The importance of underwriting standards to a healthy real estate finance market
Underwriting standards will have an impact on the real estate market by controlling speculation and risk taking. This took place when interest rates were low and the economy was strong. When this occurs, lenders increased the total amount of loans available. In most cases, the desire to add to their profit margins will result in practices that will ignore critical factors (such as: employment history, income and credit rating). Once this happens, is when financial institutions will make loans that are considered to be irresponsible. (Wickell, 2012) (Kolb, 2010)
After the economy begins to slow and interest rates are rising, is the point that these practices will hurt the lender. This is because the borrower more than likely could not afford the mortgage payment. This will result in the firm facing a wave of defaults. In the future, this will impact the ability of the bank to remain solvent. (Wickell, 2012) (Kolb, 2010)
These factors are showing how underwriting standards will help to support healthy real estate financing. The way that this will occur, is to establish certain practices that must be followed by lenders at all times. During situations when the economy is strong,...
(Wickell, 2012) (Kolb, 2010)
Changes to mortgage underwriting standards prior to the real estate boom that may have helped the boom accelerate and also created the conditions for the real estate collapse
The changes to the underwriting standards were directly linked to the boom and collapse in the real estate markets. This is because many financial institutions began to offer borrowers with less than perfect credit adjustable rate mortgages (ARMs). This is when they were provided with the mortgage to purchase a home. However, in the event that interest rates increased, is when these people will have higher monthly payments. At the same time, many of these securities were sold to investors as safe areas that offer higher returns. This is because the mortgage insurance would cover the lender in the event of a default. (Wickell, 2012) (Kolb, 2010)
At first, these practices helped to increase homeownership and the total amounts of spending in the economy. However, once interest rates began to rise is the point that many of the borrowers in ARMs could not afford the higher mortgage payments. This resulted in a large number of defaults impacting financial institutions. When this happened,…
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Liquidity and Loan Quality: the Impact it is having on Bank Health Since the 1980's, there has been an emphasis on deregulation within the banking industry. Part of the reason for this, is because of shifts in the economy (thanks in part to globalization) as the markets and products have changed. This has forced many different governments around the world to reduce regulations to include: liquidity and loan quality standards.
2. Second, the deductibility of mortgage interest and property tax payments serves to lower the after-tax cost of homeownership, also contributing to owners' ability to increase savings or consumption. Many low-income owners may not benefit from these provisions, however, because the standard deduction often exceeds interest and property tax 3. Third, homeownership allows a borrower to tap into secured lending against his or her home, which, all else equal, is often