Debt Free

What did the mortgage industry do to create the current mess? Well, they did help out the economy in the short term by lending to almost anyone with a pulse. This helped buoy the housing market, driving up prices and home owner's equity. Jobs created in the building industry and related businesses, plus the money created by the increasing home owner's equity was part of the engine that's powered the economy for the last 5 years. Unfortunately, a larger portion of the loans granted by the mortgage companies were on shaky ground from the start, compared to historical norms. They should probably have taken a pass on some of these loans in the interests of long term industry viability.

Does this mean that all low / no money down, and other non-conforming mortgage products should have been eliminated? Not at all. Many creditors use these mortgages for a variety of reasons, and are excellent credit risks. In addition, many of those mortgage customers who received these products have done fine, made their payments every month, and never gotten into any trouble whatsoever. Many of the problems stem from those mortgage holders who were relying on a continually appreciating real estate market to allow them to refinance their ARMs and other mortgages into more favorable loans before their interest rates adjusted. Others got into trouble due to unrealistic expectations of future earnings growth.

The mortgage was all to eager to help many of these folks into loans they should have never qualified for. The 93% year over year increase in foreclosures for July illustrates the point, and drives home the stark reality that there were some very poor decisions made by lenders. Based on personal experience, and that of others, mortgage lenders will allow customers to qualify for loans that are much larger than their income has a realistic chance of supporting in the long term (and mortgages tend to be so, for the most part). One can suppose they may review their loan qualification procedures to help prevent such problems in the future.

One wonders now if many investors aren't, in effect, throwing the baby out with the bath water. Causing the mortgage lenders to restate their loan portfolios to reflect added risk (which the increasing foreclosure rate proves is definitely there), makes them have increased cash reserves in order to meet collateral requirements. Many mortgage companies simply cannot do so. Other backers are calling their credit lines entirely. Again, the mortgage companies haven't a prayer of paying off the line. By so doing, the creditors are driving out of business the very companies whose loans they have invested in. Who wins then?

In the latest mortgage company collapse, Mortgage company First Magnus, out of Tucson, AZ, fired all but 60 of its 6,000 employees, ceased operations and filed for bankruptcy yesterday. Although they show over $900 million in assets against only $813 million in liabilities, they had insufficient liquidity to continue operations.

Mortgage companies are using various strategies to deal with the problems. Coutrywide Financial got 11.5 Billion in additional credit from a group of 40 different lenders, Capital One closed their GreenPointMortgage division entirely, and Thornburg Mortgage has sold over $20 billion worth of mortgage backed securities in order to raise additional cash. Cap One's decision will cost them about $860 million, but they decided it was worth it, rather than facing additional risk exposure. Thornburg expects their asset sale to ding them for over $900 million.