Changes in Lending Conditions and Its Impact on Real Estate Borrowings

This report assesses the variations in lending conditions and their impact on real estate borrowings. It analyzes the role of financial institutions and government policies, as well as the hurdles faced by lenders and borrowers. The report also considers other factors and provides a detailed view of recent changes in lending conditions.

Changes in Lending Conditions and Its Impact on Real Estate Borrowings 1
CHANGES IN LENDING CONDITIONS AND ITS IMPACT ON REAL ESTATE
BORROWINGS
The Name Of The Class (Course)
Professor (Tutor)
The Name Of The School (University)
The City And State Where It Is Located
The Date

Changes in Lending Conditions and Its Impact on Real Estate Borrowings 2
EXECUTIVE SUMMARY
This report is based on assessment of variations in lending conditions that have influenced the
real estate borrowings. It also takes account of the combined role financial institutions and
government authorities in the implementation of effective policies and procedures to avoid
adverse circumstances in future. Furthermore, the assessment is also focused on the hurdles
that are faced by both lending institutions and borrowers, which acts a significant element for
every economy. The analysis also includes several other factors that are taken into
consideration by making use of secondary data sources in order to reflect a detailed view for
better understanding of recent variations in lending conditions.

Changes in Lending Conditions and Its Impact on Real Estate Borrowings 3
IMPACT OF CHANGES IN LENDING CONDITIONS ON REAL ESTATE BORROWING
COSTS
The financial institutions have played a significant role in relation to real estate borrowing
costs, as these institutions lend the properties by imposing variable interest rates based on
existing economic conditions. It is also worth noticing that lending conditions also have a
major impact on varying behaviour of transactions and property investments. However, the
government regulators have also taken account of global financial crisis by implementing
measures to regulate mortgage in order to reduce debt to income and loan to value ratios
accordingly (Johnson and Li, 2013). These measures were introduced by keeping in view that
it might provide assistance in stabilizing house pricing and housing demand (Fang and
Munneke, 2017). On the other hand, the effectiveness of such policies cannot be determined
with the help of an empirical approach, rather a dynamic and comprehensive approach proves
helpful in evaluating the effectiveness. By taking account of national statistics and
government reports, it is also evident that the initiative was taken into consideration by
announcing a comprehensive real estate program to regulate mortgage lending through large
financial institutions (Peng, 2018).
Financial Debt Crisis
However, there was a major collapse of investment bank known as Lehman Brothers as they
exposed themselves to excessive risk due to which financial crisis came into existence. There
were also significant bailouts of several other financial institutions due to the implementation
of stringent fiscal and monetary policies to prevent further collapse to world’s financial
system. In 2008, this major collapse led to the economic downturn due to which strict lending
conditions were imposed in relation to real estate borrowing (Luque, 2017). There were
massive mortgage approval rates due to which housing prices also increased by a greater

Changes in Lending Conditions and Its Impact on Real Estate Borrowings 4
proportion and this rapid increase in delinquency rates also gave rise to the devaluation of
financial instruments i.e. mortgage backed securities. Hence, those financial institutions who
have made large investments started to face a liquidity crisis due to a reduction in value of
financial instruments (Hoesli and Reka, 2015). The federal government took a significant
initiative after this collapse and made an investment of almost $85 billion due to which there
was a massive rise in borrowing costs and lending conditions were re-considered by
government authorities to reduce such incidents in future. However, the recent changes in
lending conditions also have an impact on borrowing costs as it can still be seen across the
globe by taking account of rising interest rates and inflation due to revised and stringent
policies imposed by various economies. Furthermore, variation in lending conditions has also
affected employment and if effective measures are not taken then it can further deteriorate the
existing economic conditions. The real estate borrowing crisis has also played vital role in a
reduction of consumer wealth, failure of key business operations, and inefficiency in
economic activity leading to great recession. In 2006, financial crisis also provided easier
access to subprime borrowers due to which the housing prices escalated further (Pavlov and
Wachter, 2010). Hence, it became difficult for the individuals to repay the principal amount
of loan at higher interest rates, and financial institutions also faced problems in offering lower
interest rates due to a rise in bankruptcy cases.
REAL ESTATE BORROWING COSTS AND LENDING SITUATION
In addition to this, the primary reason of increase in borrowing costs was that the financial
institutions began to lend a higher amount of loan at lower interest rates initially, but later on
housing prices began to fluctuate and relaxation in lending conditions also gave rise to the
real estate bubble. The consumers were facing higher amount of debts due to which they had
to sell their properties below fair value and based upon the existing conditions in market.
Such incidents led to a rise in debt-ratio and significant losses had to be borne by both real

Changes in Lending Conditions and Its Impact on Real Estate Borrowings 5
estate owners and financial institutions. It also had a major influence on those ventures that
were expected to give higher returns in future, but banks were not able to generate sufficient
returns for stakeholders due to liquidity crisis and present lending conditions in the market. It
is also argued that financial agreements including collateralized debt obligations and
mortgage-backed securities also reflected an increase because it derived the value from
increased housing prices and mortgage payments (Giambona, Golec and Schwienbacher,
2013). However, this financial innovation allowed the shareholders and banks to make large
investments in the US housing market. Hence, financial institutions faced significant losses
who made huge investments in real estate properties during a fall in housing prices across the
globe. The lenders were also allowed to enter foreclosure due to a presence of financial
incentive due to lower housing prices in comparison to mortgage. Based on national
statistics, the real estate owners have lost a significant amount of wealth approximately up to
$4.2 trillion from home equity (Peng, 2018). However, ratio of losses and debts also
increased in relation to other loans because financial crisis also affected the rest of the parts
of economy. Further to this, US regulatory authorities have also placed emphasis on
deregulation in order to encourage business that has resulted in reduced disclosure of
information and monitoring of activities with regard to recent policies undertaken by
evolving financial institutions. However, if the general public is not allowed to have an
access to detailed information, then real estate owners can face an adverse impact while
making effective decisions due to lack of credible information. It is evident that policy
makers were not able to recognise the role of hedge funds and investment banks, which is
also referred to as shadow banking system.
The experts believe that these institutions have become as significant as commercial
depository banks in terms of lending credit to economy, but they may be subject to different
regulations (Lee, 2017). Despite this, central banks have encouraged lending institutions to

Changes in Lending Conditions and Its Impact on Real Estate Borrowings 6
restore faith in commercial paper markets due to their importance in terms of funding
business activities. The government authorities have also focused on implementation of
economic stimulus programs by assuming other financial commitments. It came into
consideration that such huge financial crisis was avoidable but it happened due to breakdown
of corporate governance as the institutions were taking high risk by acting recklessly (Blake,
2016). Nowadays, extra due diligence EDD is performed by lending institutions by staying
focused on profile of customers because it might have an impact on future operations of an
organization. Further, real estate borrowing costs have become an integral factor for every
financial institution due to a relaxation in lending standards by commercial banks.
Additionally, mortgage lenders also focused on relaxation of underwriting standards when
there was competition between mortgage lenders for market share and higher revenues. The
proportion of subprime mortgage also increased due to competitive pressures preceding
financial debt crisis. However, government sponsored enterprises and US investment banks
focused on expansion of lending conditions in order to catch up with private lending
institutions. It was discovered by financial crisis inquiry commission that the primary reason
of financial crisis was not only related to affordable housing policies, although inefficient
policies of government authorities had an impact on real estate borrowing costs across the
globe. Based on SEC’s report, the severity of such crisis can also be determined by fraud
incidents that amounted to a total of almost $2 trillion in relation to 13 million substandard
loans. However, it came into existence due to the acquisition of loan by government-
sponsored entities on a large scale.
Besides, government officials have performed several investigations on subprime mortgages
because they also contributed to the rise in borrowing costs. This increase can also be tied to
floating rate debt or short-term loan holders because their interest rate will be higher in
comparison to fixed rate mortgages (Downs, Sebastian and Woltering, 2016). By taking

Changes in Lending Conditions and Its Impact on Real Estate Borrowings 7
account of purchasing power parity theory, it is also evident that rise in borrowing costs can
have an impact on it as the individuals will face issues while making an acquisition of houses.
Hence, government authorities should introduce flexible but effective policies for lending
institutions so that such financial issues can be avoided in future because continuity of such
incidents can adversely affect future prospects of an economy and world at large. In 2017,
significant changes were made in lending conditions in order to minimize the number of
interest-only lending under which lending institutions issued loans to the borrowers. This
reduction allowed the individuals to borrow for 80% of a property’s value and most of the
investors will now be required to raise approximately 20% as down payment for property
acquisition.
Recent Variations In Conditions Related To Lending
Moreover, further restrictions are also imposed in which the government wants that lenders
should re-examine their metrics with regard to serviceability. The lenders use this in order to
define the ability of an acquirer as if he will be able to repay interest and principal amount
according to the loan agreement between both parties by taking account of individual’s
expenses and level of income (Raya and Kucel, 2015). Hence, recent changes in lending
conditions require financial institutions to give an assurance that their metrics have the ability
to meet existing market conditions in relation to real estate borrowing costs. However, by
considering the high-risk loans, it can place significant amount of risk on both borrower and
lender, as the borrower might go bankrupt on his payment schedule, and lending institution
may have to record bad debts that cannot be recovered later. This will also affect the
statement of financial position of any organization due to significant property losses, and
lending institution’s goodwill will also be exposed to higher risk in comparison to the rest of
competitors operating in same market segment. Despite this, it is clear that each home loan
has a principal behind it, which represents total sum of loan or principal that has to be repaid

Changes in Lending Conditions and Its Impact on Real Estate Borrowings 8
to lending institution. However, payment structure is simple in traditional mortgage system in
which real estate owners are required to make payments each month that will result in a
reduction of principal amount (LaCour-Little, 2001). Hence, interest amount is only paid on
the remaining principal each month, and these type of borrowings are referred to as principal
and interest home loans. On the other hand, interest only lending varies from traditional
mortgage system, which requires the real estate owner to repay the interest amount only
instead of principal. It means that the total sum of principal amount does not decrease for a
duration of interest only time span (Park, Matkin and Marlowe, 2016). There may be several
reasons for which the investors might prefer this option as loans are normally used by the
borrowers in order to avoid an influence on their monthly outflows. It can usually provide
assistance when it comes to the management of diverse portfolios, which will ultimately help
in generating positive cash flows (Downs and Xu, 2014). The investors can also make
savings by making an investment in another venture from which they can generate sufficient
returns through which they can also claim tax-incentives. However, once the interest only
time period comes to an end, the principal amount still has to be repaid as the real estate
owner has to make repayments for the remaining timeline of loan and investors can also face
difficulties due to inefficient preparation.
Market Reports And Analysis
Based upon analysis, government authorities and lending institutions should devise
reasonable measures for borrowers before allowing them to enter into any loan agreement
because pre-cautionary measures can allow the banks to make effective policies by focusing
on its liquidity position and customer profile. Besides, the market reports on mortgage
represents that the outstanding value of residential loans has increased by 3.3% in comparison
to previous year and the value of gross mortgage advances have reflected an increase of
almost 5.5% respectively (Marketresearch.com, 2019). However, the ratio of lending to home

Changes in Lending Conditions and Its Impact on Real Estate Borrowings 9
movers has reduced by 0.9 percentage points as a basic component of lending for the
acquisition of real estate. It can be argued by taking account of these statistics that there is
still requirement for making enhancement in lending policies, as the banks should involve
regulatory authorities that can provide assistance in retaining liquidity position because it is
vital to avoid going concern issues in the long term.
CALCULATION AND EXPLANATION
As per the appendices, the total sum of mortgage amount is considered to be as $12m,
mortgage term is 15 years, the interest rate is 7.50% and amortization is 9 respectively.
Hence, the net principal and interest amount reflects a fall with the passage of time due to
timely repayments by borrowers. However, total amount of debt service will remain constant
after each payment of interest and principal amount. Besides, if the anticipated holding period
is effectively agreed and managed between borrower and lending institution, then the whole
amount of loan can be repaid on an agreed schedule, which will prove beneficial for both
parties due to timely settlement of cash flows. Furthermore, the interest amount can also be
varied based on existing conditions in real estate sector, and overall economy.
Hence, it can be concluded that rising interest rates can adversely affect both economy, and
lending institutions. Besides, it will also have an impact on purchasing power of borrowers as
per purchasing power parity theory. The financial institutions should take account of interest
rate policies because it acts as a key indicator in relation to real estate borrowings. In existing
scenario, the interest rate on principal amount of mortgage appears to be slightly normal and
if payments are made as per agreed schedule, then it will allow borrowers to avoid
bankruptcy issues. In the end, lending conditions should be flexible to encourage the
proportion of safe borrowings, and it will also increase the profits of an organization.

Changes in Lending Conditions and Its Impact on Real Estate Borrowings 10
REFERENCES
Pavlov, A. and Wachter, S. (2010). Subprime Lending and Real Estate Prices. Real Estate
Economics, 39(1), pp.1-17.
Fang, L. and Munneke, H. (2017). Gender Equality in Mortgage Lending. Real Estate
Economics.
Luque, J. (2017). Cross-Border Residential Lending: Theory and Evidence from the
European Sovereign Debt Crisis. Real Estate Economics.
LaCour-Little, M., Yu, W. and Sun, L. (2013). The Role of Home Equity Lending in the
Recent Mortgage Crisis. Real Estate Economics, 42(1), pp.153-189.
Johnson, K. and Li, G. (2013). Are Adjustable-Rate Mortgage Borrowers Borrowing
Constrained?. Real Estate Economics, 42(2), pp.457-471.
Downs, D. and Xu, P. (2014). Commercial Real Estate, Distress and Financial Resolution:
Portfolio Lending Versus Securitization. The Journal of Real Estate Finance and Economics,
51(2), pp.254-287.
Blake, T. (2016). Commuting Costs and Geographic Sorting in the Housing Market. Real
Estate Economics.
Raya, J. and Kucel, A. (2015). Did Housing Taxation Contribute to Increase Riskier
Borrowing?. The Journal of Real Estate Finance and Economics, 53(1), pp.90-113.
Marketresearch.com. (2019). Credit & Loans Market Research Reports & Credit & Loans
Industry Analysis | MarketResearch.com. [online] Available at:
https://www.marketresearch.com/Service-Industries-c1598/Financial-Services-c83/Credit-
Loans-c415/ [Accessed 14 Apr. 2019].

Changes in Lending Conditions and Its Impact on Real Estate Borrowings 11
Lee, K. (2017). Borrowing Constraints and the Tenure Choice of Young Households. Konkuk
Research Institute of Real Estate and Urban Studies, 10(1), pp.205-223.
Peng, L. (2018). Benchmarking Local Commercial Real Estate Returns: Statistics Meets
Economics. Real Estate Economics.
Park, Y., Matkin, D. and Marlowe, J. (2016). Internal Control Deficiencies and Municipal
Borrowing Costs. Public Budgeting & Finance, 37(1), pp.88-111.
Peng, L. (2018). Benchmarking Local Commercial Real Estate Returns: Statistics Meets
Economics. Real Estate Economics.
Giambona, E., Golec, J. and Schwienbacher, A. (2013). Debt Capacity of Real Estate
Collateral. Real Estate Economics, 42(3), pp.578-605.
Hoesli, M. and Reka, K. (2015). Contagion Channels between Real Estate and Financial
Markets. Real Estate Economics, 43(1), pp.101-138.
Downs, D., Sebastian, S. and Woltering, R. (2016). Real Estate Fund Openings and
Cannibalization. Real Estate Economics, 45(4), pp.791-828.

Changes in Lending Conditions and Its Impact on Real Estate Borrowings 12
APPENDICES
Mortgage Amount: $12,000,000
Mortgage Term: 15
Interest Rate: 7.50%
Amortization: 9
Time Period 1 2 3 4 5
Interest paid 885,193 850,260 812,619 772,058 728,352
Principal paid 450,455 485,387 523,029 563,589 607,295
Total Debt
Service 1,335,647 1,335,647 1,335,647 1,335,647 1,335,647