The Fate of Mortgage Backed Securities

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Brad Inman of Inman news talks about what the consequences are for the recent shakeout in the subprime market and its impact on Wall Street’s desire for mortgage backed securities (MBS). He theorizes that Wall Street who over-indulged in the MBS market will flee quickly to higher quality investments a la venture capitalists in the 1990’s dot-com boom/bust.

This seems highly likely given recent events and news regarding the major subprime players. As Wall Street withdraws there will be a major cash crunch in the market leaving smaller bankers and brokers without the resources to lend to borrowers (especially to borrowers with poor risk profiles and in high property value areas) and leave borrowers without avenues to obtain financing.

Unless another outlet is found for these mortgages many borrowers in ARMs will find themselves without a way to refinance in to a fixed product as they will no longer fit the credit grades necessary to obtain financing. This will lead to an increase in foreclosure activity and we’ll see additional mortgage companies closing and small regional banks shuttering their lending arms as well.