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The United States of America went through a financial turmoil in between 2007 and 2009; this financial crisis was in mortgage lending markets (Cho 137). First, Feddie Mac announced its decision to stop financing high-risk mortgages, and the New Century Financial Corporation, which was the leading mortgage lender of high risk mortgages, became bankrupt (Bartholomew & Gerard 214). The crisis came in after the prices of houses fell, and the home owners who had build them were unable to finance their loans following the low payments they received from the houses and increased interests on the borrowed money, making the lenders lack funds to finance other housing projects, as others became bankrupt. This affected many industries, which include banking, small business homebuilding industries, among others.
The collapse of the housing market affected the mortgage industry, with the homeowners running short of funds to finance their mortgage payments; this led to closures, and as the interest rates rose over the years, lenders lacked funds to finance new loans (Cho 139). The housing market continued to fall as the lenders closed down, and this affected the small business homebuilding industry. The small business homebuilding industry had few people who were willing to finance the construction of the new house, and this meant that the industry could not grow. After the market crisis, investors considered homebuilding industry as an industry with a lot of risks, and this meant that investors were few in homebuilding industry, and the few who were ready to finance the industry had a lot of restriction and high interest rates (Bartholomew & Gerard 219). Most players in the industry could not survive cope with the high interests and conditions; therefore, they left the industry, making it decline in growth. New entries in the homebuilding industry also declined because of the uncertainties that were associated with lending and financing of payments for those who wanted to buy the houses, also the high interest rates meant high prices for the houses, which means few could afford them, and yet loans need to be paid, and failure to pay would make them lose the houses and their businesses.
The small business homebuilding are also affected by the prices of the home building materials, the crisis affected many industries and the prices of products increased, including products in the building and construction industry. The home builders had to incur a lot of expenses in their construction, and when it is coupled with the high interest of borrowing, the homebuilders are left with little as profits; this discourages those who are already in the business and those willing to join (Colton 215). This crisis called for an intervention to save the mortgage industry and reduce uncertainty in the market industry.
The government decided to settle on government guaranteed mortgage loans; these loans have restrictions to make sure that the market is controlled, the purchases do not as in the previous years, and the interest on loans does not rise to a point that the borrowers are unable to finance the loans (Cho 141). The restrictions eliminate discrimination in lending and issuance of loans to those who are not able to pay back. However, these guidelines are not put to eliminate private lender from the mortgage industry
The national government has come up with guaranteed mortgage pass-through with capital market coming from a large group of investors buying mortgage pass-through. This system is supported by the quality of credit and pass-through’s fungibility, which create a secondary market that is robust and orderly.
There are strict rules to remove portfolio holdings as well as limit the future purchases (Bernanke 30). Maryland has stopped the growth of current portfolios, and with the mortgage securities provided by the government guarantees will attract more capital to support the market, thereby decreasing the necessity for portfolio purchases.
The conservative underwriting standards, these standards define the amount of down payment, verification procedures and income documentation, together with credit score. This means that mortgage loans that meet the underwritten standards would be given a government guarantee, and those who do not meet the standards are funded by the private sector.
The limit of mortgage loans is set according to the geographical housing markets; this means that the government will only fund the loans that are below the limit, and others will privately funded. There are efforts to get rid of uncertainty of investors’ rights, in this case, the rights of first lien holder together with second lien holders should be well defined and in case of any conflict of interest, there are programs to protect the investors; this is meant to attract private capital to the sector (Colton 217).
In the past, there has been a lack of clarity in housing programs, and to ensure clarity in these programs, mechanisms to clarify the purpose and cost accountability of affordable housing programs have been established and evaluation of loan modification. Government guarantees should also be included in multi-family housing programs
Currently, mortgage market is coming up, and it is expected to flourish when it is well monitored and guarded; therefore, homeowners should not shy away from borrowing for investment in this industry. The homeowners are able to borrow without fear of the effects that come with high interest rates and an increase in the demand of houses. The lenders in the private sector are also been relieved off the burden from borrowers, and this means that the loans they will issue will not be of high risk because of the controlled house prices.