This post also welcomes the new Bonddad Blog.
Housing Update: Mortgage Market Problems Increasing,
Tuesday, Ownit Mortgage Solutions of California shut down, citing “the unfavorable conditions of the mortgage industry.” That’s a euphemism for subprime home borrowers getting into trouble and defaulting on loans at unprecedented speed. …
Here’s a brief overview of the mortgage market. When you get a home loan from a bank, the bank doesn’t keep the loan on its books. Instead, it sells the loan to a larger institution. These mortgages usually end up with Fannie Mae or Freddie Mac. Freddie and Fannie take similar mortgages (mortgages that have the same interest rate, maturity etc…) and “pool them”, or puts them together in one giant mortgage bond. Then, these institutions sell the mortgages to pension funds, mutual funds and other investment companies. When people state that Fannie and Freddie have added liquidity to the mortgage market, the above-mentioned process is what they are talking about.
There’s much more over at Bondad Blog so go read. In summary, we’re seeing some very bad indicators that major financial trouble is on the horizon. The old saying, “If something is unsustainable it can’t be sustained” is starting to come true.