Mortgages are ok if both lenders and borrowers are responsible

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The number of people that can buy a home without taking mortgage is extremely low. With the latest credit crunch and the mortgage crisis taking mortgage seems to be a risky business but it does not have to be that way.

Taking mortgage is a common practice in all over the world. While in the United States and some other countries the mortgage market collapsed in the latest crisis in other places of the world mortgages are stable and have not been influenced by the crisis. The reasons are actually pretty simple and have to do with responsibility of both the mortgage lenders and the borrowers.

Mortgage is a long term debt that most consumers need in order to eventually own a house. There is nothing wrong in the idea of getting a debt to buy a home as long as it is done in a reasonable and responsible way that guarantees that the borrower can pay the loan off over its term and that if unexpected problems occur such as job loss or housing market price drops the borrower can continue to pay the mortgage and does not default.

In many countries mortgages are highly regulated and the freedom to provide mortgage debt to consumers is limited in terms of the borrower income to debt ratio and in terms of how much of the home can be financed. For example in many countries including the United States in the past a borrower can not take a mortgage for the whole price of the home. The borrower has to put some hard cash on the table in order to get the mortgage. In some countries this is limited to as low as half of the home that can be financed while in other countries financing can go up as much as eighty percent or ninety percent.

Lately in the United States mortgages were given to the whole home cost. Borrowers could take a loan and get into their home without putting any cash themselves. There are two problems with that. One is that when not putting any money in the home borrowers are more likely to default since by defaulting and walking away from their home they only lose the payments they have made but they do not use any significant lump sum of money since they never paid such a sum into the home.

The other problem is that if borrowers default and the bank gets possession of the home the bank needs to sell the home in order to pay off the mortgage. This works well in a market where home prices go up significantly. But if the home market is flat or worse if home prices are on the decrease the bank can not recover the whole mortgage and has to take a loss which can accumulate to significant sums of money and in some cases destabilize banks cause a very bad chain effect.

The conclusion is simple and requires responsibility by both banks and consumers and if these are not responsible requires government regulation to make sure banks and consumers act within the limits that are financially responsible. Borrowers should not take mortgages that can not afford to pay while banks should not lend to consumers that can not pay back and should not finance the whole home cost without the consumers taking into risk or having any stake in the home.

Article Source: http://depositarticles.com/

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