Citibank Case Study

Taking loan by keeping property as a security is called a mortgage. It involves two main players, creditors or lenders and debtors or borrowers. Borrowers lend the loan in the form of mortgages keeping securities with the lenders. The amount of loan a person can take depends on the eligibility criteria to which he/she meet. One can either approach Banks or any private mortgage brokers to get the loan. Now depending on the credit history of the person, the amount of loan to be sanction is decided.

Person with good credit history is issued with a handsome amount of loan along with the evaluation of his/her property, and this loan is called a prime mortgage loan. But for people, who spoiled their credit history, getting loan from a Bank is tough, as its going to take time and also even if the loan gets sanctioned, the Bank might only support a partial amount of the applied loan by the individual.

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As such, to meet their needs, some people go into banks for a subprime mortgage loan which is of high interest rates. Banks which offer this type of mortgage loans run the business at high risks and with high interest rates imposing on the debtors. Some people go to private mortgage investors rather than a bank. And with the private mortgage investors, the interest rates are even high, but for several reasons, people do go to these private mortgage investors.

For instance, when the need for the money is pretty urgent and the wait time to get a loan from a bank is not tolerable, or sometimes seeking support of a bank can disturb ones privacy , or when seeking for huge amounts with bad credit history having dept-to-income ratio pretty low or even when the property on which the loan has to be taken is in between legal conflicts , or when there is an issue with the previous debt from a bank and to save the property from foreclosure are few examples why people seek the private mortgage investors. These loans also come under subprime mortgage loans.

To categorize between prime and subprime borrowers, the credit report score is used as a metric. This metric takes into consideration of various parameters such as late payments on existing mortgage, any bankruptcy within 2-10 years, maximum debt ratio and loan-to-value ratio. The credit score with 640 and above form the Credit A group, and 590-629 comes into second category, third category range from 570-580 and the last category is with FICO scopes ranging from 570 and below, which are considered to be poor in maintaining credit history.

Prime borrowers are those who belong to A category, and the rest of them are considered to be subprime borrowers. With the credit history details, lender gets a good understanding about the borrowers. And also it warns the lender of the risk that is involved while giving a loan to the borrower. Lender has to take into account, the market value of the property from a certified property appraiser, before granting a loan. Generally the property value should be more than the loan applied, so as to recover the amount if incase the debtor gets bankruptcy.

And also lender should provide only 80% of the actual price of the mortgage and the rest to be settled by the borrower. Due to some reason, if the borrower financial broke, and is not a position to make a payment, the property can be foreclosed by the lender. This is termed as bankruptcy. Though applying for bankruptcy is going to help the borrowers to get rid from the financial problems, most of the people don’t prefer to apply. Until and unless a situation arises to seek protection from the creditor, filing of bankruptcy is not a common act.

When an individual apply bankruptcy , the legal authority takes control over all his assets which include home , vehicle or any household equipment that he owns. Similarly if a company files, the same rules apply. All the assets are taken into control and equally distributed across all the lenders on the company. What bankruptcy should be doing, in the abstract, is asking how much someone would pay for the assets of a debtor, assuming they could be sold free of liabilities. (Jackson, 2001). The evaluation of the property is a crucial factor in deciding the amount of loan to sanction.

And also the value of property in the future is unpredictable, as if the real estate is not going good; the value of the property may reduce to a point which is less the current valuation of the property. U. S. homeowners’ equity today equals almost $11 trillion. Price declines for this year and next year may amount to $6 billion, or a 0. 05 percent decline — a worry, but hardly Judgment Day. (Elder, 2007) Sometimes a borrower seeks the loan on the mortgage for which he/she has already taken a loan from a bank and because of unemployment or health problems, the individual cannot afford to pay the loan amount.

Keeping in mind that taking a fresh loan, he/she can clear the bank debt and protect bankruptcy, an individual applies for a new loan but the risk involved in this case is two fold and sometimes even more, as the fresh loan adds up more burden to the individual as the interest rates on which he/she gets the loan is pretty high. At Citibank, for example, researchers have concluded that at least 40 percent of those who were sold ruinous subprime mortgage would have qualified for prime-rate loans. ( Warren and Tyagi, 2003)

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