We have all been witness to some pretty incredible events over the last couple of months that appear to have generated a new phrase in our language, “The Credit Crunch”. We can see the effect in the failures of our financial and retail institutions but the question of why it happened, and what we can learn from it, seems less clear.

In December I was sent a link to a seminar given at Harvard University on the 25th September 2008 called “Understanding the Crisis in the Markets” in which a panel of experts from Harvard University do their best to get to the bottom of the problem.

Presenting the seminar was a panel of six experts including; Jay Light the Dean of the University, Rob Kaplan a Professor of Management Practice, Elizabeth Warren a professor of Law, Greg Mankiw, a professor of Economics, Keneth Rogoff a professor of Public Policy and Robert Merton a winner of the Nobel Prize for Economics.

The genesis of the problem appears to revolve around a phenomenon called leveraging. Briefly, if I own my house then it has a value. I can realise that value by selling the house, but then I would not have anywhere to live, so I have to buy another house and have not really achieved anything. Or I can take out a loan against my house, then I will have somewhere to live, and the money. I have leveraged my house. As long as I am able to continue making the payments on the loan the system works.

The breakdown in the system, as described by the panel, started as early as 10 years ago in the United States when mortgage brokers became tired of the boring old system of carefully assessing peoples ability to repay mortgages and instead started to look for ways that they could make more money from their sale. One of the ways they came up with was what was called a “Teaser” rate in which the sale of a mortgage was assessed on the ability of the buyer to make payments on a low introductory rate which lasted typically two years, and not on their ability to pay the other 28 years of a 30 year mortgage, at double the teaser rate. At the same time the mortgage companies were spreading their risk around other financial institutions by repackaging and selling their mortgage-loans to them. They were therefore less concerned about buyers defaulting on their loans when the higher rate kicked in because they were no longer lending their own money.

With more money available house prices started to increase and this led to the ratio of average house prices to average wages rising in America from something like 2.8:1 to over 4:1. In the UK that Ratio exceeded 6:1 as house prices rocketed and the mortgage companies looked for new ways to sell mortgages.

This was not sustainable in a flat market, but the world was in growth, corporate profits reached record margins, property prices were increasing and the market was being sustained, for a while.

Meanwhile wages were stagnant in real terms while living costs continued to rise, making it increasingly difficult for homeowners to make ends meet. For many the only way out was to take a second job. Then the homeowners discovered their ability to remortgage, or leverage, their homes to release their capital.

While property prices continued to increase this was fine because when the teaser rates on the remortgage ran out the property had increased in value sufficiently to remortgage again. This release of capital masked the fact that middle class America was having an increasingly difficult time funding their lifestyles from their wages.

A point to note is that the perception of these “Sub Prime” mortgages is that they were supplied to the poorer sections of the community to get them on the housing ladder. In fact over 80% of these loans were remortgages sold to existing borrowers – the home owning American middle class.

Then house prices stopped rising.

Now when the teaser rates ended there was no more equity to be released and the homeowner was left with a huge debt and no way to pay it off.

In the meantime the mortgage companies, well aware of the problems they were stacking up, had spread the risk of their loans throughout the financial community by taking out loans on their loans, or leveraging, so that ownership of the mortgage was spread around in a very complex way that only works in an expanding market, or while the release of equity continues to fund expansion,

When the release of equity dried up nobody could afford to repay their loans. Not the house owners, nor the financial institutions.

The complex relationships of the worlds financial institutions and the global nature of their business has ensured that these effects are being felt around the world.

The discussion finished with questions from the floor, one of which suggested that the current crisis might be dwarfed if the problem of over leveraging is not solved before the next round of Teaser mortgage rates expire.

The panel of six experts agreed that the answer was not going to be easy to find.

In the real estate industry, there are several realities which are basically a part of the fundamental processes and overall operation of this vital entity in the society. For instance, mortgage is a very common conception that home owners and investors as familiar with and continuously work with, in their real property ventures. Hence, it is primarily imperative to know and familiarize the different terminologies in the mortgage world in order to know its essence and value in your investment.

It is primarily important to define first what the meaning of mortgage is as well as its function. Mortgage is a legal process by which a loan is taken out against your very own property. You may use this in a residential or commercial investment, depending on your preferences and discretion. The same property that you use to finance with the loan is held or considered the security for the repayment of your loan or debt.

Home sellers and home buyers alike are surely familiar with the term appraisal which is considered an indispensable tool in the initial stages of the home acquisition or home selling venture. This refers to the actual and accurate estimation of the market value of the property. A licensed home appraiser who has substantial education and training is the one tasked to perform this salient endeavor. There are actually innumerable innovations and changes in the home appraisal system which are needed to avoid the happenings of the sub prime crisis.

If you have ever entered into a home buying or home selling transaction before, you have definitely come across the term closing. Closing refers to the meeting of between all involved parties in the home acquisition transaction. Buyer, seller and lender are the main components involved in the home purchase transaction and during closing, they tackle all necessary requirements such as legal fund and property settlements.

You are actually going to know the closing costs which usually include appraisal fee, origination fee, title search and insurance, property survey, taxes, credit report charge and the like. There are other costs which are incurred in the process of settling the necessary closing requirements. Usual amount of the closing cost is 2%-5% of the total mortgage amount.

Credit score is another vital terminology in mortgage which has a salient role and function in the process of securing a good mortgage or home equity loan. This is a numerical figure or quantity which basically reflects the credit worthiness of eligibility of the borrower. Mortgage providers use the credit score of the borrower as a reliable basis or criterion for the approval of the home loan.

Borrowers who are perennially searching for the best deals in home equity loan ought to learn and understand the term FHA loan. This is a government-insured loan regulated by the Federal Housing Administration or FHA. This is a mortgage insurance provided to qualified borrowers which give them more confidence and benefits as well.

Substantial knowledge of the different mortgage terminologies is vital in order to have a sound and valuable real estate investment.

Sub prime mortgages have been covered in the press a lot recently as a result of the lending crisis that has damaged the global economy. The crisis has come about as a result of the nature of sub prime mortgages because they primarily target individuals with bad credit. Many have lost their homes because they could not afford to keep up with repayments owing to interest rate rises and various other factors that have bumped their repayment figures up.

By offering those individuals one of the sub prime mortgages out there, lenders are taking a great risk if they do not assess the ability of individuals to repay the debt over a given period of time. However, they do offer an opportunity to become a homeowner to those that would not have been able to get credit elsewhere. Many also use sub prime mortgages to consolidate existing debts, which cements the benefits of sub prime mortgages for the consumer, if lenders pay due care and attention to their customers’ needs.

A recent Financial Services Authority investigation into lenders of sub prime mortgages has revealed that many do not obtain enough information about borrowers to make an informed decision whether to lend or not. The figure stood at 60% in actual fact. It is therefore essential that any individual taking one of the sub prime mortgages out makes sure that it is the right mortgage for him or her.

If you are convinced that one of the sub prime mortgages out there is for you then you can investigate the possibility a little further before making a decision, but it may be wise to read the small print before committing.

Also, pay attention to what the sub prime mortgages lender is asking you because if the information they obtain before accepting your application is not sufficient then you stand to lose your home. In short, make sure that you are giving enough information to the lender, and walk away if you are not convinced that they are doing what is best for you.

60% figure =

[http://www.fsa.gov.uk/pages/Doing/small_firms/mortgage/practice/sub_prime.shtml]

As I was getting ready for work Tuesday morning, The Today Show on NBC had a segment with Barbara Corcoran, a “real estate expert”, about refinancing. Being a loan officer, I watched intently, hoping Ms. Corcoran would dispense good advice about the multitude of opportunities available for refinancing. While some of her advice was accurate, she made a number of points in the allotted three-and-a-half minute segment that were so erroneous and misleading, I had to respond.

The video can be found on the TODAY Show website. I recommend watching it first.

I suppose pointing out that getting any financial advice in a three-and-a-half minute segment is not a good idea. Moreover, Ms. Corcoran sold her real estate business in 2001 for seventy million dollars. While I respect her success, she is no longer involved in an industry that is vastly different now and her experience was that of an real estate agent/saleswoman, not a mortgage professional. Hopefully, the segment prompts viewers to contact a mortgage professional for more in-depth personalized advice. I know she meant well, but I have a real problem with the following tips from Ms. Corcoran:

80% LTV can “typically get refinancing”
While the statement is true, she seemed to imply that if your mortgage is more than 80% of the home’s value (commonly referred to as LTV or Loan-to-Value), you cannot refinance. Nothing could be further from the truth. In fact, there are government sponsored/supported programs that allow homeowners to refinance up to 125% of their homes value. Being over 80% does not automatically preclude anyone from refinancing.

720 FICO for best rates
Again, the statement is mostly true, except that the best rates are for those who have a 760+ credit score. In fact, rates may differ at 760, 740, 720, 700, 680… You get the idea. However, mortgage interest rates are determined by a number of factors including LTV, credit score, your state of residence, overall debt profile, and others.

Ask for a term equal to that remaining on your current mortgage or “you’ll get ripped off on that interest rate.”
You will not get “ripped off” if you get a new 30 year mortgage. In fact, a new 30 year mortgage is likely the best way to secure the lowest monthly payment. Getting a new mortgage equal to that of your remaining term is appropriate in some cases. Ask your loan officer to show you the payment differences of various terms and programs.

Pre-payment penalties…. don’t get one and don’t refinance if you have one.
This one is really egregious, primarily because it can cost you a lot of savings. If you currently have a pre-payment penalty, refinancing now at a low rate may offer savings benefits that offset the penalty. If you wait for the pre-payment penalty to expire, interest rates will likely be higher. Ms. Corcoran made a good point about peak-even analysis, and a pre-payment penalty should be part of that. If anyone offers you a new loan with a pre-payment penalty, RUN!!! Pre-payment penalties are virtually extinct, as they were part of the sub-prime mortgage world that is no longer in existence. This piece of advice would have been helpful in 2005 but is misguided and irrelevant in 2010.

No closing costs, no points. Lenders will bury the costs in the instrument.
The intimation is that a no closing cost/no points loan is a bad thing. Not true. A customer choosing a no closing cost/no points loan will trade those costs for a higher interest rate. It’s that simple. Once again, have a mortgage professional show you the difference in a traditional mortgage and a no closing cost/no points mortgage loan.

It take 90 days to refinance.
Bogus. Typically, refinances are taking 45 days. I have heard horror stories from clients when they use a traditional pick-and-mortar bank where loans have taken six months. Perhaps it’s different in Manhattan but for the rest of us, there is no excuse for more than 60 days in a worst case scenario.

PMI 1.75% going up in April.
This is misleading and incomplete. PMI is Private Mortgage Insurance. The 1.75% Ms. Corcoran refers to is the FHA Mortgage Insurance Premium, or MIP. HUD has proposed raising the MIP to 2.25% this year. MIP is typically financed into the loan. FHA insured mortgages do require Monthly Insurance (MI) of either.50% or.55% but it is usually much less than PMI. PMI is required if you have less than 20% equity and a conventional mortgage. PMI rates vary depending on several factors and is typically paid each month as part of your monthly payment. Again, ask your loan officer to show you the payment differences.What is comes down to is that a mortgage professional can help you determine if refinancing is is your best interest. Sometimes, refinancing is not the best option for you right now. Don’t make the decision based on sound bites from a TV show. Ask a mortgage professional to sit down with you and examine your current financial situation. It won’t cost a penny and may save you thousands of dollars.

Purchasing your first home is an exciting and scary time. For the most

part, new homebuyers are unfamiliar with the home buying process.

Before accepting a mortgage loan, it is important to educate yourself on

various loan programs. Furthermore, first time home buyers should be aware

of factors that improve and decrease their chances of getting a good

loan package.

How Much Can You Afford to Spend?

The biggest mistake that some homebuyers make is purchasing a home they

cannot afford. Many assume that since their mortgage application was

approved, they can meet the expenses of homeownership. On the contrary,

some lenders regularly approve questionable loans.

Obtaining a pricier home may sound appealing; however, the risk of

foreclosure is higher. Aside from affording your monthly mortgage payment,

you must have the funds for utilities and unexpected expenses that

arise.

Get Pre-Qualified for a Home Loan

Getting pre-qualified for a mortgage before beginning your search will

speed up the home buying process. A pre-qualification provides an idea

of an affordable mortgage amount. Thus, you avoid touring homes and

neighborhoods outside your budget. A pre-qualification letter from a

lender does not guarantee a loan. The loan amount is contingent on income,

employment, and credit verification.

Fix Your Credit before Applying

Although it is very possible to get approved for a first time home loan

with poor credit, a good credit rating will open the doors for low

rates and better financing options. Improving your credit is a slow

process. To begin, strive to pay all creditors on time and avoid skipping

payments. A key to increasing credit scores is maintaining a good credit

standing. Secondly, reduce your debts. Maintain credit cards at half the

maximum limit. If possible, payoff balances monthly.

Select a Good First Time Homebuyer Loan Package

Working with a mortgage broker is the best way to locate excellent

first time home buying loans. Many first time homebuyers do not have extra

cash for closing or down payments. A mortgage broker has access to

several lenders that are willing to offer assistance for down payments and

closing fees. Furthermore, if you have bad credit, a broker can match

you with a bad credit or sub prime mortgage lender. The advantage of

working with brokers is that you receive multiple offers. After receiving

the loan application, your broker will send you up to four offers from

prospective lenders

Real properties are often priced way beyond the reach of common man, in spite of the fact that a reasonable place to live is far from being a luxury that you can turn your back on, in case you cannot afford one. Raising the required amount by saving some money on monthly basis can take a lifetime of an ordinary salaried citizen, which means that the dream of purchasing and living in your own home stays a dream throughout your life. Thankfully, different types of mortgage or real estate loans are there to assist people in buying and living in their own homes, while paying the mortgage installments on monthly basis. This option, while not as good as paying the lump sum amount and owning the house right from the word go, is still better than waiting through your entire life.

You can choose from the many types of mortgage or real estate loans, for example fixed rate mortgage, government mortgage, Islamic mortgage, balloon mortgage, flexible mortgage, pension mortgage, prime mortgage, sub prime mortgage, etc. However we’ll discuss only the basic types of real estate loans.

Government Loans

“Federal Housing Administration” and “Department of Veterans Affairs” are two government bodies that assist people seeking for finance to purchase home. FHA was established after the National Housing Act of 1934, which was passed with the objectives of making home mortgage more affordable for the common man. VA loan is a secured loan guaranteed by Department of Veterans Affairs, therefore, only the American veterans are eligible to benefit from this loan. Similarly, USDA loan is another type of mortgage insured by USDA and obtainable mainly in rural areas. Note that VA or USDA do not lend themselves, all they do is to provide guarantees to the lenders.

Fixed-rate Mortgage

Fixed rate refers to the fixed interest rate of a loan. The interest rate is fixed in advance; the borrowers pay a fixed amount for a fixed duration (ranging from 15 to 30 years). You may go for fixed-rate loans only when the interest rates are lower at some specific point of time (interest rates are on the higher side nowadays due to the financial crunch); otherwise you should opt for adjustable rates.

Adjustable Rate Mortgage

As the name suggest, adjustable rate mortgage are loans where the interest rate can be changed on periodical basis. This type suits the lenders who can adjust interest rates according to the situation of market. Sometimes a loan can be both fixed (for a certain period) and adjustable (after the set period) at the same time.

The independent mortgage broker industry in Australia is still young and should prosper again after the credit crunch. The industry is yet to fall under a national regulatory body in order to give it credibility, however this is planned. When the industry becomes regulated in a similar fashion to the FSA in the UK and the turmoil in the global financial markets is sorted out, mortgage brokers in Australia should once again experience a boom.

Mortgage Brokers in the USA

Nowhere has the credit crunch hit harder than in the United States of America. Ghost towns have emerged in once prosperous areas due to the high number of properties which are now abandoned that were previously financed with sub prime mortgages. Rather than going through the stress of repossession, home owners who could no longer afford their monthly mortgage payments simply walked away from their properties, leaving them empty. Lenders would then be forced to repossess the derelict houses.

When this phenomenon happened en masse within small neighbourhoods the repossessed properties became worthless as the local real estate markets collapsed. This has left some parts of towns and cities in the USA as ghost towns. It is an event that has never happened before and can be squarely blamed on the credit crunch.

Prior to 2007 the mortgage broking industry in the USA was booming. Brokers were closing millions of home loans each year and enjoyed a large portion of the total number of loans approved nationwide. Surprisingly, given the magnitude of the intermediary industry and the importance of mortgage products to home owners, there was little regulation of the broking profession. Any regulation that did exist only covered certain areas as the regulatory model was state driven rather than federal.

But no one thought to question the lack of regulation because the property market was booming and everyone was making money. The old saying – if it ain’t broke don’t fix it – seemed an appropriate theme for the late 1990s and early 2000s. What is apparent now with the benefit of hindsight is that the industry was actually broken and did need fixing.

Fast forward to the present day and mortgage brokers in many states around the US are not only being ejected from the industry but are also being sent to prison. Massive frauds have been uncovered in the wake of the first wave of the credit crunch and it appears that some individual brokers have defrauded lenders and investors out of millions of dollars.

In addition to these headline-grabbing problems many brokers also face a new reality in which there are fewer products to sell to clients and therefore fewer deals being closed. This in turn deprives the brokers of income and had subsequently forced many advisers out of the business. Many who have remained in the profession are struggling along, closing enough sales to stay afloat, and awaiting a time when the credit market will flow freely once again. It would be difficult to find a mortgage broker anywhere in the USA who claims that he or she is not struggling to stay afloat since the credit market froze in 2007.

Home loan application approval rates have reached the lowest level for over a decade. The root cause of this is seen to be the “credit crunch” phenomenon being experience in the UK as financial lenders are finding it more difficult to source funding to offer financial loans to home owners.

Mortgage lenders are understandably cautious when it comes to home loan approvals despite the fact that many banking institutions are in fact in a position to continue lending to consumers. Even reliable borrowers are experiencing difficulties when remortgaging their properties in addition to the struggle faced by first time buyers to gain the magical approval that sees them getting onto the housing ladder. Customers with fixed rate mortgages are in the best position to ride the storm of this economic slowdown.

Approximately 55,000 mortgage applications were approved in July 2008, continuing a successive series of months of decline. The approval rate this time last year saw the number of approved mortgages almost double this at around 100,000 at the same time in 2007.

Where the ability to buy property across differing social classes is not so clear-cut, mortgage applicants with bad credit histories are finding it almost impossible to get financed now during the credit crunch for home loans. Given the sub-prime mortgage crisis in the states is seen as the cause for the cross Atlantic housing crisis, the blocking of lending to bad credit mortgage applicants should be a surprise to nobody.

Sub-prime mortgage lending in the states is being blamed by the media for bringing the global credit market grinding to a halt bringing with it fears of medium term recession. As customers of these products begin to fall behind on their mortgage payments and repossessions begin to spiral upwards, wider markets in the financial sector begin to dry up too. Poor lending decisions in recent times by banks to the sub-prime mortgage sector start to have a real effect on their own balance sheet and smaller banks either fail themselves or are taken over by more powerful banks, this is happing in both the UK and the USA.

Now that markets have started to decline, energy costs have increased putting extra financial pressure on people, spending falls and people start to worry. Governments are desperately trying to seek ways to rebalance the market and spur on demand. Just this week the Labour government set a 0% stamp duty on property sales with a value less than £175,000, many in the media think this is too little too late.

People looking to sell their home to move to bigger properties may now find that remortgaging will take longer than they thought, however many think that this economic downturn will begin to reverse in around one year so homeowners should start to contact their mortgage brokers for the latest news on the market. Mortgage brokers have access to a wide range of lenders and have special software that will enable them to tailor match the right financial product to your particular financial needs.

Another factor in the development of subprime lending as it is today was the gradual deregulation of banks from the mid-1970s to the mid-1980s. Deregulation meant that banks could open branches much more freely, but it also meant that interest rates went sky-high. At one point, average rate of interest was more than 10%. The housing market began to slow, since the interest rate meant that many potential home buyers were no longer within reach of owning their own homes. It was about this time that the subprime adjustable rate mortgage (ARM) came onto the American scene.

A borrower who chose an ARM would probably have sufficient qualifications for the lower rate. As well, private mortgage insurance (PMI) was being offered to buyers so that lenders would be protected if the buyer defaulted. PMI offset the potential loss to lenders if the borrower could not repay the loan, and the lender could not recover his expenses after foreclosure on the house and sale of the property. If you really wanted to buy a house, they were available, but at a cost. Some bankers got the message that they could raise interest rates even higher, increase closing costs and fees, and make an excellent profit from people who were probably not going to be able to repay their loans – if they just assumed more risk.

Banking deregulation meant that new branch banks were on every corner. Money for loans was readily available. And real estate looked like a great way to get rich quickly. Any good-sized social gathering was likely to have one or two new real estate agents in it. There was an astounding variety of seminars and courses on making money by selling real estate.

And of course, as always happens, it changed. Investments that had seemed secure were not; people were losing money. There were new regulations to help us through the real estate crash. Then the wave crested once again: house prices were going up, the market was stabilizing, and here we were in a real estate boom! This time, however, potential homeowners who previously would have been ineligible for loans were able to borrow large amounts of money. Underwriting requirements by lenders slipped; you could borrow money at non-banking institutions as easily as at a bank. Verifying the income of a borrower became less of an issue as lenders hurried to make as many deals as possible with borrowers.

That is a brief outline of subprime lending. The face it has worn for the past decade, and is still wearing today, is very different from the way it looked back in the 1980s, in the deregulation days. Maybe we ought to consider the idea of turning back to the way we used to handle loans. What we’re doing now doesn’t seem to be helping anyone very much – except perhaps the subprime lenders.