Currently our mortgage sector is in shambles and the government programs designed to fix the problem really just exacerbated it through mitigating the losses of the people whom made mistakes (banks) without providing regulations to force the capital to trickle down to the people who can no longer afford the high monthly payments they thought they previously could due to the bad economy. In capitalizing the banks without actually correcting the problem of massive foreclosures on bundled loans the fundamentals of the mortgage market have been allowed to decay further than at the height of the mortgage meltdown because it is no longer about earning money from honest practices (charging interest in return for the opportunity to own your own home) it is about making as much money as possible before flipping the bundled mortgages to some unlucky investor. The practices still unregulated by the government going on in the mortgage industry point to some extremely troubling signs. First of all, with the current economy being so shaky nobody can really precisely value homes. I personally feel they are still overinflated and we will see another re-correction downward of the housing market around the middle of 2010. This dip will be the direct result of not correcting the foreclosure rates currently experienced in the mortgage market compounded with the intense amount of lower income first time home buyers who rushed into buying homes because of the $8000 first time home buyer tax credit (which at the time of this writing will expire in one week.) The overall negative indicators of the current economy do not forebode well for the mortgage market.
How will this effect the financial sector and the specific economics of mortgages? First of all the big defining factor will be the FED, or Federal Reserve Board. The FED controls the rate at which lenders can themselves borrow money. The lower the rate the FED charges lenders, the lower the rate lenders charge borrowers and vice versa. The problem with the economic conditions we currently face involves the fact that in order to shore up their balance sheets and start recovering some of the money lost in the recession the FED really needs to raise rates. If the FED raises rates then the ability to get loans will greatly decrease. The mortgage brokers will no longer want to write loans to anybody without a superb credit rating and thusly the lower middle class and down won't have access to credit. So at this point (if the FED raises rates) we will still have a high number of foreclosures remaining from the previous housing bubble, the influx of foreclosures resulting from unqualified consumers greedy for the tax rebate, and yet again an extreme slowdown in the rate that mortgage lenders will write loans. The entire mortgage sector will experience turmoil resulting in a re-correction of the market to about 70% of current home values. If the FED takes the opposite approach and lowers rates then access to borrowing will be much more available but really will just perpetuate the cycle of writing newer bad loans to cover the older bad loans made before. At some point the mortgage industry needs to just chalk up the situation as a sunk cost and reformulate the basic purpose of mortgages. If greed continues to run rampant among financial institutions though we could be in for an extremely rough ride during the upcoming months.
