Saturday, January 1, 2011

Simple Thoughts On Mortgage Lending

When you take out a home loan you are literally buying a dollar for three dollars. By the time you are done paying the mortgage you will have paid the lender three times the money they lent you. This is how most businesses work.

Businesses purchase inputs, transform them into an output that is worth more. Business operations create value through this transformation process.

Lenders find people who need more money than they could possibly come up with themselves by the time they need it. This person is the borrower. They also find people who have more money than need during this same short term window. The lender than connects these two. They act as a broker.

Lending money is easy. Managing the risk of losing money in a way that consistently yields more return than loss is the trick.

Thus the real trick that lenders typically and historically do so well is to find opportunities to loan money to those who will do their best to pay back that money plus interest over a period time. One payment at a time. They do this by finding folks with steady consistent income that have a history of paying their bills and following through with their past financial obligations.

Middle class consumers who are the typical mortgage borrowers are by themselves to risky to be trusted with such a sizable loan over such a long period of time. A lot can happen in thirty years.

The asset being purchased with the loan is what creates the security for the lender and allows the American dream to be more than a dream. The fact that the lender is able to obtain the right to force a sale of the property secured by the mortgage loan is what allows the American dream to become an American reality.

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