Compensation and Incentives in Mortgage Lending essay
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To begin with, the word mortgage when mentioned in any context brings about the meaning of a security interest in real property held by a lender as a security for a debt. It is usually in form of a loan or money. In connection to this, it can be best termed as a lender’s security for a debt in the sense that it is not a debt in itself. In addition, it can be defined as a transfer of interest in land or an equivalent of it from the owner to the mortgage lender. This kind of interest is returned only on condition that the terms of the mortgage are met, satisfied or in the larger perspective fulfilled. Taking it in a simpler definition, mortgage is a security for the loan that the lender makes to the borrower. Notably, mortgages have been associated with loans that are secured on real estate rather than on other such like related properties. Remarkably, if a person is not willing to pay for real estate directly from his or her resources immediately, mortgages remains to be the only option. Taking the example of what happens in the US, the process by which a mortgage is secured by a borrower is called origination ( Wienk 259). In this sense, it follows that the borrower has to submit a loan application form that describes his or her financial history as well as the credit history of the underwriter. This helps the lender or the lending institution gain trust or rather the basis that once the loan is issued will be repaid. It is the goal of every American resident to own a home. In order to attain this goal, mortgage lending has made it possible. So to speak, the government has been involved in the sense that it protects the borrowers from discrimination on the basis of color, race or region (Turner et al. 45) This is best described as fairness in mortgage lending. It is the lender who decides whether to lend someone the mortgage or not based on some guidelines that they follow. In this context, if one qualifies for a mortgage loan, he is given but rules must apply in the sense that he or she must provide the security for the loan as well as a payment of interest based on the agreement that has been reached. Past studies on mortgage lendingOutstandingly, when mortgage lending is mentioned in any context, it may not sound as a strange terminology. Owing to this factor, it has been in use for a long time. Taking the example of mortgage lending in the US, it has been in use for quiet a good number of years. In particular, the government has been encouraging it to be done in order to ensure that home is found for every resident. Issues to do with the protection of the borrowers from foreclosures have been noted with many of the individuals being protected by the law (Wienk 508). According to literature, there were a high number of those that sought for mortgage loan in order to acquire real estate in the year 1993. However there was a notable decline in the following year. This was made possible by security backed packages that encouraged many US residents to borrow the mortgage loan. At the same time, a great contraction dated back in 1994 was faced owing to the fact that mortgage rates rose from 7 to 9 percent for thirty-year fixed rate loans in 1994(Turner et al. 26). With this occurrence however, there have been efforts in the mortgage industry that have been directed towards the expansion of the accessibility of mortgage money. This is been maintained by ensuring that there is more credit that is being directed to the low income and minority areas that may have been undeserved in one way or another (Turner et al. 26). To more qualified borrowers, the industry has also been committed to making credit available. In the management of credit however, presents the challenge of maintaining incentives especially with the fact that the industry is somehow fragmented.
Previously, quality lending with incentives was possible since one institution held a loan in portfolio at the same time originating it. The problem has been brought about by the fact that there has been the emergence of mortgage bankers or brokers of which they take the task of originating the loans and selling them into the secondary market (Wienk 16). This marginalizes the stake holding share of lenders as frontline bearers in the arena of mortgage lending. Recent trends in mortgage lendingIn the recent past, there has been a main focus towards the sharing of risks by the manager, shareholders and the third parties. This has been in terms of structures of payoffs to those parties to show that certain compensation schemes may give bank mangers incentives to pursue a high risk portfolio strategy. From a broader point of view, there has been compensation and incentives that have been related to mortgage lending. In regard to this, the incentives are made to encourage the application of more mortgage loans by the borrowers (Wienk 612). This is to suggest that the purpose of incentives is to encourage the mortgage lenders in this case to act in a certain way. As such, the mortgage lending can be encouraged despite the fact that it has suffered a great draw back especially in the years 2005-2007 in the United States. This was perpetuated by the fact that together with the global economic recession, the loans were issued as subprime loans. In this sense, subprime loans means that the down payment was so little in that it did not meet the required minimum payment. At the same time, this led to many of the many mortgages been taken back and many borrowers held as delinquency as they could not manage to pay for the loans (Wienk 53).
In the same line of thought, use of compensation is a good as well as an effective tool for ensuring that many people in need of borrowing mortgage loans have an access. In the past, the outreach and even the advertisement of applications for mortgage loans was done with an element of discrimination as the loans had only the few privileged in the society who would access the mortgage (Turner et al. 43). This made even the ones whose homes were of little value not been able to access the loan. As such, mortgage lending was being directed only to a few selected. In combination with this, mortgage lending with incentives and compensation encourages many people to borrow as well as encouraging many lenders to engage in the lending activity with efficacy (Wienk 53). Needless to say, compensation and incentives in mortgage lending has tremendous outcome if applied with care and aptness as it can as well lead to bankruptcy. As such, the borrowers can even involve those that are the minority and the ones that come from the marginalized areas. Incentives in relation to mortgage lending, means that part of what is required of the borrower, is paid for and therefore the borrower is not strained in his purchase (Wienk 277). This also means that the fears on the issues to do with the borrowers failing to pay the loan are partly catered for and therefore the lenders are so much encouraged to lend more of mortgage loans. Remarkably, such incentives with encourage the lenders in the mortgage industry which has excessively suffered from financial crisis. At the same time, the issue to do with compensations brings about the fact that in case of a loss or of loans that have not been paid, there will be compensations for the loss on the side of the mortgage lender. Such a provision will make the mortgage lenders to engage even in more risky deals as they are assured that the risks as well as the fact that in case of failure care will be taken. With the current world of globalization, International Union for Housing Finance (IUHF) which comprises of about 98 member countries has come into the context to ensure that it keeps the members up dated on the developments that occur. It is important to state that there have been several programs that have been implemented in order to be able to overcome the financial crisis that the mortgage market or industry is in. With the new housing Federal housing Administration, refinancing will provide more opportunities for lenders to restructure loans for some families who owe more than their home worth (Caldwell 1). Besides, this helps as stabilizing incentives in the housing market. The program works only when the borrower is in his or her current mortgage. The housing incentives in particular will provide a chance for the majority of the responsible, middle-class American families who have been struggling to stay in their homes (Caldwell 1). Such provisions in mortgage lending encourage the rebuilding of wealth for the households as well as the community from a broader point of view. Mortgage delinquencies and foreclosures in the United States have been on the increase with major adverse cost for banks and financial markets around the globe (Wienk 679). Over time, it has been noted that subsidized loans increase home ownership in low income neighborhoods. Nonetheless, there are costs and risks on the side of the homeowners themselves. In the same line of thought, the home ownership is an improvement towards increasing incentives to maintain a property and neighborhood. Further, it reduces the outflow of rents from low income zones. From the broader point of view, the brokers receive compensation from the borrower as well as mortgage bank after the loan has been funded (Turner et al. 37). This may otherwise jeopardize the lives of the minority low income as such brokers encourage them to get the loan even when their status do not allow for it. In the recent years, there has been so much of complexity that has been attributed to the housing market. With the involvement of brokers and bankers, the process of mortgage is not a simple process. However, wise investment and use of incentives as well as compensation in mortgage lending will promote the sector with a greater percentage. There has been so much effort as well as actions that have been taken in order to support market stability and access to affordable mortgage credit. This is an incentive that has provided a strong support of Fannie Mae and Freddie Mac to ensure continued and affordable credit across the market (Caldwell 1). Homeowners have been made a provision for to purchase new homes and refinance into more affordable monthly payments through mortgage backed securities. Actions like Helping Homeowners, Purchase Homes refinance and Modify Mortgages to More Affordable Payments, Prevent Foreclosures and Stabilize Communities have also been taken as well as their implementation (Caldwell 1). Low-income housing tax credit programs have also been availed in order to avoid the pitfalls of crisis. Furthermore, there have been laws that have been enforced in order to protect the borrower. From a general point of view, Compensation and incentives in mortgage lending is a broad topic that calls for policies to be implemented. As such they involve policies that allow for lender Compensation and incentives polices along with the standards being set and laws for regulation (Turner et al. 51).