Real Estate the Importance of Underwriting Standards Essay

Real Estate

The importance of underwriting standards to a healthy real estate finance market

Underwriting standards will have an impact on the real estate market by controlling speculation and risk taking. This took place when interest rates were low and the economy was strong. When this occurs, lenders increased the total amount of loans available. In most cases, the desire to add to their profit margins will result in practices that will ignore critical factors (such as: employment history, income and credit rating). Once this happens, is when financial institutions will make loans that are considered to be irresponsible. (Wickell, 2012) (Kolb, 2010)

After the economy begins to slow and interest rates are rising, is the point that these practices will hurt the lender. This is because the borrower more than likely could not afford the mortgage payment. This will result in the firm facing a wave of defaults. In the future, this will impact the ability of the bank to remain solvent. (Wickell, 2012) (Kolb, 2010)

These factors are showing how underwriting standards will help to support healthy real estate financing. The way that this will occur, is to establish certain practices that must be followed by lenders at all times.During situations when the economy is strong, this will prevent them from engaging in excessive risk taking and speculation. (Wickell, 2012) (Kolb, 2010)

Changes to mortgage underwriting standards prior to the real estate boom that may have helped the boom accelerate and also created the conditions for the real estate collapse

The changes to the underwriting standards were directly linked to the boom and collapse in the real estate markets. This is because many financial institutions began to offer borrowers with less than perfect credit adjustable rate mortgages (ARMs). This is when they were provided with the mortgage to purchase a home. However, in the event that interest rates increased, is when these people will have higher monthly payments. At the same time, many of these securities were sold to investors as safe areas that offer higher returns. This is because the mortgage insurance would cover the lender in the event of a default. (Wickell, 2012) (Kolb, 2010)

At first, these practices helped to increase homeownership and the total amounts of spending in the economy. However, once interest rates began to rise is the point that many of the borrowers in ARMs could not afford the higher mortgage payments. This.....