Mortgage industry glut and what can happen

A couple who stays close to my home and works for Cisco could not get a loan in the final phase of the home buying process. They had pre-approval,excellent credit however, the bank pulled the plug and was not clear about the reasoning behind not finalizing the loan. They will find out more in a day or two but this has become a common scene these days. What gives? The mortgage industry overall underwent glut of loans - small hermit companies would start with offering loans and as they cross certain loans, they would sell this to Wamus of the world, move on to the next set of loan offerings. As they got better in this, this 2nd tier and 3rd tier companies also got greedy by moving their clients into variable rates, fixed teaser programs and add 'margin' to the prime or whatever the fundamentals were (LIBOR, etc.) Now, as the number of loans consolidated with the tier-1 companies (like WaMu, CitiGroup etc.) the tier-1 started seeing a large number of defaults as the interest package they sold did not sustain - glut of loans were offered at highly lucrative rates with the hope that they could refinance when the markets get better. The tier-1 playes got hit with a double whammy - neither did the market get better nor did the consumer loans they carried got 'realized' to a sustaining mode. This also cascaded to tier-2 players who could not sustain this and chose to go bankrupt. What is the overall effect of this to dollars and cents? Probably that is not the right question to ask - the right question to ask is, Is this a 'market freeze' for buyers and sellers? How long will it take for the market to come back. As of Aug 14th, we will keep track of this at LikePoint and write more about this at http://www.likepoint.com/blogs/mortgageindustry/. Please add your comments and let us know what you think. I would love to hear more even if we get out of our market freeze phase.