Several high-profile mortgage lenders, including American Home Mortgage, closed their doors this week and stopped funding loans.  Others dramatically limited their list of “eligible” borrowers.

Many buyers and sellers across the country have been stranded at the closing table without funds this week, only adding to the confusion.

Because the story is not getting much press, let’s talk about why lenders are having to shut down.  It’s not because they made bad loans in the past, per se. 

It’s because their only function is to serve as a go-between for Wall Street and home owners.

Different from mortgage banks, a “traditional” bank collects deposits from customers and then lends some of those deposits in the form of mortgages.  Then, a special quasi-government agency steps in and buys the mortgages from the bank, in effect, “replacing” the deposits.

If you’ve heard of Fannie Mae or Freddie Mac, they are the quasi-government agencies we’re talking about.  Their mandate is to buy home loans from banks that meet certain criteria.

For a mortgage bank, though, Fannie and Freddie are not the buyers — it’s hedge funds, pension funds, international investors, and others.  If these end investors decide to stop buying loans, the mortgage bank can’t play matchmaker anymore. 

And that is precisely what’s happening.

Unlike Fannie and Freddie, mortgage banks rely on investors to provide money to their clients and, now that many investors closed the spigot on mortgage loans, many mortgage banks have no choice but to fold.

Popularity: unranked [?]

Money Magazine recently listed their 2007 Top 100 Places To Live with Middleton, WI topping the list.

The full Top 10 list, in order:

1. Middleton, WI
2. Hanover, NH
3. Louisville, CO
4. Lake Mary, FL
5. Claremont, CA
6. Papillion, NE
7. Milton, MA
8. Chaska, MN
9. Wallingford, PA
10. Suwanee, GA

How did Middleton get to number one?  The formula seems to make sense:

• Good education system
• Low crime rates
• Short commutes to work
• Good air quality

Number 100 on the list?  Cottonwood Heights, Utah.

Popularity: 1% [?]

Money leaving the stock market helped mortgage rates move lower yesterday.  As the Dow swung from a 140-point gain to a 140-point loss in a matter of hours, dollars were looking for a place to “park”. 

Mortgage bonds were one beneficiary.

When investors sell stocks in a portfolio, they don’t always want to keep the resultant cash sitting in their bank account.  In search of higher returns, bonds are often an attractive follow-up investment. 

This process is sometimes referred to “flight-to-quality” — dollars leaving risky investments like stocks and moving into safer bets with more predictable returns.

The safest of all bets is a U.S. government-issued bond called a treasury that is practically guaranteed, and therefore, is considered to be risk-free.

Mortgage bonds carry slightly more risk than treasuries, but that is why their rate of return is a little bit higher, too.

As demand for mortgage bonds increase, mortgage rates fall and that’s what we saw happen yesterday.  Today, the stock market opened with a small gain and mortgage rates are giving back some of Tuesday’s improvement.

Popularity: unranked [?]