We like to talk about good news here on the Texas Lending Today mortgage blog . It’s fun. It feels better than talking about bad news. And, let’s face it, after the past couple of years, we all deserve a bit of it. So, with this in mind, let’s start exploring why the news for the Dallas housing market has been slowly improving. And to do that, let’s look a little bit deeper into the dynamics of different parts of the housing economy around the country.

Take a recent development out in California, for example. The mortgage backed security industry finally found someone to believe in it out there, and that could mean big things for the housing market all the way over here in Texas.

According to the Powell Perspective :

For the past two years the mortgage securities market has been filled with crickets. Heavily caught up in the crippling of the residential-housing market, mortgage-backed securities (MBS), especially those offered by private firms, have been unavailable. However, Redwood Trust, Inc., a private firm in California, announced last week that it would sell off $222 million in bonds backed by pools of senior (read: less shaky) mortgages. Not only is the sale good news for investors searching for higher returns, it also could help lower mortgage rates and, in turn, accelerate the residential-housing recovery.

Because of the absence of MBS in the market place, mortgage rates have experienced spouts of modest climbs and spurred government intervention. But, if more companies like Redwood begin to offer MBS, then more investors will be attracted to the market; helping mortgage rates to lower.

When the housing market collapsed, the offering of MBS by private firms shriveled and the market relied on Fannie Mae and Freddie Mac for any MBS; but those avenues quickly dried also. Both government-controlled entities are prohibited from purchasing “jumbo loans,” which are loans over $730,000. So, since lenders cannot get Fannie and Freddie to purchase jumbo loans, they are forced to charge higher interest rates to those seeking one. But, the Redwood deal could mark the beginning of the end for high rates on jumbo loans.

[...] While Redwood does not stand to make a tremendous amount of money on this deal, the company badly needs to get the market moving again. Being a credible Real Estate Investment Trust (REIT), the company lost $1.6 billion in 2007 and 2008 when the securities market constricted and froze. Attracting investors to the MBS market once again could get private capital flowing and benefit the residential-housing market recovery across the board.

So, in other words, mortgage backed securities—those nasty little bank-y things that helped cause the financial crisis—could be key to a more rapid return to a healthy housing market (if they’re handled responsibly, unlike during the run-up to the financial crisis). And Redwood is just the first company since the industry collapsed a couple years ago to test the (non-government) MBS waters, albeit with securities that are much, much safer than the bonds thrown around during the boom.

This might sound a bit fishy. But to understand how they can help, let’s define a few terms and review the dynamics of the economic crisis (eschewing nuance and/ complicating factors, in just four short paragraphs):

Mortgage-backed securities are collections of (often several hundred or more) mortgage debts that are packaged up and sold off as bonds. Investors can buy a bond, expecting to collect the combined debt of all the different mortgages plus interest at a later date. Many of these mortgage-backed bonds were then sliced up again, packaged with slices of other mortgage-backed securities, and traded as what are called collateralized debt obligations (CDOs), basically used by banks to insure huge corporate deposits. By the time you get to this point, there could be bits and pieces of thousands of different mortgages from around the country in a single tradable portfolio.

If these MBSs and CDOs were filled only with safe mortgages that had low risk of default, we probably wouldn’t have seen such a crisis. The bubble wouldn’t have been as large, and the pop wouldn’t have been nearly as painful.

But this all took place during—and helped inflate—a growing housing bubble. Because the mortgage-backed financial products were so lucrative, there was massive market pressure on mortgage companies to loosen their lending standards and give potential "sub-prime" homebuyers massive loans with increasingly fewer standard practices like credit and employment checks. Meanwhile, bond ratings organizations like Moody’s and Standard and Poor’s were assigning Triple A status to many of these bonds, encouraging otherwise cautious and risk-averse investors like pension funds to jump into the derivatives game.

Eventually, thousands upon thousands of these homeowners began defaulting on their giant, unrealistic loans. And as the bubble began to pop, all the CDOs and MBSs saw their value begin to evaporate. Then every bank and pension fund out there that had invested heavily in these products began taking on massive losses. Panic and uncertainty soared, credit markets for small businesses and potential homeowners began to dry up, and the crisis moved from beyond just housing and banking and into the general U.S. and global economy. Aspects (that we won’t get into here today) like credit default swaps, shadow banking, major short selling, certain nefarious players, and systemic market irrationalities only complicated and amplified the problems.

So how could movement in the MBS market affect you? Let’s go back to the original intent of the system.

Increased liquidity equals cheaper mortgages . The reason banks were packaging and selling off mortgages in the first place was to free up a bunch of money and then lend again to more homeowners. When banks can sell the debts rather than waiting several years to fully collect on them themselves, it speeds up the home loan cycle . This kind of fluidity tends to lower home loan interest rates for potential homeowners or sellers like you — especially for large loans not eligible for Fannie Mae or Freddie Mac. And that’s the point — managed responsibly, our robust, largely free-market financial system exists not just to enrich the people running it, but for things like putting people in homes and allowing small businesses to grow. Again, if it’s managed responsibly.

Here’s hoping this Redwood Trust move is a step in the right direction.