Finance america mortgage
From the start of 2007, U.S. is witnessing a host of problems due to subprime losses which means that the equity of the homeowners is diluted with each passing day only to force them to back out from the previous mortgage obligations which they have entered into for realizing their dream house. Its a very simple story that in 2006, real estate hit new records of realization and the late comers dreaming that they would also reap good future benefits, embarked on ambitious financial obligations which later shattered all their dreams only within a span of 6 months or so.
With the fall in the equity of homeowners, they became frustrated and tried to shake off their hands from the earlier entered mortgage s by proceeding for foreclosures. Till one year or so, the cheap mortgage fund companies tried to maintain themselves from the percentage profit earned through bonds and mortgage s equilibrium. However, as foreclosures are increasing in number, it became extremely difficult for the two famous mortgage funds the Freddie Mac and Fannie Mae to maintain their margins resulting in a total pull back of the Nasdaq itself and President Bush and the congress had to rush to an urgent meeting ( for the sake of election repositioning in January), to bail out those two fund houses to restore confidence in the mortgage and the stock markets. The Fed has arranged to refinance the existing loans to the defaulting home owners into cheaper affordable installments and some other ways of bailment so that the number of foreclosures is decreased. A decrease in the number of foreclosures implies a saving hand to the real estate sector which is already suffering from several ailments and has been pictured as the main culprit for the ongoing slowdown.
The two large america n mortgage funds thus saved by the Fed have led to a debate in the nation about the pros and cons of such bailout. Irrespective of all these arguments, the markets rejoiced the bailout procedures and thus the stocks soared on that day. However, the big question is, will this bail out help the cheap mortgage fund houses to maintain them in the future If we go into the details of the business done by these mortgage houses, we can understand that they give cheap mortgage loans to the lower class people to secure a shelter for life. As such, the maximum limit of mortgage loans extended by these houses is around $450,000. Any loan over and above this limit would come under the category of bigger houses for which, the borrowers have to seek the private firms help.
Coming to the point, the loans which are extended to the public at cheap rates such as 7% are actually funded by the bonds which are sold to the general public which can be redeemable after a fixed period, say an year or so, usually at the rate of less than 5% to ensure that they earn a profit of 2% on each transaction to cover their management expenses as well as the losses to be borne by them in case of mortgage house property foreclosures. However, if suppose, the demand for mortgage loans decreases with an increase in the number of foreclosures, then the firms have to shed out all their profits to service the bonds which they have taken up earlier. This is just the case which is happening in the realm of both the mortgage fund houses. Is there any viable solution for this deadlock
A relook at the problem would suggest that such bail outs may of course solve the problem but only for a short period of time. What is more required that the mortgage fund houses have to ensure is their viability by confirming that the profit they earn is enough to cover their costs. Even though these fund houses may be non-profit oriented organizations, this does not mean that they tax the common man so frequently. One more consequence may be that even some large mortgage fund houses may look to the Fed citing these examples in the future. In this way, the fund houses may become lethargic hoping that they would receive some help even if things turn out to be worse.
Instead, if a solution of this problem would have been taken up, even though Freddie and Fannie required money infusion into their mortgage houses, the Fed would not have bailed out the mortgage fund houses, then; these mortgage funds would realize that they need to stand on their own. Probably a merger of both the fund houses into one and turn around strategies would have slowly but steadily inculcated the much needed strength into these mortgage fund houses rather than bailing them out by burdening the sincere tax payer of extra amounts who is already vexed with the growing inflation and employment opportunity loss.
These major happenings speak of political strategy instead of finance wherein the senate wants to improve its ratings to pass through the cut throat election competition by boasting that they have rescued the cheap mortgage fund houses for the poor man. Little does the poor man know that for a relief of ½% in the interest rates, he needs to shell an extra amount in the form of taxes If we happen to put all these parameters in a linear equation, the variable of X which denotes the gain percentage may be lower than the variable of Y which denotes the expenses to be borne to reap those gains. However, this equation may be more beneficial in the eyes of the Fed that they can reap higher X returns for a low Y inputs.
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