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Checking the Unchecked in Mortgage Sector

During the past few days, many of us have heard and read a lot about Sub prime Mortgage crisis, whose consequences are still making strong impacts on world economy.
But, have we really thought about the concerned parties, who could have played a vital role in curtailing the crisis and perhaps avoiding them even completely!
So why not today ………

The people, who play an important role in the complete mortgage cycle i.e. from origination to disbursement, can be monitored or controlled or conceivably, we could even refer them as controlling the ‘unchecked.’

Now the question arises, who are these concerned parties; it would be very unfair to put burden on few, as there was an entire lot comprising powerful partakers, who played a crucial role. This group was made of Brokers, Banks or Mortgage Lender and credit rating agencies.

The Brokers
they are the intermediateries between the borrowers & the lenders; infact, they are the initial contact modes between the borrower and the lender. In accordance with the common perception, mortgage brokers give a paid advice to borrowers. Nevertheless, these brokers are more like independent sales people, who are often paid not only by borrowers but also by lenders. Brokers can get many important facts from the lender or the underwriter and tends to hide many information regarding borrowers to lenders. They can paint a very rosy picture of the borrower in front of lender and vice versa. The controversial fee of Yield Spread Premium is one of the most commonly used tools by the broker.

Their working style
The mortgage rate offered by lenders may be different, as an instance if they are paying a specific interest rate of 6%, it can be called the per rate. But, the originator also offers an alternative through mortgage brokers. If a broker can convince a borrower to accept a mortgage with a 6.25% rate then it will be beneficial not only for lender but also for the broker, as the broker will be receiving a fee equivalent to 1% of the total value of the mortgage. The 6.25% interest rate is leveraged with no additional cost.  

This is the controversial Yield Spread Premium, which is supposed to be the reward for broker for providing a loan with an above-market interest rate. This is considered a temporary relief for borrowers, as borrowers has to pay smaller amount to broker because the broker is already charging the lender.

The brokers also help the borrowers in arranging for earnest money, without disclosing to the lender, which makes the loan 100% financed. Though, it reduces borrower’s equity in property, the chances of defaults increases.

This fuels to impart a small portion of risk, after the disbursement of the loan by making borrowers a party to the repayment of loan. It can be done by dividing the fees into portions, which has to be paid with EMI. Nonetheless, it can be availed only when the borrower does not default. Thus, the broker can assist consumer to acquire the necessary   financial acumen and take advantage of the competitive marketplace, shop compare, ask questions and expect answers but a broker’s intension should not to influence borrower’s decision or exploit them.

Though many of us might argue that there were signs which were continuously visible and telling that the crisis happened; this was the time when FED should had taken corrective action ,but the role of the parties listed above cant be denied; if they would have behaved responsible perhaps the crisis would have been extinguished.     

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