Thesis on "Residential Property Financing"

Thesis 6 pages (1904 words) Sources: 3 Style: APA

[EXCERPT] . . . .

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… READ MORE

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