So much of the world economy is gauged by the expansion and contraction of credit. Of all the loan products that contribute to the overall credit picture, mortgages – those loans secured by real property – are among the most influential toward the health of national economies. The converse is also true: the financial strength of any country significantly affects the availability and terms of mortgages loans. Interest rates, application fees and closing costs rise and fall with recessions, depressions, wars and the national debt. In the United States, for example, mortgage lenders pay careful attention to the actions of the Federal Reserve Board relative to the money supply and the prime rate. Consequently, the interrelationships among world events, national policies and the mortgage industry cannot be overstated.
Of the present economic circumstances affecting mortgage lending, jobs and wages lead the pack. The slow tempo of the US economic recovery is reflected by very modest job creation and little rise in earnings, according to an article in Mortgage News Daily. These factors make refinancing – much less purchasing – a home cost-prohibitive for many families. The piece goes on to identify the construction industry as one of the hardest hit in terms of job loss and wage stagnation. Fannie Mae forecasts several years elapsing before this industry fully recovers. Home furnishing retailers are also struggling with shrinking workforces and compensation, according to the Washington Post.
Another trend impacting mortgage lending is the state of collateral. CoreLogic, a real estate information services company, reports that the number of homeowners with negative equity – i.e. the outstanding loan balance exceeds the value – in their properties has declined over the second quarter of 2012. Should this trend continue, banks and other lenders may respond with greater flexibility in their credit guidelines, approving a larger pool of borrowers and allowing more favorable terms. In the same way, lenders gain confidence when foreclosures are few. Across the United States, foreclosure numbers are dropping, although they are rising in certain states. Accordingly, the credit standards of banks will vary by location.
The extent to which government intervenes in the borrower/lender relationship can both stimulate and hinder robust mortgage lending. In the wake of the financial crisis of 2008, many homeowners found themselves struggling with their monthly payments.
The government responded with HARP, the Making Home Affordable program. This initiative allows qualified property owners certain benefits relative to current mortgages: reduced interest rates to save on money, lower total fees and even principal curtailment in some cases. This benefits the financial institutions by keeping borrowers out of foreclosure and current on payments. Yet the same banks end up absorbing the losses incurred by the renegotiated loans. Unfortunately, many potential participants in MHA walk away, discouraged by the amount of paperwork lenders require and by the time it takes for approval. As a result, the program has been extended to give banks time to streamline their procedures and attract more homeowners. How it will affect credit extension remains to be seen.
The financial crisis also led to the rise of the reverse mortgage. This was a type of home loan designed for older people, that allowed them to access their home equity. This type of home loan is useful in many situations, especially since it doesn’t require monthly repayment like a traditional mortgage. Instead, mortgage holders have the flexibility to pay what they can afford, or even nothing at all, for the duration of the stay in their home. The reverse mortgage loan would only come due when the property owner died or moved out of their home. At that time, family members would be given the option of paying off the balance. Otherwise the home would be sold. The proceeds would be used to pay off the loan, with the balance given to the family.
Central banking is a primary factor in the volume and distribution of mortgage loans. For one thing, the Board of Governors of the Federal Reserve System set the prime rate, i.e. the lowest rate at which money can be borrowed. They also regulate the amount of money in circulation, often increasing the money supply when growth is sluggish. Most significantly, the Fed can purchase mortgage-backed securities, essentially buying up debt so lenders are clear to fund more mortgage loans. The central bank has continued this practice as recently as September of 2012, as reported by Bloomberg News.