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Crunch Time? – Lenders Tighten the Reins on Mortgage Loans

September 14, 2007

The facts appear overwhelming. The housing market is continuing to cool, interest rates are slowly increasing and foreclosure rates are reaching record numbers. In fact, the Mortgage Brokers Association recently reported that 5% of all mortgages in the United States are in default. The culmination of these factors appears to have had a catastrophic effect on a number of lenders that are suffering losses, especially in the sub-prime market.

The Problem – From the Prospective of Residential Mortgages

The calamitous affect on lenders is most clearly evidenced by the recent bankruptcy filing of one of the nation’s largest mortgage lenders, American Home Mortgage. In addition, at least five other lenders have stopped funding loans or appear to be experiencing instability, including the nations biggest mortgage lender, Countrywide Financial Corp. Countrywide recently reported escalating financial problems due to the continuing rise in the default rate.

Especially hard hit have been sub-prime and mortgage loans in which people seek to borrow more than 80% of the value of their house. These borrowers are facing increasing difficulty as lenders are concerned with continuing real estate value depreciations. These lending circumstances seem to create a complex situation as mortgage loans become more difficult to obtain, and home sales will likely continue to decrease. As this happens, home values tend to decrease as well, which in turn leads to an increase in default and foreclosure. Lower home values mean some refinances and sales are no longer an option, due to a sudden lack of home equity.

A true credit crunch creates a scenario where lenders stop lending and credit becomes increasingly difficult to obtain. It tends to first affect cash-strapped companies and over-mortgaged homeowners, who have come to rely on easy credit and the ability to refinance.

Following the loss of high-risk lending, the crunch may ease into traditional markets, thus making it more difficult for companies and people with good credit to obtain loans. To gauge the health of the lending market, typically we could look at the financial markets and determine the willingness of investors to make money available. Based on recent market fluctuations, it would appear there are some signs a credit crunch may be upon us, as the market has suffered significant losses in mortgage investments.

As more homeowners lose their homes to foreclosure, lenders will continue to suffer significant losses. In addition, …

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by: Justin H. Dion, Esq.

September 3, 2007

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