Liquidity Crisis Explained

It was just a short time ago that investors from all over the world were hot for US Mortgage Backed Securities (MBS). Historically these investment vehicles performed well as US home owners made good on their mortgage payments. Think about it, in the olden days home buyers needed at least 10% down to even qualify to buy a home. Anyone who could manage to save a 10% down payment obviously had to be very responsible with their personal finances, and this fact played out in the return and relative safety of the MBS.

All of the sudden, there was more money available for people to buy homes than consumers were demanding, a liquidity surplus you might say, and with no room to muscle in on the "A" paper conventional mortgage markets, clever investors decided to create new and different types of mortgage loans to take advantage of all this investor money. Hence the birth of the Sub Prime mortgage industry.

With very little history as to the performance of these MBS, and a very hot US real estate market, investors and home buyers plunged into the market with reckless abandonment, ultimately leading to a person who was one day out of a chapter 7 bankruptcy with only a 580 credit score qualifying for a 100% home loan. (Credit scores range from 350 -850). By all known standards, this was a loan destined for default and in the past, no investor in their right mind would have made this loan. But money kept pouring in and an endless stream of home buyers and now people wanting cash out refinancing kept showing up at their local mortgage companies door and more recently at all the internet mortgage sites that promised hundreds of thousands of dollars for unbelievably low monthly payments.

It took a while but eventually, as history started to accrue for these sub prime loans, there appeared to be higher than expected rates of delinquency and default, which brings us to today and our current liquidity crisis. As more and more investors stop investing in these sub prime MBS vehicles, there is less and less money in the US for people who want to buy or refinance homes. Couple this with the fact that even some of the conforming or non-sub prime lenders are seeing higher rates of delinquency and default, and you have a situation where the mortgage arena, which recently had more available money than it knew what to do with, now is left with only a handful of investors who only want to buy the most secure of the MBS, those made up of people with high credit scores, a good solid track record of income, money in the bank and either a down payment or significant home equity in the case of refinance.

So there you have it, Liquidity Crisis, and if you are a real estate agent or mortgage professional, boy does it hurt!