Effects of Mortgage Problems in Todays Economy on the Business of Real Estate Appraisal and Sales - Essay Example

Effects of Mortgage Problems in Today's Economy on the Business of Real E Appraisal and Sales Financial problems in country arising from bad loans: The real estate market, especially house market, has shown continuous down fall in price and sales. Homes are facing foreclosure and repossession problems due to the nonpayment of loans by the borrowers. The mortgage lenders are now hesitating to give out new mortgage loans due to the financial crisis arising from their bad loans. Further, lenders are also not in a position to tightening up the required qualifications for getting mortgage loan due to the absence of qualified buyers in the market. When considering the historical data, the prevailing rates for a 30-year fixed loan, is extremely lower and the mortgage lenders are facing problems to setoff their losses from real estate business. Location factor is the basis of mortgage business and it is now assuming greater significance in today's housing market. Thus there exist differential rates of growth in the mortgage industry. Mortgage lenders face serious financial problems such as default from borrowers on repaying loan installments in time and such instances of nonpayment had severe implications in the housing market and real estate industry. Mortgage business is based on lending of mortgage loans to the clients. Thus, falling house prices in the US economy will result in immense losses on the mortgages the companies own as security for loan issued, and thus the loan given out on the basis of such securities also suffer higher risk. This higher risk in security investment will influence individuals and institutions like pension funds, hedge funds, insurance companies and banks negatively. Therefore these institutions compelled to stop buying the residential mortgages from mortgage lenders. Thus the mortgage industry will suffer from lack of financial resources and the home buyers are also restricted from getting loans. Investment is the basis of the real estate market. The report on real estate business shows that the values for homes across the country are showing a declining trend and the real estate appraisers are suffering increased pressure from real estate agents and mortgage brokers to show the asset values at a higher rate in order to increase sales. Control measures for followed by the real estate agents and mortgage brokers by compelling the appraisers to artificially increase the property values, which also affect the mortgage business badly. Due to the increased pressure from mortgage brokers, appraisers give over value report on the asset on mortgage. The authenticity of their valuation seems to lack reliability and the customers hardly trust it. This affects their further business growth badly. The mortgage lenders are facing problems with default in repayment of loan installments and they are not in a position to retain the loan from the securities which are overvalued through the influence of brokers. (Kerr). As per the new regulations in the US mortgage industry, banks and mortgage brokers are required to order all appraisals through an independent third party. This third party is required to order the appraisal from a licensed appraiser, and he selects only those who agree to do it for the lowest rate without any quality constraints. This provides advantages and disadvantageous in the mortgage industry. The new regulations help the borrowers to get the appraisal price at reduced level. Due to the elimination of upfront communication between the lender and the appraiser, the problems arising from such communications in the mortgage industry can also be reduced. A consequence of this new regulation is that only lowest priced appraisers are accepted by borrowers while most of the qualified appraisers are avoided. Thus in the real estate market, there may only be the lower priced appraisers. Thus local appraisers, charging a little higher price has to do their quality work in a very specialized market. This new system also creates other problems for the mortgage business such as the loan decisions of underwriters is based on appraisalsfrom less qualifiedappraisers. Thus the lending process on the basis of this appraisal becomes so risky. (Kennedy). Economic stress factors also affect the mortgage business badly. The declining house value resulted in lowering of the investment in housing assets and thus in the mortgage industry risk related to excess inventory arising due to fall in demand. The declining home prices also affect the personal wealth and consumer confidence and the economy as a whole witnessed a down ward movement. Lending of subprime loans by mortgagers also creates problems. Through subprime loans even disqualified persons can get cheaper, conventional mortgages and this will lead to increase in the bad loan rate in economy. (Housing Bubble and Real Estate Markey Tracker). According to the report of S&P, the US mortgage markets will become worse than today and the earnings of mortgage business firms will also deteriorate. The factors that lead to this condition are negative home price trends and the impact of the sub prime mortgage market. The downturn movement in house price results in shrinking home prices and it reduces the demand for mortgages. Due to the biased act of appraisers in the valuation of properties, the house value tend to be more lower than expected and it puts further downward pressure on home prices in the market. Thus the unethical act of appraisers on property valuation seems to be the basis of downfall trend in home prices. (Housing Bubble and Real Estate Markey Tracker). By allowing the buyer to borrow much more than the property's real value, the ability to repay the mortgage payment and other expenses will be lower and the chances of unpaid debt becomes higher. Purchasing of property for over-value would results in further downturn in asset prices with the declining real estate value. This is termed as "being upside down", and it is the worst condition borrowers suffer. A lender who lends on the basis of this overvalued asset also had to face risk. (Seltzer). The borrowers may resort to refinance facilities for the repayment of their debt. This will add further complexity to the mortgage problems. The wide geographic variation in home price trends also result in mortgage problems. Foreclosures are costly for mortgage services and investors and it affects their regular working badly. The financial crisis in the US economy is related to the sub prime mortgage crisis. Downward trend in house prices and related mortgage payment problems such as foreclosures affects the US financial market badly. The investments in housing assets have declined in value and thus the financial conditions of mortgage firms become more risky. Availability of financial resources for personal and business spending also have declined in the economy as a result of tightened lending practices of financial institutions. Investments in financial products like mortgage backed securities etc are facing risk of loss. The US subprime crisis indicates a condition where high risk loans are available to customers having poor credit histories with continuous default in repayments. Thus the subprime loans raise more risk in the mortgage industry. With the decline in house values, the levels of unpaid credit are also rising. Because of the higher standard conditions put by the lender for loan payment in order to reduce risk, the cost of obtaining credit also becomes much higher. Business and personal loan applicants will have to face intense scrutiny with costly repayment plans. (Turner). Housing problem is a significant problem in the current US economy. The report on this subject says that at least 7.5m Americans are titled with negative equity due to owing more on their mortgage than their home is actually worth. It is reported that more than 1 million home owners are facing foreclosure or repossession problems from their mortgage lenders and a million are making delay in their mortgage payment. This type of huge nonpayment problem will lead to economic crisis in the mortgage industry. (Quinn). The level of fraudulent lending to unsuitable borrowers in the country seems to be more than the expected rate. The risk related to defaults on subprime mortgages is also increasing due to the act of unqualified mortgage holders in the economy. Provision of loans without verifying the actual income of the customers is helping the fraudulent borrowers to get loans through forged documents and inflated salaries. As a result, the borrowers can receive bigger loans than they could repay. "The number of foreclosures in the United States jumped by 115 per cent to 243,947 in August, from the year before - or one in 510 households according to RealtyTrac, the housing monitor." (Bawden). When the rate of foreclosures rises, it will lead to further downfall in house prices and thus investors' confidence on investment on mortgage-related securities also declines. They become less likely to borrow and spend. Conclusion: Down-falling house price in the economy is the main factor that affects the mortgage industry badly. Unethical act of appraisers causes overvaluation of assets and the borrowers get more amount of loan than they can repay. Thus the rate of default in repayment of loans by borrowers is highly increased. The issue of sub prime loans causes fraudulent lending and it adds further increase in the loan default rate. Existing conditions in the economy is adding complexity to the mortgage. In order to overcome the existing critical conditions in the mortgage industry a mutual understanding between the borrowers and lenders has to be established through ethical business practice. Works Cited Bawden, Tom. US Mortage Crisis Predicted to get Worse as Home Loan Defaults Soar. Times Online. 2007. 21 Nov. 2008. . Housing Bubble and Real Estate Markey Tracker. Wilshire Holding Group. 2008. 21 Nov. 2008. . Kennedy, Mike. Deep Creek Lake Vacation Home Financing - Part 2. Deep Creek Lake: Garret County. 2008. 21 Nov. 2008. . Kerr, Tom. Can Mortage Company Appraisals be Trusted. Mortage Loan.com. 2007. 21 Nov. 2008. . Quinn, James. Housing Remains the Biggest Problem Facing the US Economy. Telegraph. co.uk. 21 Nov. 2008. . Seltzer, Curtis. Appraising Real Estate Appraisers and Appraisals. Rismedia. 2008. 21 Nov. 2008. . Turner, Rebecca. Is The US Economy In Recession: The Subprime Crisis May Be Forcing The US Into Recession. Suite101.com: The Genuine Article Literally. 2008. 21 Nov. 2008. . Read More