Discovering the constants and innovations that have shaped borrowing and lending
Throughout the past 100 years, the mortgage industry in the United States has witnessed significant changes and experienced ups and downs. However, certain core principles and practices have remained intact, ensuring the stability and reliability of the mortgage market - and some may say also causing stagnancy and lack of innovation.
5 things that have stayed the same:
Down Payments: Down payments have remained a fundamental aspect of mortgage lending. Borrowers are generally required to contribute a certain percentage of the home's purchase price as a down payment, demonstrating their financial commitment and reducing lender risk.
Creditworthiness Assessment: Lenders continue to evaluate borrowers through credit scores, income verification, and debt-to-income ratios to assess their ability to repay the mortgage. Sound and stable creditworthiness remains a crucial factor when applying for a mortgage.
Appraisals: The appraisal process, which determines the market value of the property being financed, remains a standard practice. Appraisals help lenders assess the collateral's value and ensure it aligns with the loan amount.
Financial Documentation: The mortgage application process still requires thorough documentation, including income verification, tax returns, bank statements, and other financial records. These documents are essential for lenders to assess borrowers' financial stability and ability to repay the loan.
Closing: The closing process, where the mortgage loan is finalized and the property ownership is transferred, has remained a consistent element. It involves signing legal documents, paying closing costs, and completing the necessary paperwork to formalize the mortgage transaction.
When looking for innovative mortgage products, we usually focus on areas that continue to change and evolve throughout the years.
5 things that have changed:
Mortgage Regulations: Over the years, there have been numerous changes in mortgage regulations and lending practices. The introduction of laws such as the Truth in Lending Act (1968), the Dodd-Frank Wall Street Reform and Consumer Protection Act (2010), and the implementation of the Consumer Financial Protection Bureau (CFPB) have brought about significant changes in how mortgages are sold and regulated.
Technological Advancements: The advent of technology has transformed the mortgage industry. Digital platforms, online applications, electronic documentation, and automated underwriting systems have streamlined the mortgage process, making it faster, more efficient, and accessible to a broader range of borrowers.
Mortgage Origination and Servicing: The mortgage origination and servicing process have undergone changes, with the rise of mortgage brokers, online lenders, and non-bank mortgage lenders. These entities have emerged as alternatives to traditional banks and have reshaped the mortgage landscape.
Mortgage Products: The range of mortgage products available to borrowers has expanded and evolved. In the past, fixed-rate mortgages were very dominant, but nowadays borrowers are open to more options such as adjustable-rate mortgages (ARMs), interest-only mortgages, and various specialized loan programs catering to specific needs and demographics.
Securitization: The practice of securitizing mortgages, where lenders package and sell mortgage loans as investment securities, has significantly increased. Mortgage-backed securities (MBS) have become prevalent in the financial markets, providing liquidity and enabling investors to participate in the mortgage market.
The last two are actually intertwined, as the need for innovation in this field leads pioneers to try and create holistic products. The RTM™ (Risk-Transfer Mortgage™) by Contigo Capital is a great example, as it rebalances the financial system.
A little while back, the main goal might have been to try and push the homeownership rate, which is sticky at 65% for the last 5 decades, up a notch to 70%. But in light of the recent events and with interest rates that cross 7%, the affordability crisis is exacerbating. Furthermore, with recent talk of recession coming in Q4 2023, it is no surprise that people are staying put, causing the already historically low inventory to go down even further.
It’s time to shift the risk from the weakest entities - households, to those who can take it on - investors. With the RTM™, institutional investors will finally be able to invest in residential real estate in a much more efficient and cost-effective process. At the same time, the RTM™ will grant borrowers access to a new source of funding, thus enhancing affordability, and ensuring they grow their equity all while reducing their financial fragility.
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