What Is The “Liquidity Crisis” and How Did It Happen?
The most recent events in the mortgage market have been dubbed a variety of names from “credit collapse” to “credit crisis” to “liquidity crisis.” Whatever term you choose to use, it is clear that the issue is no longer isolated to sub-prime loans.
To define “Liquidity Crisis,” you must first understand a basic process of the credit market. In the beginning, a mortgage company promises to fund a loan at a certain interest rate. The loan is then originated, packaged and sold in the secondary market, sometimes more than once. The end investor determines the risk of purchasing the packaged loans based on the history of the housing market.
The Liquidity Crisis began when end investors adjusted their risk tolerance for purchasing these packaged loans. Unlike the strong housing market of previous years, investors started seeing real estate values decline and delinquency rates rise. The real estate market adjustment and increase in foreclosures implied more risk to the investor.
Mortgage loan closings tend to peak at the end of the month and the end of July 2007 was no exception. However, unlike previous months, some mortgage companies could no longer find investors in which to sell the packaged loans. The investors perceived more risk and demanded a higher rate of return to compensate the risk. The mortgage companies had already promised to fund loans at a lower interest rate, causing the unbalanced situation called the Liquidity Crisis. Ultimately, several of these companies had to close their doors, leaving tens of thousands of borrowers without financing.
As this unprecedented turmoil in the credit market continues, borrowers should contact an educated mortgage professional to assist in navigating through these turbulent times. For more information on the current market, contact Marc today 775.833.1014. |
