Residential Property Financing Programs: Characteristics

Residential Property Financing Programs: Characteristics in a Bust Market The American economy is in a clear-cut state of recession. With job creation on the downslide, the dollar in a value spiral and commodity costs levying the already imposing specter of inflation on the American people. In the midst of these conditions, a litany of irresponsible credit and loan policies has produced a housing market bust. Though slowing economic indicators have persisted since 2000, consumer confidence and credit purchasing had sustained the economy for several of these years.

This was the case against the better judgment of sound economic stewardship, as today countless homeowners are unable to keep up on mortgage payments. Massive foreclosures have ensued, with houses entering the market at a pace far greater than the exit of houses from the market or the entrance of new buyers. The lagging economy is not the only reason for this negative trend however.

There are additionally indications that one of the foundational explanations for the current mortgage crisis is the dearth of understanding of many borrowers as to that which is stipulated by their respective residential property financing terms. It is the assumption of this account that a more clear-cut understanding of the characteristics of some of the residential property financing programs that are available will help individual borrowers better understand their options and, once an option is selected, their responsibilities and liabilities.

The incapacity of many to fully understand the terms of their loans would be mixed with an exploitive tendency by credit lenders and mortgage agencies, who recognized the opportunities present in individuals already demonstrated toward economic disinclination. Therefore, it is necessary to first instruct an understanding of the meaning of residential property financing, which in its simplest terms is the buying of a mortgage. For most individuals who are unlikely to purchase a property out of pocket, the mortgage or property financing agency is the standard intermediary.

If approved as a financially fit candidate for mortgage lending, the lending agency will offer the borrower a set of terms for repayment. Under these terms, the mortgage lender purchases the property from its seller and allows the borrower to acquire full ownership of the house through the set terms for repayment.

As the Urban Financing Group (2006) tells us, it is important to "note that the financial details of your home loan agreement are inevitably tied to the cost of your home (either to build or purchase), the location of your property and the kind of home you intend to purchase or build." (UFG, 1) This is to say that the overall cost and conditions relating to the property will have an influence on the terms of repayment which the company or agency is able to offer.

Lending agencies can come in myriad forms, which will in many instances be directly related to the financing terms and conditions which they are able to offer the potential borrower. In many ways, public and private lending agencies play different roles in the housing market, and will be of more particular use or less particular use depending upon the nature and interests of the borrower.

With consideration to public agencies for instance, their designated role in assisting certain groups such as those below the poverty line, veteran groups and public contracts helps to define their particular purpose. Likewise, for private lenders, an interest in the opportunity for profitability through interest-based loaning is primary. Thus, a great many factors concerning financial viability and risk-optimization will help to influence these terms of lending, which are less restricted by government regulation.

To these alternate motives, we note that, for instance, "most private lenders place size requirements on the apartment complexes they are willing to finance, usually five units or more. Smaller complexes just don't have the revenue generation potential required to make your loan officer feel comfortable." (Brown, 1) This is a specific type of financing consideration though, which refers to residential income property.

If one is in the process of financing a residential property with the intent to draw revenue from said property, a differing set of characteristics is to apply than if the individual is a borrower seeking a smaller sum and a lesser risk in a simple residential property. That notwithstanding, "residential income property loans usually carry a higher LTV ratio than other property types.

If you recall from the first segment of this series, LTV (loan-to-value) ratio indicates the percentage of money your lender will lend you to the property's market value. An 80% LTV is the maximum most lenders will provide for residential income property." (Brown, 1) This does provide such borrowers with an incentive to navigate the varying options availed to them in order to optimize the special categorization thereby given.

As to the options available to borrowers with an intent to own residential property, the factor beyond the nature of the property which will bear the largest impact on the borrower's terms is his or her financial profile. The ideal profile for the average property borrowers will land this individual in the first category of conventional financing program which is described by the Urban Financing Group. Here, the fixed- rate mortgage establishes a stable interest and repayment rate that remains unchanging over the course of time.

This is beneficial to the borrower who locks into a property at a time when interest rates are particularly low, allowing a large measure of financial insulation against the instability of the economy or dramatic changes in the housing marketing. We find that such insulation can be exceedingly invaluable in times of great uncertainty such as our current period of housing crisis.

The context in which today many borrowers find themselves increasingly unable to meet loan terms is the 'nonconforming loan,' which allows a financing organization to establish creative terms for lending and repayment that, for one reason or another, may place the borrower significantly at the mercy of the lender. As opposed to the conforming loan, which is not fixed but regulated by the federal mortgage agencies, Freddie Mac and Fannie Mae, nonconforming loans "are loans that do not meet Fannie Mae or Freddie Mac qualifications.

There are many reasons that a loan may be considered 'nonconforming': the loan amount is higher than the conforming loan limit (for mortgage loans), there is a lack of credit, there is an unorthodox nature of the use of funds or there is something unusual about the collateral backing the loan." (UFG, 1) These are the types of general exceptions that helped to pave the way for massive loaning to what are being referred to today as 'sub-prime' borrowers, whose less than ideal status for home ownership financing would be compensated for by largely exploitive terms under this umbrella category.

Thus, the inconsistency of this category and its program terms may be its most salient characteristic. Most often, the terms set forth in such nonconforming loans have been residential financing programs sponsored and enforced by private lenders and private mortgage agencies. Thus, by characteristic, such programs differ from the types of financing programs which are available to specially identified demographics.

For instance, those qualifying by state of poverty for federal assistance, or applying for it by virtue of being otherwise unfit for acceptable terms of repayment, do have access to the resources allotted through the Federal Housing Administration (FHA). Herein, those qualifying as lower income families may be eligible to receive loans which are backed through the FHA and distributed through such federally recognized agencies as the Urban Funding Group.

This is a program specifically designed to bypass the features of many residential property financing programs for which borrowing eligibility is based on the financial suitability. (UFG, 1) This is likewise the case for members of the U.S. Veterans Administration, which is subsidized by the U.S. government for the financing of up to 100% of a desired property. This will allow a U.S. war veteran to obtain a financing program without a down payment or mortgage insurance.

This and the FHA program noted above are two forms of public residential property financing which are characteristically beneficial to those who are otherwise seen as lending liabilities. However, as further research reveals, these are the types of programs which are consistently being given the short-shrift in the face of the private lending crisis.

As study on the housing market collapse which consumed the once dynamic economies of Asia and Southeast Asia evaluates such countries as Singapore, who a decade prior to the United States, overextending credit platitudes to unfit borrowers, with the expense coming for all citizens in rising property prices amidst a contractive economy. The article by Chow & Ng (2004) notes that today "bank credit is available only for private residential property financing in Singapore.

Though the price of such credit serves as the reference for [The Housing Department]'s own mortgage scheme, public housing cannot benefit from bank mortgage financing. There is then a clear divide between the amount of credit available for private and public properties holding the cost of this credit constant." (Chow & Ng, 13) Simply stated, the collapse of the Asian housing markets.