Wednesday, August 15, 2007

Is The Mortgage Market Headed For A Meltdown?

Wharton Prof and Yahoo!Finance Columnist Jack Guttentag corrects the record on the recent panic you've heard about in the press (yes, the same panic that is affecting the stock market) about mortgages.

Jack argues that the Mortgage Market is not "melting down", in fact he argues just the opposite. The mortgage market is still lending, it has just "repriced" its risk and adjusted its parameters for lending.

While this will cause a lot of pain for those who are looking to buy (and for those selling....les buyers), it is more than healthy as the mortgage industry was making loans that were pricing risk incorrectly.

Let me give you an example, In February a person with a good credit score could have gotten a loan (conforming) at a rate of 6.25%, the ten year treasury was at about 4.7%. Today, that same loan, with the 10 year treasury trading around the same point could cost as much as 7%, though most likely around 6.675%. Nothing has changed, but the risk has been repriced - meaning the lender requires a higher interest rate to do the loan.

The days of ultra cheap easy to get mortgage loans appear to be over (at least until the next cycle) and this is spilling over to other credit markets which spills into the stock market.

Long term you will forget this even happened, but in the short term there will be some pain.

Those who live with the pain will endure.

Scott Dauenhauer CFP, MSFP, AIF