Question 1: underwriting standards are important in terms of promoting a real estate investment market that is healthy. According to (Kagan, 2020), underwriting standards refer to the guidelines established for purposes of ensuring that the loans issued are highly maintained and secure. Additionally, the canons assist in setting scales in relation to the amount of debit that may be issued to a person, the terms of loans as well as the amount of debt a given firm is ready to issue and the chargeable interest rates. Therefore, in relation to real estate investment market, underwriting standards aid financial entities in defining whether a borrower is eligible for a loan. Additionally, the standards assist financial organizations in setting the amount of debt that should be issued, interest rates to be charged and terms of the debt. Furthermore, underwriting standards safeguards banks and other financial institutions against excessive risks and losses.
Question 2: There are a number of modifications to mortgage underwriting standards before the real estate affluent that might have assisted in the acceleration of the boom, while at the same time created the conditions that were responsible for the collapse of real estate. According to (Kathleen, 2011), prior to the changes to mortgage underwriting standards, it was difficult for individuals with employment gaps and those with the modest means of making money to acquire loans from banks. This is because their income low hence, they could not raise the high down loan payments. In other instances, individuals of color faced discrimination and it was difficult for them to obtain credit. This is because many financial lenders refused to offer financial services to African-American and Hispanic borrowers despite some of them having high incomes and clean credit histories. Therefore, one of the changes that facilitated real estate boom is securitization. As highlighted by (Kathleen, 2011), securitization is considered the greatest contributor of real estate booming. This is because it revolutionized mortgage financing by combining Wall Street with Main Street. Additionally, it opened up new huge pools of capital both nationally and internationally that financed home mortgages more so in the United States. As such, securitization enabled lenders to give out loans continuously, especially mortgage loans. Furthermore, securitization assisted in solving a major problem that existed in banks, whereby banks held home mortgages until they were paid off. That implied that banks financed long-term mortgage loans but with short-term demand deposits. As such, banks were subverted. However, with the introduction of securitization, banks were in a position to move mortgages off their books in exchange for upfront cash.
The other underwriting change that contributed to real estate boom is the rapid appreciation and ease of mortgage credit access for lower credit-rated borrowers. According to (Furlong, 2014), the same change later led to the flop of the market for houses and there was an increase in the number of defaulters on mortgages that were residential. The other change is the participation of government in housing finance. As pointed out by (Agnello, 2019), when governments take part in housing finance, homeownership is expanded. This is because it contributes to the buying of affordable housing. However, in as much as government participation play a crucial role in the expansion of homeownership, it also leads to the reduction in terms of the availability of mortgage instruments thus affecting competition in the financial sector as well as the saving of incentives by potential home buyers.
Question 3: A number of changes were implemented in relation to the standards of mortgage underwriting in response to collapse of the real estate. According to (Lerner, 2018), the real estate collapse marked a new error in the real estate sector. Lenders and policy makers learnt that eroding underwriting standards and promoting easy credit was not a viable solution to higher demand for loans. As such, new lending policies were introduced among them the introduction of new regulations that separated the appraisal process by putting a firewall between it and the underwriting process. Additionally, unlike before, the new standards hinders individuals with credit scores below 620 from accessing loans. The other change is regarding alterations of certain lending areas. For instance, the access of loan products that allow low down payment have been increased and higher debt-to-income ratios that were allowed regulations introduced. These regulations compare how people repay their debts on a recurring monthly basis against their gross salary.
Question 4: The Federal Deposit Insurance Corporation is an example of an underwriting body. As such, (Kagan, 2020), highlights some of the underwriting standards of the mentioned body. One the standard for credit cards posits that the applicant’s willingness to pay and their capacity to do so should be measured. The other standard requires the carrying out of credit history as well as how they performed on previous and existing commitments. Furthermore, the other requirement is about income assessment among them investment income and self-employment income. The other important standard is whereby the relationship between the borrower and the bank on the aggregate credit should be considered.
References:
Agnello, L., Castro, V., & Sousa, R. (2019). The Housing Cycle: What Role for Mortgage Market Development and Housing Finance?. The Journal Of Real Estate Finance And Economics. doi: 10.1007/s11146-019-09705-z
Furlong, F., Takhtamanova, Y., & Lang, D. (2014). Mortgage Choice in the Housing Boom: Impacts of House Price Appreciation and Borrower Type [Ebook] (pp. 10-68). San Francisco.
Kagan, J. (2020). Underwriting Standards. Retrieved from https://www.investopedia.com/terms/u/underwriting-standards.asp
Kathleen, E. (2011). THE EMERGENCE OF THE SUBPRIME MARKET [Ebook] (pp. 13-54).
Lerner, M. (2018). 10 years later: How the housing market has changed since the crash, https://www.washingtonpost.com/news/business/wp/2018/10/04/feature/10-years-later-how-the-housing-market-has-changed-since-the-crash/
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