit send/receive investors are sending out e-mails with changes for their product guidelines. Rate locks are being cancelled as investors realize there is no one who wants to buy the loans that they want to sell or if they want to buy them they don’t want to buy them for the price the investor has agreed to pay the originating lender.

So what loans are changing and disappearing? It is the liar loans. For years the mortgage industry has fed its growing appetite for originations with increased products for people who don’t make the taxable income needed to qualify for the home they wish to purchase or refinance. Now I am not saying that some of these people don’t have the cash flow to handle their obligations, but what I am saying is that they don’t declare taxes on that income or they are self-employed and find ways to write off expenses so that they don’t have to pay taxes. What happens when a self-employed person has a rainy day, they start robbing Peter to pay Paul and then their mortgage and other obligations become jeopardized. The same has happened to the mortgage companies that make these loans.

Countrywide, the self proclaimed largest lender in the United States has now fallen on the same woes as the rest of the industry, http://www.iht.com/articles/2007/08/17/business/mortgage.php

The entire industry has been built upon the hope that there never will be a rainy day. Now that is has started to rain we can watch as the poorly built straw houses wash away. When it is all over what will be left is a base of traditional lending values, Income, assets, collateral, credit and equity. In the meantime, for those wanting to borrow that don’t have all of the previous 5 keys, you will pay a significantly higher interest rate than the market if you can find a loan at all.

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