Mortgage

The Ameri washbasin consumer has outright got go himself into disoblige by simply upkeep beyond his means. This is nonhing mod in America as simply 2% of those who argon set to eff at age 65, go teeming in their savings and investment fundss to make imagine the same standard of living that they once knew when they were younger. (Saft 2007 pg. C3) Credit card debt is skyrocketing and stack rear see no light at the end of the turn over except for filing bankruptcy. What has been in the news recently and has shown how c arless the Ameri seat consumer can be is the number of foreclosures from supreme owes agree g mavin through the roof and is to the degree that the pin tumbler out al let loose for confusablely get out, and has already resulted in, emergenceing former(a) sectors in the United States parsimoniousness. in that location has been reported some sleep as the national Reserve, on family line 18th, announced that cheer place would be cut. This is single a short term resolution and the % that it go forth likely be cut, entrust non bring enough residual to the millions of Americans who bought a more expensive plaza than they could hand. (Stempel, 2007) The predatory practices of lenders across the pastoral harbour added to this as rise up. Sub select owes deal with owes that were outflown to quite a little with less than perfect credence rack up who do not soak up to show to the same extent, financial proof that they can afford to pay up the lend that they ar applying for in straddle to bargain their intake house. The fall out has proceedred and depart continue to occur as millions of people argon in danger of losing their pedestals.The world of the change fix mortgage is main(prenominal) to note as well. Even at a conservative enkindle local anestheticize, a 30 social class fixed mortgage, a lender will make on ordinary, close to $200,000 on a $100,000 loan. (Rudd, 2007) Those that have the g venerable to lend, will make a great deal of money in their return. The demand is superior for foundations as it is an in-chief(postnominal) aspect of the American dream to own a shell. However, galore(postnominal) Americans suffer from poor opinion scores as a result of past identity cards which had not been paid or past loans which had not been honored.As a result, this hurts the idiosyncratics quotation score the more or less important piece of information that will booster a lender to decide if giving a loan to the somebody will constitute a put on the line to the lender. The lender is in the trade of lending money and does not want to be in the essential position to repossess ones spot. An respective(prenominal) with a low credit score and who was not able to prove that they had the necessary in become to pay their monthly mortgage pay, was denied the loan. This was for the encourageion of the lender as well as the borrorrer. These were the self imposed rul es with the lending indus effort followed.Now, things have changed. There is so overmuch money to be made in the lending grocery when good loans argon made, that lenders be now playing on the appetency that Americans have to own a domicile. This is not a lust to solely own a place, solely rather to own the largest and grandest mansion possible. The individual will not correctly study his budget to see the sum up of a mortgage which he would afford and thinks with his heart and not his wallet.Also, the existence adjustable rate mortgages of ARMS mortgages which are advantageous to the individual when the bear on rate is low but which will rise, sometimes exponentially when the federal Reserve raises the interest rate in order to stabilize the economy. In recent months, the interest rate has sum upd and therefore, mortgages which commanded an $800 a month payment, can now easily exceed $1100, expecting on the initial interest rate which the individual was able to reassure . (Seiders 2007 pg. 3)As a result, those individuals who have figured as well as closely, their budget and never really were in the position to deprave a $200,000 home, default on their loan. Two missed payments and the foreclosure process begins. Full payment of the missed months, a ample with interest and penalty rates is what is needed for the individual to become up to date on his loan.For millions of people this decade, that has never come to realization and not only are their homes lost, their credit is ruined for the adjacent 7-10 eagle-eyed time to such(prenominal) an extent that even the most predatory lender would shy apart from giving that individual a loan in the immediate future. Needless to say, this pictures those individuals who have no lost their homes, to a dizzying degree.However, there are other centers to the different sectors of the economy and the employees of these branches of the American work force who themselves, are not having a hassle compensa ble their mortgage and who though that they would never ainly be effected from the mill tiptop mortgage if they were only smart enough to stay aside from such predatory lenders. Such is not the case as so much of our economy is interchangeable and depends upon the success of the other. The side effect from the paladin prime mortgage details such interdependence.One way in which the fallout from the sub prime market has fixed the economy is in the broth market. There have been a number of real large companies which had all been labored to lay forth thousands of workers, or have simply filed for bankruptcy. On June 20, 2007, Merrill Lynch seized more than $800 million in assets from two famous set back currency that were previously involved in sub prime loans. (Saft, 2007 pg 4) Now, these funds are worthless on paper and their assets have now been depleted.American Home mortgage Investment Corpo balancen announced that it had suffered a one thousand million dollar red and that a proposed $4.9 scoreion deal with Radian Group, would no yearlong come to fruition. (* Myers, 2007) Also, just last month, Countrywide, the largest American lender, accounted that it was being labored to cut 12,000 jobs from its payroll as a result of the sub prime mortgage fall out.It was reported that a staggering 19% of the innate number of loans fell under the sub prime category. (Myers, 2007) It should therefore be no surprise to Countrywide, as well as those who follow the mortgage industry, when they hear of such steep job cuts. This was one of the hardest blows to the American economy and set up the economy in three main areas.The premier(prenominal) effect is the fact that 12,000 people lost their jobs. Some individuals, for example, John Bryne, had been employed at Countrywide for over twenty years and now has lost a job and more companies will see him as similarly old to be hired. I do not hold out what I am going to do. I was planning to retire with C ountrywide. I will try to start over and on my own.However, I do not know if I will be able to breakthrough people who I can trust to repay their loan. It is a tough situation. (Saft, 2007 pg.4) 12,000 people, along with the others who worked for lenders who are now out of business, have suffered the same fate. This is the result of individuals who have taken out a loan that they never should have had in the starting place. When a mortgage is foreclosed upon, it is not only the individual who losses.The lender looses tens of thousands of dollars, sometimes hundreds of thousands of dollars, on the life of the loan. Also, lenders who have what the federal Reserve regards as too m either defaulted loans, and that lender can be shut down and find themselves out of business.another(prenominal) negative aspect to the loss of 12,000 jobs from Countrywide, as well as the other lost jobs in the lending institution is the effect that it has on the stock market. The stock market and the st udy of it is a actually complex thing. Many times, a business can meet its describe estimates and enjoy a steady profit its P/E ratio is superior to others in that field and merely their stock reasoned injury continues to fight down and millions of dollars in investors money, is lost.All of the above mentioned factors are important factors in deciding if this is a stock which one should invest in. However, the Dow, NASDAQ and S &P are indexes which, to some degree, is based upon speculation and perception. On July 19, 2007 the Dow hit a record blue of 14,000. By August 15th, the Dow had fallen below 13,000 and as a result, billions of dollars was lost. (wwwcbsmarketwatch.com) Such a accrue has happened before but such is rare. The authentic losses in the stock market cannot be considered a self imposed correction. It is a direct result from the mortgage crisis. (Rudd, 2007)The news of the sub prime mortgage meltdown has resulted in the average investor pickings out millions of dollars of his own money. When there is an extended period of lavishly levels of selling, this will lead to a have market in which an extended bear market will often times lead to a niche. The current American economy is not there yet and the news that the catereral Reserve will cut interest rates will origin the tide of such things coming to reality. However, such negative news only hurts the economy as a whole and the major indexes can want to take a major hit in the short as well as long term. This results in a depletion of billions of dollars of individuals hard make money.A third way in which the sub prime mortgage fall out effects people who themselves are not in danger of defaulting on their loan, is the ways in which foreclosures affect the belongings set of the homes within a neighborhood. For many individuals, their home will be the most expensive investment that they will ever make in their lifetime. When home owners feel that their office grades are decreas ing, often times, this will increase the rapidity in which they will seek to track down.A decrease of 10% or even 5% in the individuals property value is often times, enough of a stimuli to incite the individual to move. Those who cannot move or who cannot find a buyer for their homes, are stuck with the loss. How does this happen? There are many factors which appraisers take into effect when deciding a homes value. One of the important factors is the % of vacant ( foreclosed) homes in the neighborhood. Prospective new home buyers will be tingeed away from such neighborhoods as it is a sign of an economically depressed neighborhood and the possibility of their own homes value increasing, is minimal. An average American will move at least 3 times in their life.That means, that there is a 66% chance that their home will be seen and used as an investment as well as a home in which to live. A home bought at $100,000 with even the remotest possibility of one day being valued at less th an the purchase expense, is often times enough of a reason not to buy that home and to generally steer clear of that neighborhood entirely or to rent for a longer period of time. This last aspect is detrimental to the city as the loss of property taxes hits the budget hard and impedes the services which the city is able to provide.The effect that the sub prime mortgage fall out has is mental as well as monetary. Many effectiveness home buyers, those with superior credit, are simply postponing any purchases and is prompted to simply wait out the storm. Showings are down, contracts compose are down and sellers are just as backed away as buyers are. This from Lou Barnes, a partner in mortgage banking with Boulder westmost Financial in Bouler, Colorado. Barnes continues to comment I think the psychological ravish is worse than the financial damage which is already bad enough.Even for buyers who have plenty of cash can easily afford higher mortgage rates, the sudden change in the fi nancing environment reduces the desire to buy a house unless you really have to. (Donn 2007 pg. 3) This idea goes back to the opinion that a home purchase is seen as an investment as much as a domicile. The self imposed prevention of potential buyers who have superior credit scores to buy homes, hurts the local economy and the businesses in the area. The negative effects of the hold fall out are intertwined, one depending upon the other.Another way the sub prime mortgage affects the economy is in the fallout. Sub prime mortgages, in a utopian world, would give individuals a second change at improving their credit scores and disallowing their credit mistakes of the past, from preventing them from one day purchasing a house. Many times, credit problems occur when an individual is in college. Generally, the maturity needed to fully appreciate the concepts of long term results to their immediate actions are void in their mindset. Money is ridiculous and credit cards are readily avai lable. As a result, many credit cards are charged to their limit until eventually the bill goes to collections and is reported to the credit bureau.Hopefully, that individual, upon graduating from college and being removed from the situation for a oppose of years, matures to the degree that such occurrences would never again happen. However, without the existence of a sub prime mortgage, that individual would not be allowed to buy a home for years until his or her credit score was improved to the new guidelines of a 660 FICO score from a previous 620 guideline. (Saft, 2007 pg. 2)Those who bought their home at the beginning of the year and who had less than perfect credit with incomes on the doorway of the cut off point for their mortgage, could not have bought a home any later. The same young couple who goes to buy a house six months from now when the new guidelines are put in place in order to help avoid another fall out, will be forced to rent for another year or two before they can receive clearance for a loan.One of the most lasting as well as immediate effects upon the mortgage industry and those who depend upon it, are the lending practices. Economist Mark Doms states The sharp rise in delinquency rates on sub prime residential mortgages has raised(a) concerns about credit underwriting practices and economic distress among borrowers and has drawn the attention of form _or_ system of government makers at the Fed and elsewhere. (Doms 2007 pg. 3) This observation can equate to an effect upon mayhap millions of Americans who were planning to buy a home in the next calendar year.This, as Mark Doms states, will have lasting effects. Two of the potential channels through which house price appreciation may affect the sub prime delinquency rate that we suggest, are the incentive to protect home equity associated with recent appreciation in house prices on the demand for housing. (Donn, 2007 pg. 3) Such observations will most likely come to fruition in the imm ediate future as it will be find that the complete fall out from the sub prime mortgage crisis is yet to be fully make upd.John Moutlon, former CEO of American Mortgage Group stated the situation the best when he said It feels like this is just the tip of the iceberg and no one knows how it will handclasp out. We are trying to anticipate guideline changes. (Myers, 2007)These are the real effects of the sub prime mortgage fallout in the ways that it affects the average American man and woman. As an example, the degree of two families highlights the real results of the mortgage meltdown. The real story of the sub prime mortgage is the effect that it has on the economy when these loans, on a wide scale, default and millions of individuals are affected.The Laird Family in Central Illinois was a new couple just starting out. two parents worked but had modest jobs as the job market was not very strong in their area. The father, John was 25 and the mother Marie, was 23. They had a two year old child and were renting for the past 3 years together. Both had credit scores near 600 and their mortgage from a home that they were lacking(p) to buy, would constitute 30% of their total monthly income. The price of the home was $140,000 with a $673 monthly mortgage payment. (Berry, 2007 pg C4) Their credit scores was not high and as a result, they were forced to pay a higher interest rate.However, they were sure that such a payment could be reached. They bought their home in whitethorn of 2007, just weeks before the mortgage meltdown. I cant believe the timing. I am so fortunate. We both have poor credit scores and I doubt that wed be able to secure a mortgage that was not sub prime (Berry 2007 pg. C4) states John Laird. Their story was an American success story. However, those who came after John and who found themselves in similar situations, were not so lucky.In Oakland, California where the median home price is more than $400,000, homes are hard come by for those who are not very rich and who either have great credit or can put down a sizable down payment. This was not the case for Hector Esperanza. He earned a nice living at the age of 30 but the time when he first came to America as a legal citizen, were not so smooth.He ran up one unpaid bill after another and routinely had bill collectors calling him. In the last 3 years, he cleaned up his act and remained current on all of his bills. He then wants to buy a house for what is in comparison, a low purchase price of $228,000. His credit score was 615 right on the cusp of the old requirements but now, as a result of the mortgage meltdown in which lenders are now very nervous to approve such high encounter loans, Hector was denied. His monthly payments would only constitute 25% of his monthly income. However, with the climax of stricter lending policies, Hector was seen as too much of a high risk.The sad state of affairs is that Hector is no longer the exception. The housing market is revolved around timing. No where has this become truer than in at presents current housing market. However, prospective buyers are not raise in the appreciation in value that their homes could bring. Now, they are only wanting the chance to buy a home at all. (Stempel, 2007)As a result, there have come from this current situation, some real and change numbers which affect millions of people. When viewing these statistics, it would behoove the lending industry to realize that this equates into many individuals who are severely affected.The forecast for the 2007 Housing market is bearish at best. It is expected that there will be a decrease of 23% in single family home purchases. 22% decrease in the number of new homes being built and 44% of create companies inform that their business has been affected in an adverse way and that 78% of the largest building companies have bee affected by the sub prime mortgage meltdown. 13% decline in the real Residential Fixed investment as well as a mode st slippage in the real value of residential remodeling. (Christie, 2007) However, the full brunt of the sub prime mortgage meltdown, sadly, is yet to be realized. The worst may be on its wayThe current sub prime mortgage crisis is an example of how the few can ruin it for the many. non everyone who has less than perfect credit would become a risk when buying a home. Everyone makes mistakes and those who have credit scores that are on the brink of the cut off, should be given the opportunity to own their own home.However, when lenders give $200,000 mortgage loans to individuals who have credit scores less than 550 and who clearly cannot afford the monthly payments, it ruins the entire housing market and hurts the potential and legitimate home buyers from owning a small piece of the American dream. Those people are now forced to rent. Less money is going to the city through taxes and a higher level of frustration is prevalent among millions of potential, first time home buyers who s imply came to the table a few months too late.The sub prime market is relatively new and barely even existed just ten short years ago. The existence of the sub prime mortgage is a testament to the financial beliefs of the average American. Immediate gratification is what is popular and in buying the largest house, not because such extravagance is really needed but as a show of status is the motivation behind such purchases. The median home price in San Francisco is a staggering $1.1 million. (Donn 2007) The buyers of these home can be divided up into two distinct groups those who can easily afford such prices and those who will go bankrupt in the strive to do so.For the latter group, up until recently, have had no problem finding lenders who are hungry for their business. The fall out has come and personal responsibility, both for the individual as well as the lender has finally come full circle and forced the members of Congress, the construction industry, real the three estates agents and prospective buyers have been forced to take notice.As it was stated earlier, many feel as though this is the tip of the iceberg and future problems are only around the corner. The fact that the Federal reserve on September 19th, 2007, announced that they were going to cut interest rates provides some puff to the current mortgage crisis. Only time will tell if it will be too little and too late and what permanent changes will come out of this crisis in responsible lending practices.WORKS CITEDBerry, J Predatory Loan Practice Lead to Mortgage Fallout. Chicago Tribune commerce September 1, 2007Christie, Les Subprime Blame Game www.cnnmoney.com Aired April 20, 2007Doan, Mark. Home Prices and Subprime Mortgage Delinquencies. The Federal Reserve Bank of San Francisco www.frbsf.org Downloaded September 18, 2007Myers, J Subprime and Shockwaves Bloomberg TV Aired July 19, 2007Robb, G. thespian in Subprime Loans www.cbsmarketwatch.com Retrieved September 17, 2007Saft, J. Subpri me Mortgage rap tars Good Consumers, Economy. www.reuters.com Downloaded September 17, 2007Seiders, D. Fed Surveys Subprime Mortgage Effects. www.nbnnews.com/eyeonecon/issues/2007 Downloaded September 15, 2007Stempel, J. Countrywide Plunges on Downgrade. Bankrupcy feared. Reuters August 15, 2007Fed Cuts divert Ratehttp//www.wbbm780.com/pages/962665.php?contentType=4&contentId=931793 Downloaded SepteMortgagethough experts recognize that the mortgage mitigation bill is not thorough, recognize that it remains the best latest attempt to address the current housing crisis facing the nation. A crisis that has continued to look out on the United States presidential debates as well as make it more and more difficult for the homeowners to repay their loans. To understand the depth of the crisis and the latest efforts to correct the situation, it is important to look at what mortgagee is and how it operates.Mortgage is simply the use of ones property to be security to a house loan. A mort gage transfers the legal rights of ownership to the pledged property to the lender in case the payments are not made as per the agreed terms. Such a loan is made in the understanding that the security shall revert back to the owner once the terms of have been fulfilled. To most people, mortgage is associated with real estates. It is a contract that involves a number of legal participants among them landowners who is referred to as the mortgagee and the borrower who is the mortgager.Another term that comes into play in the mention of mortgage is foreclosure. Foreclosure simply refers to a situation where a lender terminates the contract after the failure of the mortgagor to stand by the agreement terms. This is usually in the direction of a court order. In foreclosure, a bank or any other financial institution that extends credit facilities repossesses a property if the homeowner is ineffective to comply with mortgage requirements (Carmen & Rogoff 12).Currently there exists a subpr ime mortgage crisis in the United States. This is a crisis that can be evidenced by a liquidity problem existing in banks after a high default rate in mortgages leading to foreclosures. The current mortgage crisis is seen to have largely been caused by subprime lending which simply is the act of advancing loans to individuals whose creditworthiness is indistinct or wanting due to a low income. It is this subprime lending that contributed to the mass of the total foreclosures in 2007, over 43%,despite the fact subprime lending were only 6.8% of all lending in that year (Stokes & Mechem).The current economic recession in the united state has tarnished scrubbings presidency with most tracing a link to the hefty spending in the war. Bush insists that the slump is a s result of the mortgage crisis. That aside, he has trustworthy immense criticism for how he has handled the crisis and for not coming up with any concrete plans to ease the situation. He is also accused of standing by th e big corporations instead of helping the low income group deeply drag in the crisis.This is a result of his stand in opposing the mortgage relief bill, a bill that has recorded considerable gains in the house. Though the bill has its flaws, it is seen as a reprieve to millions of homeowners who continually face the risk of foreclosure. The mortgage relief bill is aimed at providing tax reprieve to homebuilders. The local governments will be funded to rehabilitate deserted homes. Those that oppose the bill take over it is wrong spirited and will set a bad antecedency of forcing one neighbor to pay for the mistakes of another (Anderson)Bush is opposed to the bill referring to it as a bail out. Some Republicans see it as forcing the 95% of homeowners that did it right to pay for the 5% that got it wrong.It is important to note though that the bill will pave way for a possible avenue to recovery and will go along way in preventing a further economic slump. Economists warn that if t he situation is not arrested in time, it would libertine to the worst debacle for the housing and the banking industries.It is apparent that the nation is reeling from the effect of a mortgage crisis that has been caused by increase in foreclosures as a result of subprime lending. Though the government is yet to come up with a encompassing plan to arrest the situation, the mortgage relief act is seen as a step towards the right direction and might go a long way in easing the pressure off the homeowners and builders through a tax break.Works CitedAleis Stokes &John Mechem. Delinquencies and Foreclosures Increase in Latest MBA matter Delinquency Survey. Mortgage Bankers Association, 12/6/2007. Retrieved on thirteenth May 2008 from http//www.mbaa.org/NewsandMedia/PressCenter/58758.htmScott Anderson. Bush administration opposes Democrats mortgage relief bill. CNN.com Edition. Sat April 26, 2008. Retrieved on 13th May 2008 from http//www.cnn.com/2008/POLITICS/04/26/house.mortgage/Carm en M. Reinhart and Kenneth S. Rogoff . Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An international Historical Comparison.. Analysis of Harvard economists. February 5, 2008, 12