Wednesday, November 05, 2008 Osmeña: Economic crisis By Antonio V. Osmeña Estatements
THE culprit in the global economic meltdown is the sub-prime mortgage fiasco in the United States.
Broadly speaking, mortgage markets are classified into primary markets and secondary markets. The primary market is made up of lenders who supply fund directly to borrowers, bear the risks associated with long-term financing, and who, as a rule, hold the mortgages until the debt obligation is discharged.
The secondary market is composed of lenders who seek an outlet (employment) for their funds, but who are neither equipped nor willing to originate or service the mortgage debts. These lenders merely buy mortgages as long-term or temporary investments in competition with other types of securities, such as government or corporate bonds.
Agencies that purchase mortgages for re-sale or lend against them as collateral security are also active in the secondary market.
The Lehman Brothers, American International Group (AIG) and many others that have declared bankruptcy were the leaders in the buying and selling of secondary mortgage markets around the world.
But primary and secondary market operations are not as clear-cut as the above explanation would lead one to believe. Many lenders act in a dual capacity: as primary market leaders to the limit of their own funds for investment, and as originators, service agents and assignors of mortgages for which they find profitable demand in the secondary mortgage market.
The adequate supply of funds at reasonable rates of interest is largely responsible for the significant growth in the total housing supply that took place in recent years. The sources of credit are many. Each source had its peculiarities, which may be caused by state or federal laws (as in America) or by internal organizational rules of the lending institutions that forbid mortgage lending in excess of certain amounts or in certain geographical areas.
Private sources of credit are supplied by two principal lending groups: (1) individual lenders and (2) institutional lenders.
Increasing interest by state and federal agencies in home construction, and the liberalization of home mortgage lending policies, have sparked institutional lenders to assume a lending role in home mortgage financing.
Individual (private) lenders formerly accounted for the largest part of funds outstanding on mortgage loans. But while they account for less than one-ninth of the total mortgage debt at present, they are still important sources of prime mortgage funds and are, by far, the largest source of junior mortgage loans.
Funds supplied by individual lenders include those loaned by trustees of individual trusts, estates, endowment, pension or corporate funds and those made available by fraternal and similar non-profit organizations as outlets for their surplus funds.
The institutions whose lending practices and policies exert the greatest influence on the mortgage market include the following: mortgage companies, mutual savings bank, commercial banks, life insurance companies, and savings and loan associations.
Mortgage credit policy may be called the barometer of the residential real estate market. A tightening or liberalization of mortgage lending policy has a direct and immediate influence on home construction and real estate market activity.
Most homes are brought on credit. Prior to the sub-prime mortgage fiasco, it is not uncommon, therefore, to see new homes advertised at an X amount of dollars in down payment and Y amount in monthly payments, without reference to the total transaction price. Unfortunately, the “easy” purchase plan thru the credit liberalization of the federal agencies has tempted thousands of buyers to end the amenities or pleasures of home ownership in financial greed, causing a trillion-dollar meltdown and the secondary mortgage market to collapse.
The National Association of Real Estate Boards (Realtors), the leading and most influential trade organizations in America and throughout the world, being directly involved in all the sales of homes, is fully aware of the major cause of the failure of the sub-prime mortgage market.
The bottom line in the present economic turmoil is the failure of mortgage lenders to obtain information on the financial means of the thousands of prospective borrowers.
It is never profitable for lenders to have a foreclosure mortgages in order to get back the money they lend.
