SOURCE: The Motley Fool

Everyone was buying real estate, even if they couldn't really afford it. These subprime borrowers, who just wanted a home, took advantage of the low-documentation loans that were being offered by mortgage originators. These lenders would then sell off the high risk loans to investment banks that dumped them into pension funds and others that were desperate for high yields.

Not only that, the ratings given by the ratings agencies on the mortgage securitizations, that originated using horribly inaccurate models, convinced investors to buy in. Of course the feds were no help either by allowing the interest rates to stay low for entirely too long. This contributed to the housing bubble which saw housing prices rise by more that 70% over eight years.

In the first quarter of 2006 speculation was truly out of control. Twenty-six percent of loans were of the interest-only or negative amortization variety... The statistics are damning. In 2005 and 2006, 20% of all mortgages were subprime, and a further 12% to 13% were low-documentation Alt-A loans.

Read full report »

SOURCE: Reuters

Between relief to the Federal Home Loan Bank System as well as Fannie Mae and Freddie Mac, it is hoped that the mortgage markets may begin to stabilize. These changes in the rules and additional money being made available may be able to help dramatically.

Restrictions are being eased for both Fannie Mae and Freddie Mac. This will allow them to take on a larger role in helping to settle the mortgage markets. They will be able to guarantee about $2 trillion in mortgages this year as the Office of Federal Housing and Enterprise Oversight said the restrictions would be relaxed immediately.

The Federal Home Loan Bank System will be allowed to double their mortgage holdings to about $300 billion as more relief may be available to them as well. With these continued influxes of money to the mortgage market, it is hoped that the Fed's attempts to spur on the economy by lowering the overnight interest rates will make a difference to ease financial market stress.

Read full report »

SOURCE: The Motley Fool

With more and more borrowers walking away from their homes as well as their mortgages, it is even more difficult for housing sales to improve. With lenders generally being highly leveraged, managing a 1-2% default rate is fairly typical. If the default rate increases to 5-6%, it further reduces liquidity in the mortgage market.

If there is a 15% estimated decline in the housing market that will translate into 21% of people with mortgages who owe more than their house is actually worth. If a recession develops and the housing market falls 30%, then nearly two of every five mortgages will be underwater.

There really is only one good thing about this market which is that some stocks are now unbelievably cheap and could have fantastic returns in the next few years. That said, be extremely cautious in this market but keep looking for opportunities that could potentially provide huge gains when the market finally turns.

Read full report »

SOURCE: NPR

While speaking to a banking group in Orlando Florida, Ben Bernake the chairman of the Federal Reserve said that more powers should be given to the Federal Housing Administration (FHA) and the Department of Housing and Development (HUD).

Bernake feels that by doing this, more strength would be given to the national housing market. This is important as rising foreclosures threaten the wider economy. Some economists fear that the country is on the verge of recession which makes these possible changes even more valuable.

"This situation calls for a vigorous response," Bernake said to the banking group. "Although lenders and servicers have scaled up their efforts and adopted a wider variety of loss-mitigation techniques, more can, and should be, done," he said. Reducing these preventable mortgage foreclosures may be possible by offering refinancing products to more borrowers.

Read full report »