Mortgages Availability Tightening, Existing Home Sales Continue to Fall

President Bush Urges Action

Last night, in prime time address to the Nation President Bush described the current market crisis as "our markets no longer working properly" and "the gears of our credit system grinding to a halt." Banks and financial institutions, in a panic have all but stopped lending to businesses and consumers.

Housing Sales Slump Without Credit

This is causing the housing inventories to continue to swell as existing home sales decline in August. Declining 2.2 percent, sales are down 10.7 percent from August 2007.

NAR President Richard F. Gaylord, also a practicing real estate broker in California, explains that credit tightening has gone too far. "The difficulty in obtaining a mortgage increased over the past couple of months, making it more challenging for creditworthy borrowers to find financing." Real estate brokers, mortgage lenders, and borrowers are hoping that these new legislative initiatives will take stress of the banks--reopening lending.

The longer borrowers are without viable credit opportunities the more likely the housing market continues to spiral downward. A lack of credit blocks buying and refinancing, which is a true double edged sword. The lack of new mortgage loans prevents the much need buying of excess home inventory in the market, which continues to lower housing prices. Likewise, a inability to refinance adjusting or ballooning mortgages forces existing homeowners into default and foreclosure. This results in the additional dumping of houses into the market and again lowering housing prices.

FHA Reform Provides Minimal Relief

Some relief is expected as FHA modernization and reform legislation kicks in October 1, 2008 with increased loan limits, revised down payment guidelines, and provisions for shrinking home equity. However, these reforms only impact the mortgage insurance. The FHA still needs the banks and financial institutions to lend, which is not happening.

The Credit "Knot" Continues to Tighten

Many experts believe this is a direct result of uncertainty around billions of existing mortgages that sit on these lending institutions' balance sheets. This uncertainty causes these mortgage assets to become illiquid or as Treasury Secretary Paulson describes it, "a knot [of credit] that keeps getting pulled tighter."

An asset, like these billions in mortgages, become illiquid when pricing becomes uncertain and causes them to no longer trade. This is precisely the condition in the market today. Billions of mortgage-backed securities and whole mortgage loans have taken on a risk profile that in unprecedented. Traders are unable to properly analyze and predict losses (risk) on these portfolios--causing them to cease trading. The simple cause and effect is that banks and lending institution hold on to their cash (to cover these illiquid assets) instead of lending it to borrowers.

$700 Billion Bailout Proposal Critical

This is why the next few days in Washington are going to be critical to the direction of the US economy. Without a swift resolution to unclog these impaired, illiquid mortgage assets from bank and financial institutions' balance sheets lending will completely cease and the economy, led by housing prices with rapidly decline even deeper.