Smit Shah's Blog

Smit N Shah

Article # 5
Mortgage Lending Companies Marketing Strategy

Most of today's home buyers use some kind of financing for their homes. There are mortgage lenders which provide a loan to borrowers holding their property; in our case their home as a collateral. Their properties are valued by qualified and certified individuals or companies commonly known as appraisers. They value the property based on its condition, location and age. The lenders offer a loan to borrowers up to a percentage of the property's value. Generally, if the borrower is borrowing more than 80 percent of the property's value, the lenders secure the loan by requiring a PMI or Primary Mortgage Insurance.

A couple of years back during the real estate boom, lending companies came up with a new type of loan called "Interest Only" loan. Traditionally borrowers would pay a monthly payment from which a part would go towards the interest and a part towards the principle. With the interest only loans, they borrowers did not pay anything towards their principle but only the interest on their loan. These kinds were highly profitable to the lending companies. Because they get higher returns on their investment, and even after the life of their loan, they still have the original amount. The borrowers were happy because they had lower monthly payments. These loans were also for a short period, and their rates would adjust after that.

This was a great marketing strategy which fueled further sales for the lending companies. To stay competitive, companies also started lending to borrowers with "less than perfect" credit scores. Since last year, the federal interest rates have gone higher and those borrowers who bought new homes in hopes of having an affordable home are now worried. Increase in these interest rates would directly impact their monthly payments, and for borrowers who just cutting even, this increase would bring them to a point where they might start falling behind on their payments and end up foreclosing the property.

This situation is bad for the borrower and the lender. Because prospective buyers know that the lenders are eager to sell, they wont offer what would be the "market price" of the property. Also, due to the recent slowdown in the real estate market, the price of these properties have gone down as well. Hence a lender who lent eighty thousand dollars for a hundred thousand dollar home, now the home being depreciated to seventy thousand, and only earning interest would be loosing money doing business.

I think that marketing should help drive up sales, but not to the extent that it becomes a liability instead of an asset. A balance has to be attained between margin and volume.

// posted by WizKid @ 11:14 AM