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Thursday, January 6, 2011

Housing To Fall Further: Here's Another Reason

Residential real estate values could drop even further in 2011 and beyond, depending on the outcome of an upcoming ruling in a Massachusetts court case on mortgage transfer requirements.

This ruling could make it harder for future mortgages to be packaged for securitization purposes.  This can trigger a negative "domino effect" in which mortgage underwriters (the banks which grant the mortgage) find it harder to sell off their underwritten (or granted) mortgages, and then have to hold on their books more of their issued mortgages as "mortgages held for investment."  

I would expect the ultimate effects to be an increased reluctance to issue mortgages based on the banks' perception of having higher risk, the risk being merely the risk of being unable to sell the mortgages off and thus having to retain the mortgages (and the underlying risk of not getting paid on them).  As banks get more risk-averse, they almost certainly will raise mortgage interest rates and other fees.  That means that borrowing costs for homebuyers will increase, and their purchasing power -- i.e., the amount of house they can buy -- will decrease.

The effect on home prices?  Down.

The effect on mortgage rates?  Up.

Say goodbye to those four-percent mortgage rates. 

(I mean, I don't gamble, but bet on these things happening)

Eric Dixon is a New York lawyer who helps people with legal and business problems through Eric Dixon LLC.  Mr. Dixon is available for comment or consultation at 917-696-2442 and via e-mail at 

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