Where Is the Mortgage Market Heading?

With so much turmoil in recent months, a shake-up in subprime lending, and now a spillover effect into Alt-A lending, you may be wondering what’s next for mortgage.

While it’s impossible to identify the extent of the damage caused by loose underwriting practices and mortgage fraud, I think it’s safe to say things are going to get worse before they get better.

Sub-prime lending is no more as investors turned their backs to anything high-risk. Alt-A lenders, who provide average to good credit are experiencing a lull in new business while dealing with picky secondary investors.

Additionally, mortgage stocks are getting battered and home prices are stuttering, or falling in most markets throughout the United States.

So what does this mean for mortgage? Is it really as bad as the media has made it out to be, or worse?

Well because of the recent shake-up in sub-prime lending, many small to mid-size lenders have shut down, and now many Alt-A lenders will likely follow suit as investors force them to reduce their product offerings to only the best borrowers.

The Second trust deed market will come to a standstill as virtually all investors shy away from risky second mortgages, and the buyers market we are seeing nationally will become a “super buyer’s market”.

Falling property values will make it difficult for many homeowners to refinance, and thus cause a new flurry of foreclosures, as former rising property values won’t be around to bail people out. The increase in foreclosures will again lower housing prices and cause more problems until the Fed finally steps in.

Once things reach critical mass, the Fed will lower interest rates in a bid to spark a second wave of mortgage refinancing, purchases, and overall financing.

While this is good news, you can bet it won’t be the same as the last cash-out refinance boom.

Stricter underwriting guidelines will make it tougher to qualify and more conservative loan programs will be offered as a means to avoid another mortgage crisis.

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