About three years ago, President Barak Obama of the United States said “Subprime lending started off as a good idea — helping Americans buy homes who previously couldn’t afford.” Opinion of this nature reflects effectiveness in the operations of Mortgage sector. However, the impacts of the global financial meltdown have also affected the sector which is now faced with many shortcomings resulting to the stagnant in its operations.
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Prior to the present widespread Universal Banking System, such financial functions as mortgage funds, loans, home lending, property lending, home insurance, commercial mortgage, foreclosure, investment management, advisory services, marketing services were primarily and solely carried out by the mortgage institutions around the world. However, the introduction of the universal system into the global financial sector has paved the ways for commercial banks to fully carry out such mandated functions. This has so far contributed to the downfall in the operations of the Mortgage banks.
Other issues are argued to have contributed to the problem of the global financial meltdown as affecting the mortgage sector. In the observations of financial experts, the sharp increase in foreclosures and the problems in the mortgage market were largely blamed on loose lending practices, low interest rates, a housing bubble and excessive risk taking by the lenders and investors.
Some of the experts observed that the event of September 11 attack pushed America into a serious regime of economic struggle and led to the cutting of interest rate to a very low level which forced people with credits to go for the housing bull market. The development later on posed additional challenge to the investors and funds as they had sold mortgages they originated into the secondary market. One of the experts, Hamid Varzi stated that the U.S. economy, once the envy of the world, is now viewed across the globe with suspicion. America has become shackled by an immovable mountain of debt that endangers its prosperity and threatens to bring the rest of the world economy crashing down with it.
The ongoing sub-prime mortgage crisis, a result of irresponsible lending policies designed to generate commissions for unscrupulous brokers, presages far deeper problems in a U.S. economy that is beginning to resemble a giant smoke-and-mirror Ponzi scheme. And this has not been lost on the rest of the world. Besides, in 2006, about 80% of U.S mortgages were issued to subprime borrowers after the U.S house price began their decline thereafter and refinancing became more difficult. Despite the government instituted increase in loan incentives such as easy initial terms and long term trend of rising housing prices had encouraged borrowers to assume difficult mortgages in the belief they would be able to quickly refinance at more favorable terms; once the inter rates began to rise, housing prices started dropping.
Financial expert Dr. Peter Richardson observed that the crisis in the US sub-prime mortgage market could bolster the gold price not only because gold provides a safe investment haven. The crisis is expected to slow GDP growth, spurring lower real interest rates and a weaker US dollar that will boost gold investment demand. Gold’s traditional role as a safe haven asset in times of financial turbulence and instability is enforced in the current market as the metal recouped the majority of losses which occurred. Supporting this view is the fact that gold recovered despite a rise in the US dollar caused by a European Central bank intervention that boosted liquidity in Europe. However, the attempt for the mortgage rates sustainment called for the immediate institution of rate control acts in 1966, resulted to the rate rising and slow growth economy posed further difficulties for people to qualify for mortgage which in turn limited ability to generate income.
As United States kept roaming in these problems, the option was to institute another financial instrument by the policy makers as a way to retain funds and generate lending business. Although, steady growth was initially accounted for through such actions, but they were later on sabotaged by the existing rates controls. It is argued that the policy makers did not recognize the increasingly important role played by the financial institutions such as investment banks and edge fund; as some experts believe these institutions had become as important as commercial (depository) banks in providing credit to the U.S economy, but they were not subject to the same regulations.
Other suggested problems include moral hazard, imprudent real, deposits, upsurge inflation, lack of net with many institutions, ineffective financial regulation, inability to vary the report of assets, uprising competition, initial elimination of regulation designed to prevent lending excess to minimize failures, fraud and abuse of insider transaction; conflict of interest among the directors, pressure to restore nets worth ratios, inaccurate evaluation of saving and loan business by public accounting firms, indecision in supervising process, inexperienced number of staff, high number of inexperienced staff, lack of quick decision in the Bank Board while tackling problem cases.
However, several recommendations have been suggested to tackle these problems, among these are those of Geithner (2009) when he observed five elements which are critical to effective reform that the financial authority should expand the FDIC bank resolution mechanism to include non-bank financial institutions; ensure that a firm is allowed to fail in an orderly way and not be rescued; ensure taxpayers are not on the hook for any losses, by applying losses to the firm’s investors and creating a monetary pool funded by the largest financial institutions; apply appropriate checks and balances to the FDIC and Federal Reserve in this resolution process; require stronger capital and liquidity positions for financial firms and related regulatory authority.
In a regulatory reform bill presented in to U.S. Senate in May 2010, the recommended solutions include investors confidence or liquidity to help Central banks to expand their lending and money supplies so as to offset the decline in lending by private institutions and investors; restructuring through bankruptcy, bondholder haircuts, or government bailouts (i.e., nationalization, receivership or asset purchases); increase in government spending or cut-down in taxes to offset declines in consumer spending and business investment; banks should avoid foreclosure by adjusting the terms of mortgage loans, with the goal of maximizing cash payments; governments should offer financial incentives for lenders to assist borrowers; systematic refinancing of large numbers of mortgages and allowing mortgage debt to be reduced in homeowner bankruptcies; reinstated regulatory rules designed to help stabilize the financial system over the long-run to mitigate or prevent future crises.
In addition, Guy Cecala, states “the banks servicing these loans traditionally haven’t considered modifications. They’d rather do short sales where the owner hands over the keys and walks away. The institutions that own the mortgages don’t believe they have to accept modifications to avoid losses down the road”. The borrowers need loan modifications—meaning changes in the terms that would help most in holding the payments level. That way, a majority could cover their mortgages and keep their homes.
Abubakar Jimoh
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