Introduction
Real estate can be defined as a piece of land that contains any buildings, permanent or temporary structures, the air above it, and the ground below it. Real estate can include business and/or residential premises and is sold either through real estate agents or the individual owners themselves.
Thesis Statement
In reference to the given question, this paper will discuss a problem that is facing the real estate business and will propose a solution to it. It will also show how the solution addresses the concerns of the people or other stakeholders involved. In addition, this paper will make an argument as to why this solution should be accepted and implemented even if there is an objection to it.
Discussion
Th real estate market affects the economy of a country up to 49% and is considered very important in terms of the GDP of a country. The market faces a couple of problems which if not addressed affect the economic growth of a country drastically. One of the problems that are faced by the real estate market is the sub-prime mortgage crisis. Sub-prime mortgage crisis refers to the deterioration of the mortgage market and the losses that are backed by the securities and collateralized debt obligations which are backed by the subprime mortgages (Nicolasa 17). Mortgages used to involve the straight-forward relationship between the lending banks and the borrowers but in the past decade, it has become a very complex series of transactions and relationships among numerous parties (Nicolasa 18).
In the discussion below, we will discuss the main participant in the sub-prime mortgage lending process. In addition to that, we will also discuss their roles in the sub-prime mortgage lending process. These participants are likely to face exposure due to the deterioration of the mortgage market. They are;
Borrowers
In the past decade, sub-prime borrowers have developed the characteristics that are most likely to make them default on a loan. Some of these include; characteristics of a high debt-to-income ratio, a weak or minimal credit history. As they are considered very high risk, the sub-prime lenders charge higher interest rates and costs for sub-prime mortgages (Nicolasa 25).
Mortgage Brokers
This group of investors makes up a two-thirds majority when it comes to sub-prime mortgages. They are the ones who market the mortgages and assess a borrower’s credit risk. In addition to that, they are the ones responsible for submitting the loan application forms to the lenders (Nicolasa 27).
Lenders
This group of investors is the ones responsible for the financing of the mortgages. The lenders finance the mortgages in a number of ways which include; the use of revolving lines of credit from warehouse lenders, loan sales and issuance of securities that are backed by the mortgages (Nicolasa 29).
Deterioration of the Sub-prime Market
Short-term interest rates rose in 2006 and the value of homes dropped in the same year. Due to this, borrowers had a hard time because they could not sell their homes in order to pay off their mortgages when it was clear that they could not pay their monthly rates. As a result of this, the default rates on sub-prime mortgages rose significantly. Payment defaulting became very common in 2006 due to this sub-prime mortgage crisis (Mimoun 24). Purchasers of the mortgages forced lenders to buy back the non-performing mortgages due to the rising number of mortgage payment defaulters. As a result of this many smaller lenders who were unable to buy back the non-performing mortgages were forced to file for bankruptcy. Investors in those securities suffered huge losses and it was uncertain in the financial market about such securities (Mimoun 18).
Results of the Sub-prime mortgage crisis
The sub-prime mortgage crisis has had a drastic effect on the country. Some of the effects that are being witnessed include among others a rise in the number of lawsuits where the purchasers of these mortgages are suing the lenders. Other professionals that are being sued by the purchasers include mortgage brokers, investment advisors and investment fund managers (Mimoun 29). Shareholders are also filing security class action against lenders and other related companies with investors suing the underwriters and investment managers for their losses in the sub-prime mortgage crisis.
In addition to that, several other small lenders have filed for bankruptcy because they do not have enough capital to buy back the non-performing mortgages and are also being sued by the purchasers of the mortgages for losses (Mimoun 14). The government has also established an investigation into the sub-prime mortgage crisis with an aim to ease the tension in the sub-prime lending industry and also find a solution for the cropping problem. The government is also likely to increase the regulations of the mortgage industry.
Solutions to the Sub-prime mortgage crisis
There are several solutions to the sub-prime mortgage crisis so as to avert a future crisis in the real estate market. Some of the solutions to this crisis include; establishing a borrower’s ability to repay the mortgage fully. The mortgage brokers are supposed to assess the ability of the borrowers to repay the mortgage fully no matter the risks of short-term interest rates rising in the process of repayment (Nicolasa 42).
The mortgage brokers should also verify the income of the borrowers and be sure that the borrower has the ability to repay the mortgage with his/her income. On the other hand, the lenders should limit the prepayment penalties in that they should be able to arrange with the borrowers on a prepayment method that is suitable for both parties. The mortgage brokers should also be able to align their incentives with the needs of the borrowers in that they should be on the same level (Nicolasa 46).
The government should put in place a requirement of a secondary market loan purchaser in that, when the lender is unable to purchase back the non-performing mortgages, the secondary purchase is thereby able to purchase back the non-performing mortgages. The government should also limit the number of small lenders in order to limit the number of lenders that finance mortgages so as to limit the number of bankruptcy cases filed in the midst of a crisis (Mimoun 34).
Why should my solutions be implemented?
The main reason why my solutions should be accepted and implemented is that these solutions are going to cushion a lot of people from losses in case of a mortgage crisis in that they will be able to pay up their mortgage without having to sell their property to do so.
By the implementation of the solution, the government and the lender will be able to limit the number of borrowers who are willing to take mortgages in that they will be able to find the most prospective borrowers who are willing to pay their mortgages in any case which includes in case there is a rise in the short-term interest rates.
Works cited
Mimoun, Karime. Impact of Financial Innovations on the Subprime Mortgage Crisis. Marienstrasse, Altstadt: Grin Verlag, 2010. Print
Nicolasa, Consuelo. The sub-prime mortgage crisis. San Antonio, Texas: St. Mary’s University Press, 2009. Print