Osmeña: Origin of the crisis

Antonio V. Osmeña
Estatements

THE present world economic meltdown started with the subprime mortgage sector.

The US Government-backed “easy” home purchase plan has tempted many families into prematurely undertaking the responsibilities that home ownership entails. And many, to their sorrow, have learned that home ownership is an important venture and must be carefully planned and timed.

The US banking and financial institutions that initiated the subprime mortgage concept had assumed that home ownership was currently and potentially within reach of every income producer who need not muster the necessary down payment. The lending institutions did not carefully apply to each all the principles of home ownership.

The case for home ownership, generally, is well-stated and, if based on social and political considerations alone,
unquestionably deserves strong support. Borrowing against future income, or for purposes of putting land into productive use, is often an economic necessity. Care, however, must be taken to assure that the project to be financed is well conceived and that reliance to meet the loan obligations is placed not only on the income-producing power of the property, but also on the financial integrity and ability of the borrower.

The personal factors in mortgage lending have rightfully merited greater emphasis in recent years. The success of mortgage lending in the final analysis depends on the intent of the borrower, and his sincerity of purpose to carry on the mortgage terms.

It is true that many lenders consider the property as final security in terms of foreclosure, but such remedy is often a costly “cure” and an admission that symptoms of mortgage failure were present to begin with and the capacity or intent of the borrower were not analyzed with care.

It was in the subprime mortgage that thousands of home borrowers, without visible source of income and with no initial down payment, were easily extended home mortgage with the cooperation of realtors or selling brokers.

In the last five decades, a significant change has taken place in the use of credit as a mode of finance and in the
acceptance of the real estate mortgage as an appropriate means to further a desirable end—widespread home ownership.

The shift of emphasis from saving to credit financing in the acquisition of homes and real property has, in effect, wrought a financial revolution. Income rather than capital now serves as the important criterion and guide in the determination of one’s ability to own and pay.

The ever-increasing use and importance of mortgage debt financing can best be visualized by reference to mortgage debt statistics, where mortgage indebtedness has increased to over a trillion dollars. Apart from the necessity to borrow funds, probably the greatest justification for incurring indebtedness is to be found in the principle of trading on the equity. In conformity with this principle, it is economically advisable to borrow funds when the use of such funds brings a higher rate of return than the rate, or cost, of borrowing.

Trading on the equity is sound provided the amount borrowed is in reasonable relationship to the amount invested and the ability of the debtor to meet the fixed and generally long-term obligations. In fact, trading on the equity does not increase the earnings of the borrower but rather compensates him for the additional risks assumed in securing the safety of borrowed funds and in underwriting the priority of interest amortization payments to which the lender, under the financing agreement has a legal claim.

Over a decade ago, commercial banks charged 18 percent interest rate and 35 percent during economic crises and interest on mortgage financing on floating interest rate was unilaterally increased by commercial banks. Fortunately today, most commercial banks impose a fixed interest rate on loan during the term of mortgage financing.

Obviously, it has been the conservative policy of the Bangko Sentral ng Pilipinas that our country’s commercial banking system did not succumb to the subprime mortgage concept.