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In general terms, Mortgage refers to a loan borrowed by a client to pay back after a certain period of time. It is a kind of process that legally allows the lender to have temporary rights on borrower’s property for a certain period of time. US mortgage industry is backed by Real estate procedure Act, 1973 whereby the underwriter decides on the process of loan hence based on a decision; they pass or reject the loans whatever it deems fit right according to the process. They generally categorized the loan (mortgage) into two different parts like fixed rate mortgage & adjustable rate mortgage.
The US mortgage industry has always been a troubled child’ as it has led to several crisis in the past which was first in the year 1930’s while in the year one of the biggest crisis was seen in the year 2007-2010 that has led to another economic delusion. The crisis not only disrupted the whole US but also affected the savings of the people. Many of the economist & US treasurist believe that the sub prime mortgage crisis was majorly occurred due to housing bubble of 2000 – 2006.
Generally, several big banks like Goldman sachs, Bekhshire Hatway, etc predicted the signals and warningsof sub prime crisis which might emerge soon after the huge property crash in the year 2000. Hence they offset their investments much sooner. As witnesses due to the sub prime mortgage crisis several banks like Lehman & Brothers had an un-expected huge collspse in the market. Hence in recent years to hedge against the market risk. The mortgage industry has predefined two set of methods such as:
Asset Backed Securities (ABS): It is a type of financial security against your mortgages asset. It is a similar form of Mortage Backed Security backed by loans, debt, and several other financial instruments.
Mortgage Backed Securities (MBS): It is kind of Asset Backed Securities (ABS) whereby a mortgage is not only paid back by single authorized person. MBS includes the two types of instruments such as: CDO (Collatralised Debt Obligation) and CMOs (Collateralize Monetary Obligation)
In order to decrease the repayment risk, they have subsequently reduced the interest rate and longer the term of repayment in order to avoid the total debt. However in a recent years the US government has strengthen their security level of amortization by considering the several documents such as:
Verification of Employment (VOE)
Verification of Payment (VOP)
Mortgages are considered to be one of the biggest industries in US Market. But still its is very much different from European Union markets (EU) as the US markets follows a fixed interest rate system while the European markets have variable interest rate system. Hence in a recent years, the US mortage industry has applied a strong ethics and credit score in order to save the industry from credit risk. Thus offsetting the risk can increase the money supply in the economy. We hereby can say the mortgage industry works on certain parameters altogether.
Mr.D Williams, Founder & CEO of Williams Brand Management. An Avid Reader of Multi-Cultural Books,Finance,Tech & Marketing Gig. You can follow him via Twitter or can connect him on Linkedin