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The past several weeks have been a rollercoaster ride for the mortgage market. The lights areout in some lending institutions while others have drastically amended their lending guidelines.

Over the next several weeks and months we should see more lenders and Brokers with office

space clear from wall to wall. But what is causing all of this upheaval in the market? To under-stand the effect it is important to understand the cause and history of the recent market, its stages

and how the real estate industry has played a role through the cycle and into the near future.

After the stock market crash in 2001, investors were looking for the next great place to store

their money. With the Fed aggressively lowering the short-term rate (see graph pg.2) and the

stock market being the last place for investors the transition came to real estate. Soon after

mortgage rates began coming down partially due to the large amount of cash on hand with thebanks new loan programs were created providing an opportunity for less than qualified buyers to

purchase homes and speculators to come out in full force, the rest is history. Practically every

individual had an opportunity to purchase a home even with little to no money out of pocket.

From mortgage brokers, to real estate agents to the media, it was a great time to buy a house and

why rent when you can own was the rhetoric heard throughout.

But what was the progression of the mortgage industry through this period? The history of our

cycle begins with Wall Street viewing mortgages as stable and high returns buying bulk loan

packages for the various funds. Lending institutions recognized an opportunity to provide loans

at a lower rate by selling in the secondary market to Wall Street instead of holding in their port-

folios, making a profit and then having the ability to fund more loans; this strategy was done

over and over again. Lending institutions competed with each other to issue loans to borrowerslowering rates and guidelines to get out their money. Guidelines lowered creating an opportu-

nity for less than qualified borrowers and investors to obtain easy financing. This influx of

money into the mortgage market wouldnt be complete without a run-up of real estate demand

and therefore prices. Over the real estate boom from 2002-2005 an unprecedented number of

buyers entered the market for such reasons as 1) affordability, 2) real estate stability, 3) specula-

tion or investment, and of course 4) timing or lifestyle for family. Money was cheap and we

knew it; why wouldnt we want to take advantage of this opportunity?

Now we are seeing mortgage companies going out of business and lenders drastically changing

their guidelines, programs and approval process (see matrix pg.2) due to the fact that Wall Streethalted the purchase of loans in the secondary market after many months of defaulting mortgages,

less than appropriate profit from lending institutions and fears that the worst is not over. InSanta Clara County the foreclosure rate is up with almost 600 homes sold at auction year to date.

Approximately 80% of these properties went back to the bank because there was not enough

equity to make for a viable purchase. Lenders will now face the reality of holding their loans in

their portfolios instead of just pushing them off into the market because Wall Street is precau-

tious. Most people will agree that you watch your money better than your neighbor, so naturallyif you were loaning your money you will be more cautious. This compounded with the fact that

the lenders will not have as much money to loan; funds will now go

Mortgage Market ShakeupInside this issue:

Mortgage Market

Shakeup

1

Mortgage Market

Shakeup (cont)

2

August, 2007

RE Special Update

N i c h o l a s F r e n c h , B r o k e r A s s o c i a t e , C R S

Nicholas French

Broker Associate, CRS

4906 El Camino Real #2

Los Altos, CA 94022

650 773 8000 (cell)

650 961 2338 (office)

650 961 5238 (fax)

nfrench@cattonproperties.com

8/14/2019 Special Update August 2007

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Mortgage Market Shakeup (continued)

to more qualified buyers with larger down payments, better credit scores and more security. Addi-

tionally, with loans staying in the portfolios a higher margin is necessary to suffice stockholders and

profit targets. Those loans that are sold in the secondary market will be stronger and safer borrowers

with less default rate than what weve seen over the past several quarters.

So the next logical question is how will this affect the real estate market? As with any market it is

important to seek a property that is best fitted to you and your familys needs. It is important to have

extraordinary representation that has familiarity of the market, the ability to negotiate aggressively

and resilience to go after those deals. This is valuable time in the market to seek good properties inthe best neighborhoods that are good homes for your family. My clients are patient and already seek

the best properties and good prices, so I am not saying anything you havent already heard. Do not

feel pressure from the rhetoric of if you dont buy now you will miss the market. Its time to seek

those great properties! For sellers, be mindful that financing is crucial to buyers looking to purchaseyour home. Be mindful of the affordability for buyers, lenders will. We have seen a number of ma-

jor changes to the mortgage industry and its affects on the real estate market have not been fully real-

ized. I will maintain my dedication to my clients and update you appropriately with any market ad-justments. I can also put you in contact with the best loan broker to answer any of your specific ques-

tions. She knows her information! Feel free to contact me anytime.

Recent changes to the mortgage industry that may

affect your ability to obtain financing:

Fed Rate

Date Perc.

2007

7-Aug 5.25

21-Mar 5.25

31-Jan 5.25

2006

12-Dec 5.25

8-Aug 5.25

29-Jun 5.25

10-May 5

28-Mar 4.75

31-Jan 4.5

2005

13-Dec 4.25

1-Nov 4

20-Sep 3.75

9-Aug 3.5

30-Jun 3.25

3-May 3

22-Mar 2.75

2-Feb 2.5

2004

14-Dec 2.25

11-Nov 2

21-Sep 1.75

11-Aug 1.5

30-Jun 1.252003

25-Jun 1

2002

6-Nov 1.25

2001

11-Dec 1.75

6-Nov 2

2-Oct 2.5

17-Sep 3

21-Aug 3.5

27-Jun 3.75

15-May 4

18-Apr 4.5

20-Mar 5

31-Jan 5.5

3-Jan 6

2000

16-May 6.5

21-Mar 6

2-Feb 5.75

1 American Home Mortgage, the 5th largest bank in the US for mortgage lending, is gone

2Wells Fargo closed its sub prime lending division, halted Alt-A wholesale and discontin-ues stated income 95% and 100% loans

3 Wells Fargo discontinues stated verified/stated asset 100% loans

4 National City, SunTrust and IMPAC stopped their Alt-A products

5 IndyMac and Deutsche Bank discontinued their MTA adjustable programs

6 Indy and UBS discontinued all doc types below SIVA

7 Saxon closed its correspondent division

8Greenpoint Mortgage discontinues a large portion of their product line. Even if you arelocked and approved you either have to have a higher credit score or go somewhere else

9 Aegis Wholesale closed their doors early this week

10 Washington Mutual discontinues a large part of their product line

11Interest only loans can only qualify at a fully amortized payment; therefore making it moredifficult to qualify

12 Majority of lenders are now requiring higher credit scores and more money down