CHANGING GAME IN THE MORTGAGE FIELD

The impact of the sale of Countrywide to Bank of America cements a new wave in the tumultuous mortgage scene. It marks a significant shift in the way mortgages will be issued to consumers in the foreseeable future. Mortgage companies took the lead from savings and loans and bank. They borrowed money mainly from non banks and used it to fund loans. After closing the transactions, they sold the loans back to investors who issued securities backed by those mortgages.

There were essentially two categories of loans: the subprime loans and the prime loans. The first group refers to loans that did not meet Fannie, Freddie and FHA/VA guidelines in terms of required documentation, loan to value and credit. These loans were not necessarily given to borrowers with bad credit as most people are let to believe. Because some of the loans did not require down payments, escrow and extensive documentation of income, they appealed to a lot of borrowers.

The second group of loans were the traditional type: borrowers have to provide detailed information about income, credit and assets. In addition, they were subjected to maximum loan limits and loan to value amounts: for instance the maximum loan amount for a single family home was and still is $417,000 and the minimum down payment is 5% for conventional loans and 3% for FHA insured loans.

The dual system worked well as long as mortgage companies were able to secure financing by selling the loans that they made. Once the borrowers began to fail to make their payments, investors stopped lending money to mortgage companies and the system essentially came to a halt. What followed is now referred to as the subprime meltdown characterized by rising foreclosures and strict application of guidelines. Over 160 mortgage companies have closed their operations (www.lenderimplode.com ), wholesale by banks has been curtailed and consolidation underway.

The new game where banks are the dominant players is the norm. The purchase of countrywide marks the return of banks as the primary sources of mortgages.
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