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Role of variable rate mortgages in current financial crisis |
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It is very tricky to be doing business with the help of financial derivatives, as you are not aware of the practical aspects of the economy. You always have to consider a probability, through which you can judge the profits and losses from before hand. The entire scenario of conceding loans against the mortgages are similar, as the entire property is evaluated through a loan calculator, and then the deal is finalized. If the property is worth the effort then the bank may find ways to get the best use of it, by charging higher or lower mortgage rates. Essentially there are two different kinds of mortgage rates available at the market, which could be categorized as fixed rates or variable rates. In certain cases the banks along with the individuals may decide on a particular rate for the mortgage, for the individual's convenience. It may also happen that the variable mortgage rate is maintained in the hope of making profit. Considering the depreciation of the value of the plot bank may increase its rate of interest and make more profit against the value. Taking all these minute details into account, the banks would be able to fix the problem
and keep up with the money they have. This would strike a balance between their assets and the loan they have and their investments also. However, in doing so the banks have come across a situation, where the value of land has gone down greatly and the entire market is plummeting. Even so they are not in a position to heighten their rates of interests, but on the other hand they cannot out pay their debts. This fix has led them to a dilemma, through which they are finding really difficult to come out. They are seeking the help of the government in such cases, without which they cannot stabilize their condition. Thus, the banks would have to think twice before lending out mortgages in the future, as they should always keep in mind that there should be provisions to extract money, through the derivatives in an orderly fashion. With the help of these improved policies the financial crisis like the one that we are facing today, would not turn up. Due to the variable rates of interest, the banks could not get the rough approximation of the scenario and hence landed on such dangerous grounds. It would be very wise on their part to understand the situation fro before hand, before investing on something; that could be only done if you had the idea of what you can risk. Financial Crisis
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