Let’s just start naming these Sub-Prime mortgage related posts with the same naming convention, ok? I am pretty confident there will be more than two on this here blog.  So, let’s get down to the nitty gritty shall we?  A few weeks ago, we saw home mortgage interest rates jump anywhere from a half to three-quarters of a percentage point in a matter of two to three days.   This was something that went unnoticed by John Q. Public, but was probably the defining economic moment of 2007.  We saw yields on the 10-year Treasury note jump to 5.4% when it seemed that it would never break the 5% barrier for many moons. Today, the 10-year note is trading at a yield of 4.80%…but, we have not really seen a comparable drop in home mortgage interest rates of similar maturity/length.  So, what gives? Well, the short of it is that there are a lot of mortgages that are not performing and lending institutions and investors are taking back properties at near-record levels.  When we saw the mortgage interest rates jump a few weeks back, the big news was really that underwriting guidelines for ALL borrowers changed dramatically. What most people have not taken notice of is that in addition to sub-prime loan programs getting slashed and trimmed into a small image of what they used to be, Alt-A and A paper underwriting guidelines have followed suit.  So, while lenders can borrow money, in theory, at cheaper prices (competing with bonds of similar maturities), mortgage interest rates have not moved down.  The investors that buy the MBS (mortgage backed securities) as well as the lenders (who can’t seem to sell their loan portfolios like they once could) are increasing the spreads they require to cover their asses.

The story here is, that credit is tightening in the mortgage markets.  This is not something that is simply affecting people with crappy credit scores.  Tightening credit is affecting all borrowers of all credit profiles.  Loan programs that were available 9 months ago, are no longer available today to the vast majority of borrowers.

What I find most intriguing at this point is that many of the non-performing sub-prime and other residential mortgages are owned by hedge funds.  In the late 80’s and early 90’s when the S&L crisis was in full effect, the RTC (Resolution Trust Corporation) was tasked with disposing of all of the non-performing loan assets.  The laws in effect at the time prevented banks from holding REO on their books for more than a certain amount of time. I am not aware of any regulation that would prevent hedge funds and non-banks from disposing of their REO.  What does this mean? Nothing other than it is different….and quite interesting.

tags: home loan, mortgage, sub-prime, subprime