Helping the Mortgage Market

The next big plan for helping out the mortgage industry is to full inform investors of the types of mortgages they are buying into. The idea is to promote confidence in the investment they are making so that mortgage-backed securities will be bought once again.

A group representing the buyers and sellers of mortgage backed securities unveiled a plan on Wednesday to recharge the moribund mortgage market.

In order for lenders to raise enough money to offer as many loans as they do, they have to bundle their mortgages and sell them to investors as mortgage backed securities. Lenders such as Countrywide, Wells Fargo and Wachovia will package a random assortment of these loans together and sell them to investors with very little information offered to the purchaser.

But then the losses began to add up and naturally people and institutions stopped buying these pools of residential mortgages. Therefore these lenders didn't have the extra cash for home buyers to get loans.

The American Securitization Forum has a plan, Project RESTART. The idea is to increase the supply of mortgage loans available to borrowers and also make them cheaper. Because of course if you jumpstart the mortgage market you jumpstart the housing market.

Part of the plan includes making these packaged loans more transparent. Clearly there is going to be more confidence in your investment if you are presented with all the facts and amount of risk ahead of time. This should also allow for more accurate pricing.

Previously the loans were packaged with a mixture of high and low risk. This makes it more difficult to understand what you're really getting into and makes pricing more vague. Obviously it's not feasable to provide all the information on each individual mortgage borrower but there is certainly more information that can be offered.

Also these loans would be bundled together by type. So that an investor can choose a group of mortgages that all are from prime borrowers with documented income, 720 credit score and a 20% downpayment. If a particular investor is into higher risk and higer payoff they could buy loans with subprime borrowers and low credit scores. The big idea here is that the investor would know which they are getting, and pay accordingly.

I think this sounds like a great idea. My only issue with this is, why is this just happening now?

http://money.cnn.com/2008/07/17/real_estate/jumpstarting_mortgage_markets/index.htm?postversion=2008071716

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