FHA Mortgages & The International Marketplace

by Peter G. Miller
November 27th, 2007

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Last July we reported the HUD decision to allow the use of the LIBOR index for adjustable FHA mortgages.

The use of the LIBOR is really part of the internationalization of the mortgage marketplace, the idea that an investor in any country can buy U.S. mortgages. On many levels this is good for U.S. borrowers because more capital typically means lower rates.

HUD has now come out with an explanation of the relationship between mortgages on your block and the international financial marketplace. Entitled, “The Measurement and Management of Mortgage Credit Risk in the United States: Implications for Emerging Mortgage Markets,” this is actually a document with great significance. Here’s why:

If you look at what has happened on Wall Street in recent weeks, you quickly realize that the fortunes of many large companies, banks and investors are tied to the securitization of mortgages. The HUD document explains how the process works — and also gives an unusually good explanation of the mortgage writing process in general.

Credit quality is now one of the central issues which everyone is trying to figure out. Just how good are mortgages in general and toxic loans in particular? No one knows the answer, but to date it appears that former assumptions regarding credit quality were — in many cases — wildly off base. The result is now a massive re-pricing of mortgage-backed securities, stock prices and mortgage inventory values.

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