[SuffolkGirl]

Mortgages have (had?) become a big business. The loans are written and then bundled together and sold on the secondary market in a Mortgage Backed Security (MBS), thus generating additional money that could be lent out again. With most real estate in the country appreciating there was little risk that the payments on the underlying security (the loan) would not be made. Recently, values have softened if not declined. People who were in a 2/28 (fixed for 2 years then adjusted for 28) were facing murderous increases in their interest rates (the Fed has raised interest rates 17 times!! - although just dropped .5% this a.m.). These people then tried to refinance but the value of their home no longer supports the loan amount. So now they are faced with a criminally high interest rate on a property that is not worth what they owe on it.

FNMA (FannieMae) and FHLMC (FreddieMac) are quasi public entities that were created to alleviate the credit crunch that we may very well be experiencing. Each year they survey the real estate market and set a limit for the amount of the loan that they will buy. This becomes the "conforming" loan amount limit. At present it is set at $417,000 for a single family/condo. One can purchase a property for whatever amount, as long as the first lien does not exceed $417,000 then it is considered a conforming loan. Because FNMA and FHLMC are nominally backed by the government, investors have decided that they only want to purchase mortgages that fit this guideline.

Given the softening RE market, large institutions that purchase MBS have completely lost their appetite for any security that is not backed by FNMA or FHLMC. These institutions have gotten into lots of bond trouble recently, check out Bear Sterns and Goldman Sachs.

This is a very far reaching problem right now. Those individuals and institutions that have a good supply of cash and are not over leveraged should be able to weather this storm.