One of the most staring topics these days in terms of the financial markets is the mortgage industry in different countries, especially in the United States, where the mortgage is considered as one of the major financial sectors.
The federal sectors are trying to create different programs to foster mortgage lending, construction and also encourage homeownership for its citizens.
There was a mortgage crisis that the people faced in the year 2007-2010, which showed us rise in the subprime mortgage delinquencies and foreclosures. Even the earlier loan crisis in the 1980s and 1990s was faced primarily because of the lending that went sour in terms of unsound mortgage lending. The mortgage crisis eventually led to the risen foreclosures, which led to the 2010 United States foreclosure crisis.
So, reflection over this topic is beneficial for people who are looking for all the details in terms of loans and mortgage.
What is mortgage lending?
Mortgage lending is the process through which many of the guidelines that loans must meet are suited to satisfy investors and mortgage investors is carried out. Mortgages are basically financial papers which are lent or assigned freely to other holders as security.
In the United States, there are various programs or government-sponsored entities that foster proper mortgage lending, ownership of homes etc.
Few of these programs include Government National Mortgage Association (Fannie Mae), The Federal Home loan mortgage corporation (Freddie Mac) etc. which work to offer certain guarantee on the mortgage payments of certain conforming loans.
Later on, these loans are securitised properly and are then issued at slightly lower rates of interest to all kinds of investors and are henceforth known as mortgage-backed securities(MBS), and are also known as agency bonds or agency loans.
Securitization basically allows the financial institutions to lend the money quickly to other borrowers and in the process create more mortgages than the amount they could through the process of using their deposits, allowing the people to utilize the opportunity to buy homes fully. Investors eventually gain low-risk income at a higher rate of interest compared to the money they could gain from most other bonds.
The wider dissemination of technology in the mortgage lending world has led to the process of rapid growth in securitisation. The method of securitization allows the borrowers with superior credit, government loans and ideal profiles, allowing rates to be almost artificially low since the pool of funds used to create new loans can be refreshed more quickly than in years past, which allows more rapid outflow of capital from investors to borrowers without many personal business ties whatsoever.
Some of the things that they do are providing niche loans at a higher price than the investor mostly does not wish to originate. The process of an increased amount of lending led to the bubble created in the times of 2000-2006. Because of this bubble that was created many banks established tighter guidelines for the people, and it became difficult to obtain loans.
What is the hype about Predatory Mortgage lending?
There is a big concern these days especially in the states about the predatory mortgage loans which are keeping the people confused, so it is essential to know about it and be informed about it in the best possible way. The point of concern that is operating widely is that the lenders and brokers operating widely are trying to find some kind of loopholes in the law that exists to obtain profits.
What actually happens is that the lender makes the terms in a way which are beyond the means of the ill-informed and uneducated borrower. The borrower mostly makes a thrust of payments and then fails to pay which makes it possible for the lender to take the property and recover the amount and also helps in keeping the interest and principal amounts and also the loan origination fees which makes it a clear win situation for the lender and makes him richer.
So the borrowers must understand the terms and conditions carefully before investing and have their ideas clear and the way they will have to pay the money so that they can be safe and they do not fall for any kind of surgery or poor schemes designed to rob the borrowers.
How does the mortgage industry work in the US?
The mortgage industry in the US works a bit differently in the United States compared to other parts of the world, here mostly the mortgage loans are treated as commercial papers which mostly means that lenders can convey and assign them at their free will. That results mostly in situations where financial institutions are in the position to bundle mortgage into some kind of securities in which the people can invest freely.
The basic purpose behind such a system is to free up money for the financial institutions so that they can lend it out in the form of new mortgages and in order to facilitate this system. Most of the mortgages have mostly fixed rates, which are a deviation from the variable rates commonly found in Europe and elsewhere.
So if you are looking for applying for a mortgage loan in the US then you will have to deal with an underwriting, these underwriters work for banks, or they might want to choose to work with a brokerage. The mortgage workers generally don’t provide loans directly but have direct relationships with several lenders.
In many cases, you don’t need to provide all the information some loans are referred to as low doc or no doc because you are not required to provide any documents for verification. These loans are more expensive comparatively and require preauthorization before you submit an offer on a home or any other property that you would like to buy.
Most mortgage loans require down payment up to 20 per cent but in case of larger amounts are usually required for low doc and no doc loans, and if you qualify for it you will get 100 per cent.
When you are looking for buying real estate in the US, remember that the market is pretty much competitive and the overall interests are similar to those in most of the European countries, and there is fierce competition even there.
Fixed vs Variable mortgage rates:-
Most of the loans in the US are fixed-rate mortgages which means you have to follow the same rate for the whole time and when the rates drop you will have to refinance in order to take advantage of the situation and for this it is important to make sure you understand the terms of that type of mortgage.
On the other hand, variable rate loans are basically referred to as adjustable-rate mortgages in the US, and they are available at lower interest rates than fixed mortgages. Also, the interest rates associated with an ARM can drastically increase, in exchange for a low rate at the initial rates.
After you have obtained the mortgage loan, you will begin to build equity in two different ways where the portion of each mortgage payment will go toward the principal, which decrease the amount you owe to the lender. You can also build the equity if the value of the home eventually increases, in either case, you can access that money easily through another special type of loan.
Also, the home equity loans are also at times referred to as second mortgages because you are expected to use your equity as collateral. If you also think of obtaining a home equity term loan, you will receive a lump sum and then will have to make a monthly payment from time to time, and this will allow the person o withdraw and repay money conveniently throughout a specific period time.
Mortgage for non-US citizens:-
It is a problem nowadays for foreign-born individuals owning a home is a dream; the big American dream that people have. But mostly the misconception is that there is no way that they can easily get a mortgage, thus creating a kind of barrier for the person.
There are certain challenges that they face if you are not a citizen of the US and non-citizens can even qualify for government-insured mortgages which have the advantage of requiring low down payments for the whole process.
Another point to be kept in mind is that the requirements for getting a home loan depend in large part one’s residency status that they wished to have. There are certain situations where the foreign nationals do not conform to Fannie or Freddie standards so the lenders try to keep these loans on their books because the bank assumes there is more risk and it is more likely that they will require a substantial down payment eventually.
The main hurdle to getting any mortgage is actually trying to fit in any lenders profile which means providing your employment history, proof of income etc which is a relatively straightforward process because most actually hold a credit trail in the United States and also some kind of W-2 forms and also tax returns that clearly depict their earnings in the most practical way.
You will also have a definite advantage if you practically have an existing relationship with an international bank with the branches in the United States. It will also have a record of your finances already so they will agree to take a bet on you more likely as compared to anyone else.
The lenders to be considered:-
Some of the lenders try to get the borrowers to skip through different hoops as compared to others to get you a loan so you can eliminate a lot of headaches by identifying those who work with the non-US citizens.
Credit unions are another option worth considering where nonprofit financial service providers always try to offer extremely competitive rates and depending on their location; they may provide special lending programs for a green card as well as visa holders.
The whole process summed up just goes on to prove that many banks and mortgage companies offer all types of conventional and FHA home loans to all kinds of non-US citizens provided that they can provide residency status, work history etc.
Also, they are most likely to be taken into consideration soon, which makes it particularly good for the people who are looking to have a mortgage for themselves. Also, it is essential to have a good understanding of the mortgage markets clearly and have no apprehensions or doubts in the mind if they have any and look for answers, which are clear and understandable.
The markets are highly volatile and if they have any ideas about how difficult the situation is it are always essential to have the clear understanding of the possibilities that may arise in the markets and hence it is important to make decisions most properly.
The mortgage industry is an important industry in the US which has a lot of different theories and for people to get the right ideas accurate research is required for people to clear all the issues and come up with the right choice of mortgage and the companies to choose from.
The United States government is trying hard to make people understand the importance of the use of mortgage and how to get it properly which is why it is important not to misunderstand and run away instead try to have a clear understanding of the process and stay away from fraudulent people.
The above article tries to encompass all the aspects of mortgage especially in the US context and the readers will find it interesting to know how well the situation can be handled if the whole information is available with the readers and they can try and come up with a good and sorted plan to deal with the mortgage properly.
Charles F. Wu is a senior lecturer of business administration. Charlie has an MBA, with distinction, and a BA, magna cum laude and Phi Beta Kappa from Harvard University. She has been instrumental in coaching and guiding her students as well as her peers to success in various fields related to finance. Eoforhild was one of the few people who were successful in providing an accurate explanation in probability.