How Mortgage Underwriting Standards have Changed

Not grasped by many and studied in high ranks of economics, mortgage underwriting is the process by which the lender, usually a bank of a crediting institution, analyses if the risk rate of offering a mortgage loan to an individual, institution or organization requesting this loan, is acceptable or not. If the risk is too high, the lender will not agree to the loan, or will add more conditions to be protected from any loses.

Mortgage loans are a kind of financial instrument that use property insurance in the name of the borrower. Mortgage insurance protects financial institutions when borrowers are unable to fulfill mortgage contract terms and cannot return the money lent to them including interest. Moreover, in such instances, the bank or lending institution usually rteain the right to take the property through a foreclosure. The word mortgage originates from French law and means “death contract”.

Economic research from the Federal Reserve Bank of San Francisco explains how the standards of mortgage underwriting have changed in the last several years and in accordance the state of the economy. Mortgage underwriting standards are guidelines that help secure “better” deals between banks and borrowers. In an article about these standards, Henry Cisneros says: “Properly structured mortgages can responsibly open the door to home ownership for families with modest wealth and incomes. Of course, prudent mortgage underwriting is the foundation of a sound system of housing finance and the single most effective way to mitigate risk in the system. But while underwriting standards became dangerously lax in the period leading up to the foreclosure crisis, the pendulum has now swung too far in the opposite direction.”

Nowadays, mortgage underwriting standards have become too strict due to high risk. The Obama administration, trying to figure out a relaxation of these tight standards, is examining new ways to extend mortgage credit for a larger range of people who are still unable to access these resources. This will contribute to the recovery of the nation’s economy much faster, but also enables easier ways for homeowners to have a starting capital to purchase real estate.

In an article by Jonathan Miller, how mortgage underwriting standards haven’t eased is expalined. “People are confusing rising demand with easing standards”, says Miller.

In these times of economic crisis and recessionary conditions, any financial institution based on interest and investments is trying to prevent loss and cut down their financial risk. However, for the time being, today’s risk is also lower than times past due to high loan demand and low rates for successful investors.

Consumer Financial Protection Bureau’s in every country are trying to specify the rules of what is called a Qualified Mortgage and mortgage servicing, but uncertain points of these laws are keeping away most consumers. Accepting a mortgage is not an easy step to take, and usually new customers are not very acquainted with the laws, so they might be accepting very strict standards that are hard to comply with.

This new “industry” of foreclosing and selling properties is also intentionally used by many people as a new business move. Many houses,are not easily sold due to location, internal structure damage or aging. Putting them in the hands of an institution in exchange of a loan is far more profitable for the individual, but creates crisis conditions in the mortgage market.