For my first post I wanted to write about something that seems to be on every-ones mind lately, the mortgage meltdown.  Why did the banks stop lending?  Why can’t I qualify now?  Why are rates going up? I often get asked these questions by friends, clients and family.  Here’s my chance to try to explain them a bit in simple terms.  For several years now I had been referring to some of the so called “exotic” mortgages that were being originated and closed as being funded by the “junk bonds of the new millennium”.  You see basically what started happening years ago was that banks started securitizing (or selling) loans on Wall Street.   By packaging these loans and selling them on Wall Street banks were able to make larger loans and make more money.  They didn’t have to hold these larger loans anymore.  (Most mainstream loans under $417,000 were “insured” by government sponsored entities such as Fannie Mae, Freddie Mac) Institutional investors thinking that they were buying relatively “safe” investments secured by real estate gobbled up these mortgage backed securities.  They felt safer than the hammered stock market (remember the tech bust?) Every year we started seeing riskier and riskier loan products.  Remember the second mortgages that went up to 125% of the value of your home that were around several years earlier. I thought these newer riskier products would eventually just disappear when investors realized what they were buying like those loans did.  Well the didn’t and it turns out it was a lot worse than that.  What seemed to have happened was that these riskier loans were being “bundled” with the “good” loans.  Basically the investors buying these mortgage backed securities were duped by the brokerage houses selling them.  When investors realized what they were investing in they “freaked” out.  They started pulling their money out and said NO MAS.  The investors simply stopped buying these securities.  Now all of a sudden the banks could not sell their large and riskier loans.  Mortgage companies (that were not banks) that depended on Wall Street to sell their loans all of a sudden went out of business because they had no other money to lend.  Risky loan products started disappearing.  No more 100% stated wage earner loans for folks with challenged credit.   Buyers that were in the middle of purchasing thier new home suddenly found themselves without a loan.  Escrows started being cancelled, borrowers trying to refinance out of an adjustable loan now could not.  The dreaded “pay option” loans that allowed folks to buy a home that they should never had been able buy were now getting into trouble.  They found themselves in a home they could not afford.  Loan defaults started going up, then turned into foreclosures.  The foreclosures started driving down home prices.  Now folks that can afford their home and wanted to refinance could no longer because the “value” of their home went down too much.  Meanwhile the investors start losing more and more because of all the foreclosures.  Now they do not trust these mortgage backed securities and they simply refuse to invest in them.  Without investors “buying” mortgages the banks have no place to put them but on their own books.  Back to basics.  Now that the banks will be “holding” the mortgages they originate they are tightening up.  They don’t want anymore risky loans on their books.  It was ok when they were selling them but now, no way!  So you see it’s a domino effect, less folks can now qualify, less homes get sold, prices keep going down and we find ourselves in the Mortgage Meltdown of 2007!  Hopefully this answers more questions than it raises.  We will see and I’ll comment on what our “leaders” will do to solve this crisis.  After months of doing nothing they have been reacting in the past few months.