Mortgage Brokers – R.i.p ??

A few months ago, the headquarters of mortgage banks and the surrounding buildings were filled with people working for mortgage companies, selling mortgages to people looking for the best deals in town. Thousands of people used to work in such areas. No longer.

One of the hardest hit sectors in the current credit crisis is the mortgage industry. Jobs by the thousands have simply disappeared. People in other industries have managed to hang on to their jobs, but mortgage brokers and those depending on the mortgage industry have lost theirs.

The housing market is stuck with an existing inventory of 4.5 million homes and no one is buying. With so much supply but very little demand, home prices have plunged across the country. Depressed house prices in turn have reduced the market values of mortgage-backed securities — a major factor in the current financial turmoil we are all living through.

Falling mortgage rates

In late November, the Federal Reserve announced plans to buy $500 billion — that`s right, one-half trillion dollars — worth of mortgage-backed securities through June 2009. This program induced mortgage rates to slide downwards.

Interest on 30-year fixed-rate mortgages fell from above 6% to a national average of 5.10% at year-end, according to a survey ran by Freddie Mac. For 15-year fixed mortgages, the average rate was down to 4.83%.

The Treasury Department is also purchasing mortgage bonds. With the Fed and the Treasury acting in tandem, analysts believe the mortgage market as well as housing market will attain some stability. The move towards lower rates will open up refinancing options to current homeowners as well as attract potential buyers.

In mid-December, Treasury Secretary Henry Paulson announced serious plans to reduce mortgage interest rates even further to 4.5%, which he hoped would be pursued by the incoming Obama administration. Further reductions in mortgage rates would give a powerful boost to the housing market, Paulson said.

The 4.5% rates would be available only to new loans for the purchase of new or existing homes. It would exclude refinancing of existing mortgages. If these plans materialize, several hundred billion dollars in new mortgages could be financed, according to people in the industry. This could set conditions right for a revival in the housing market.

Initial market reactions

Lower mortgage rates have triggered an avalanche of applications for home refinancing, but they have not sparked renewed interest in home purchases. Application volumes for refinancing surged more than fivefold since October, when rates started moving down, but applications for home purchases have barely reached 15 percent increase.

While lower mortgage rates help in the decision to buy a house, there are other things to consider. For one, buying a house may not be a priority when people are still concerned if they`ll still have a job or if home prices will continue plummeting.

As well, it usually takes some time for people to learn about changes in interest rates. A year ago, they might have heard about it from mortgage brokers but these people are gone.

Then, too, banks have imposed tougher standards for credit approval. It is now more difficult for borrowers to comparison shop for deals to which they may qualify. People used to depend on mortgage brokers to help them find suitable deals.

Some conditions for revival may already be present; some are not.

It is people who buy houses, and it is still people who help them arrange the financing. The market may soon look for the return of the lost army of mortgage brokers. Until then, those 4.5 million houses may remain unsold.