Subprime Mortgage Crisis Why Can t Lenders Just Fix The Bad Loans And Move On

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span                            portfolio of loans that they
class="cap">With        originated, but by in large most
all of the foreclosures and     banks do not. Most mortgages are
bankruptcies that are being           owned by a pool of investors and
triggered by the subprime             are merely serviced by the
mortgage crisis why don’t lenders     company that homeowners send
just put all of these homeowners      their payments to.

in better loans? We are asked

This is why when you call your
this question on our mortgage         current lender that you already
blog quite often. It’s a              have to refinance they make you
reasonable question too. If it’s      re-qualify for a new mortgage
the bad loans that are causing        again. While I was originating
the problems wouldn’t be cheaper      mortgages, I had countless
for the lenders to just bite the      borrowers call me to refinance
bullet and fix the bad mortgages?     that were disgusted with their
Meaning, wouldn’t it cost banks       mortgage company for that very
less money to lower interest          reason. It seems to reason if you
rates and fix adjustable rate         have paid your mortgage on time
mortgages on their loans than the     for ten years the bank would just
billions they are losing from all     lower your rate to keep from
of the foreclosures?                  jumping-ship to another lender.
In some cases banks are doing         The problem is that they have to
just this because it does make        put your new loan in a new
sense. However as I will explain,     portfolio and sell that portfolio
this is much easier said than         to other investors, this is
done for most banks. The reason       called securitizing.

is that very few banks these days

Banks and lenders buy money to
“own” the mortgages they service.     sell much as retailers do for the
A few regional and national           inventory that they keep on their
banking chains do maintain a          shelves. For instance, a toy

store can purchase a crate full

Staying with the toy soldier
of toy soldiers at a wholesale        analogy, what has happened to
price then put them on the            banks in this crisis is they
shelves and retail them for a         can’t sell the box of toys to the
profit. Banks buy and sell money      investors anymore. The retailer
the same way from their retail,       has $100 invested in the box of
or mortgage divisions. The only       toys and investors believe that
difference is that banks reach        the toy soldiers are a bad
their loan capacity they have to      investment and will only offer
take these groups of loans and        $70 dollars for the box. This
sell them to investors on Wall        means that the retailer has to
Street. If banks didn’t do this       hold onto the box until prices
they would loan all of their          rise back to $100 or sell the box
money and be out of the mortgage      for the $70 dollars and take the
business.

loss. This is the same with banks

Now you have a group of loans      today; either they cannot afford
that is being serviced by the         to sell their loans or they have
bank that is owned by 1 to 100        chosen not to and ride out the
different investors. That group       storm.

of loans is treated like the

Both way lenders and banks
wholesale the box of toy soldiers     have stopped buying and selling
that is sold by the case not          money as freely as they used to
individually. To ask the              and cash is in short supply. When
investors to reach into the “box”     supply is short and demand is
and pull one soldier out and          high prices typically go up. This
alter it would disrupt the total      is why the Federal Reserve
value of the box as a single          Chairman keeps lowering the prime
unit. This would also upset the       rate in an attempt counter higher
other investors who have money        rates that would almost drive a
tied up in the box of toys.

nail in the coffin of retail

lending. As of this article and lending will begin a new
Atlanta mortgage rates are around day.

5.75% for a thirty year fixed >About the
mortgage and would probably be in Authorthe mid-sevens without Bernanke’s id="authorbio"
involvement.

class="membersnoticewhite">Aubrey

Passing legislation that over      Clark is and editor and writer
regulates banks and lenders will      for lendfast.com, a not solve our problems. Neither       href="http://www.lendfast.com">na
will instituting individual           tionwide home mortgage loan
government plans aimed at helping     company directory. He lives
a finite amount of borrowers like     in Atlanta Georgia with his wife
some in congress have suggested.      and 4 children and writes about
The answer to this subprime           subjects that range from credit
mortgage crisis will be derived       cards to from a plan to restore confidence     href="http://www.lendfast.com/geo
in mortgage backed securities         rgia">Georgia low mortgage
that will allow the flow of money     rates.