Question

In the United States when the demand for mortgages outstripped the supply of money in the financial markets, creative methods such as the development of secondary markets and mortgage backed securities were developed. Discuss what effect these financing arrangements might have on the accountability of the borrower. Answer in atleast 150 words.

Answer 1

Mechanism of Mortgage loan

Normally for the various need like purchase or construction of home, purchase of vehicle or any other capital asset many a person takes loan from the financial institutions or banks. Banks provide loans to his customers on the basis of mortgage of such purchased assets on the basis of valuation by their expert.

Banks provide these loans from the deposits they have from their depositors however it happens frequently that these deposited money run out and banks found themselves in a position that borrower want loan against mortgage but banks does not have enough money.

To sort such a situation banks take a position to sale it to large fund agree-gator who purchase these mortgage assets and in turn create various small loans against mortgage based securities. These securities sold in different financial markets and investors and various fund managers for mutual fund, pension funds, Government and insurance companies etc purchase these funds. By doing this agree-gator  got money which it has paid to bankers. Bankers also got money to provide further loans to borrower.

Accountability of Borrower

As it can be seen for the above mechanism that all the mechanism is depend on the mortgaged asset, if a borrower who has borrowed money fails to repayment principal amount or interest thereon, its mortgage assets liable to be seized. As banked, agree-gator and investors all have interest on such asset and loan provided against it. It is also true that many times banks fails to realize their full amount of loan and interest accrued thereon. This creates a panic situation in whole financial cycle. It is therefore utmost care should require to be taken before providing loan to any probable borrower. Financial background, repayment capacity, valuation of assets should be properly judged by financial institution before providing such loans so that any such uncomfortable situation does not arise in future.