A simplified explanation of the issue plays out this way. Your bank loans you money to buy a home in Redwood City, but then it combines your mortgage with others and sells them to investors as mortgage backed securities. Your bank now has its money back and it can once more loan out to more money. If your bank did not sell many of its loans, it would soon run out of money—selling provides liquidity. However, as foreclosures have increased, investors have stayed away from purchasing mortgage backed securities, so banks are running out of money to loan. With less money to loan and frightened investors, the banks tighten their lending requirements—money is still relatively cheap to borrow, it’s just much more difficult to get approved. This has lead to millions of people not being able to qualify for home loans.
Without the ability to borrow money, many first time buyers or people thinking about buying up, have not purchased the home they wanted. This has slowed the market down in places Redwood City and San Carlos which then has caused qualified buyers to take a wait and see approach because many speculate that both interest rates and home prices will come down..
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Mark Martinho
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