Breakdown of the Mortgage Supply Chain Essay Example

of the mortgage supply chain new changes are being implemented. These changes will take many years to effectively realign the inconsistencies upon which the mortgage industry relied. Needless to say, investors will not be easily fooled again. The only mortgages currently being purchased are the "plain-vanilla" loans which encompass high credit scores, low loan-to-values and full-documentation borrowers.

From a profit margin tand point, these loans provide minimal yields which leave little profits for those involved. In order for those employed in the mortgage industry to remain profitable, the mortgage supply chain must be integrated effectively. Profitable originators are crucial for buyers because without them there would be no intermediary place for borrowers to go for mortgage loan information. (Focardi) The mortgage industry has yet to conclude what the "new normal" will be; however, automation must be an integral step towards "normal". (Focardi) It is not to say that companies were not automated before the financial crisis.

However, the technology was merely scattered throughout different companies without a benchmark of quality to guide the flow of information. There are enormous opportunities for defects and bottlenecks of disclosure of information, offering the wrong product to the borrower, ineffective borrower screening, inefficient credit scoring models, missing information in the loan package and incorrect loan pricing and compliance issues could be easier to address should a regulated software be implemented. These inadequacies ultimately lead to repurchase requests by the investors and possible penalties by the government.

History Before the mortgage crisis approximately 80% of the United States mortgage loans were issued to subprime borrowers on adjustable rate mortgages. (Dodd) The decline of sales began shortly after the home values

peaked because refinancing became more difficult. As borrowers with existing adjustable rates began to see them move from their preliminary fixed rate of 2-3 years, mortgage delinquencies increased rapidly. Mortgage backed securities collateralized with sub-prime loans, which were widely held by major financial institutions, lost most of their value.

As a result, credit underwriting tightened nationwide as the capital of many banks eclined sharply. Residential Mortgage Debt shows the "Outstanding First-Lien Residential Mortgage Debt" in all sectors as of 2007. The "Agency Mortgage Backed Securities" represent the high credit, low loan-to-value, "safe" loans administered by governmental agencies such as; Fannie Mae, Freddie Mac and Ginnie Mae. The right side of the exhibit shows the "Non- Agency Backed Securities" which make up three areas of mortgage where the government is not willing to lend.

Jumbo loans consist of those loans which exceed the maximum allowed loan limits which differ from state-to state. This level is set orth by the government and is any loan $417,000 or greater in North Carolina. The Alt-A loans are intended for those borrowers who do not fit in the conforming guidelines but who have a better credit rating and history than a sub-prime borrower. Alt-A loans would consist of loans for investment properties, second homes, or high loan-to-values for borrowers who would otherwise be considered conforming.

The third section of this exhibit makes up the sub-prime borrowers who have less than stellar credit but are willing to pay a higher down-payment and a higher rate to get a mortgage loan. As you can see, the sub-prime sector makes up he majority of the non-agency loans. Also note that most of the

sub-prime loans were put on an adjustable rate mortgage which offers a fixed rate for an allotted amount of time (normally 2-3 years) and after that time the rate then adjusts normally according to the LIBOR (London Interbank Exchange Rate) approximately every six months depending on the lender.

This is a risky program for borrowers who have had a history of credit issues. Figure 1 The Mortgage Supply Chain It is easy to compare the mortgage supply chain to a manufacturing supply chain in order to learn lessons about the current financial crisis. You can look at mortgages consumers to build houses by borrowing money or refinancing their homes, and then selling the financial instruments to the banks (suppliers). Once the market is flooded with inventory this affects the channel partner's ability to pay for what they have already bought, let alone purchasing more.