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The Reeling Mortgage Market and the Effect on Housing Prices
October 17, 2007

With the much publicized collapses, and subsequent closing of two hedge funds from some of the very prominent brokerage firms, to the collapse and possible liquidation of two more mortgage companies in the last few days, Wooden Nickel Funding sees more failures to come.

The housing boom all started with the cheap money that started with a Federal Funds rate of 1% back in 2001. It started a bull market in real estate that enjoyed some of the greatest home appreciation faster than anytime in history. This spawned excesses and speculation that led that we haven't seen in generations. With adjustable rate mortgages, people were able to buy a $500,000 house instead of $ 250,000 house, and a $1,000,000 house instead of a $ 500,000 house. If rates only stayed low, everything would be fine, but, they didn't. Borrowers that jumped into low interest rate adjustable mortgages are experiencing payment shock. They are discovering that their "adjustment" is often resulting in mortgage payment that is doubling in some cases. This has lead to the inability of borrowers to service the debt, leading to a rash of foreclosures throughout the U.S.

The pendulum is swaying back toward borrowers having to bring real cash to the table to purchase real estate. Lenders are tightening equity requirements as well as credit requirements; some discontinuing programs such as Option Arms, 2nd Mortgages, and Alt-A loans. While this is healthy for the housing market in the long term, short term- there are less buyers available to prop up falling home prices. While opportunities always exist in real estate, Wooden Nickel Funding sees real estate prices continuing to correct and spreading to some regions which have remained steady. This means that housing prices will fall in some regions and the average length of days on the market in many regions will significantly grow. This creates a "buyer's market" and more than that it creates desparate sellers. This creates a unique enviornment for investors to buy. If you have the right funding in place you could make a lot of money. That's where hard money lenders come into play.

It remains to be seen how big a credit crunch we will experience. When very large, overly leveraged hedge funds are caught making bets on the wrong side of the market, exaggerated, even violent market moves could continue until a total washout in the mortgage bond sector is complete. Wooden Nickel Funding will be monitoring the situation as the events unfold in the coming days and weeks.