Large mortgages quickly become more expensive


While all investors should be painfully aware of incredible risks in subprime exposure in the current market, the ramifications of this sector's blow-up for other mortgage markets remains rather unknown.

An insightful New York Times piece that ran today broke the story which many investors, including myself, didn't truly understand -- the growing costs of borrowing money for large home purchases. As a result of much greater difficulty in re-selling private mortgage securities (basically a basket of mortgages grouped together and sold to a buyer), even low-risk borrowers are having trouble borrowing capital at reasonable rates of return because there is much less demand for these mortgage-backed securities.

This information is devastating for homebuilders in high-priced markets. Understandably, the already out-of-demand expensive homes are going to become even less in-demand as a result of potential buyers no longer being able to borrow the money needed to complete the purchase at reasonable rates. Due to this factor, among others, pricing is probably going to continue its decline.

Refinancing will also become much more difficult for very similar reasons. Because second-market mortgage buyers have been devastated by the subprime implosion, they won't have the ability to purchase nearly the same amount of refinanced mortgages that they once had.

In today's day and age it seems like everything is intricately connected to one another due to derivatives, leverage, and so on. Gone are the days when simple cause-and-effect analysis could be used to understand a piece of breaking news.

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