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The Impact of Structured Finance on the Ghanaian Financial Services Industry in the Next 10 Years

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A Company can issue bonds to investors secured on the future profits expected to arise from part of its existing life business.

When a pool of financial assets (such as car finance, home or commercial mortgages, corporate loans,royalties, leases, non-performing receivables, and contractually pledged operating revenues) are structured and transferred to a ‘special purpose vehicle or entity'(SPV or SPE) it is known as a Securitisation transaction.

Generally, most securitisation transactions involve a two tier transaction in which the originator of the assets to be securitised transfers such assets to a wholly-owned SPV.In turn the SPV transfers or pledges such assets to another entity, which issues rated securities in the capital markets that are collaterised by such assets. This second tier entity can be another SPV or a multi-seller commercial paper conduit and can provide funding by issuing medium term notes or commercial paper.

Types of Securitisation transaction

Usually with securitisation transactions, the transfer of rights to assets can take one of two main forms, true sale or synthetic securitisation.

1. True Sale securitisation

In a true Sale securitisation, the originator (for instance a bank selling mortgages) sells the assets to the Issuer. the assets are serviced by the servicer who happens to be the Originator, with respect to say the mortgages sold to the Issuer(i.e.) and the originator continues to collect the principal and interest from the borrowers on behalf of the issuer on such mortgages and see to all default mortgages as well.

The significance of true sale is that the first-tier sale of the assets from the originator to the SPV is structured as a “true sale” such that the assets are removed from the originator’s bankruptcy or insolvency estate and cannot be recaptured by any trustee. Thus, the issuers are usually incorporated as insolvency remote entities; and may not engage into any transactions other than those necessary to effect the securitisation what is known as “limited purpose-concept” by which virtue the SPV will not be allowed to issue any additional debt or enter into mergers or similar transaction.

The transactions can be conducted as conduit, whereby the purchaser purchases and securitises assets from a number of different originators. This is done by through refinancing by issuing commercial paper into the capital market. Banks usually engage in conduits by arranging securitisation for their clients, or standalone where the purchaser only purchases assets and issues as asset-backed securities in the context of a single securitisation transaction. No commercial paper is issued.

It must be said here that, the legal characteristics and economic substance of the transfer will be the primary determining factors as whether the transaction is a true sale not a loan.

2. Synthetic Securitisation

In a synthetic securitisation transaction the originator does not sell any assets to the Issuer and therefore does not obtain any funding or liquidity under the transaction. The originator enters into a credit swap with the issuer in respect of an asset or pool of assets, transferring the originator’s risk to the issuers. Under this contract, the issuer pays the originator an amount equal to any credit losses suffered in respect of such assets or pool of assets. The Issuer’s (SPV) income streams in a synthetic transactions are the fixed amounts paid by the Originator under the credit default swap and interest amounts received on the collateral. These transactions are typically undertaken to transfer credit risk and to reduce regulatory capital requirements.

3. “Whole-Business” Securitisation

Apart from the main two forms above,” whole business” securitisation is sometimes used to finance a stake in private or management buy out of the Originator.

This type of securitisation originated in the United Kingdom. It involves the provision of a secured loan from an SPV to the relevant Originator. The SPV issues bonds into the capital markets and lends the proceeds to the Originator. The Originator services its obligations under the loan through the profits generated by its business. The Originator grants security over most of its assets in favour of the investors. In terms of cash flow, there are three most common types of securitisation transactions:

Collaterised Debt- this is similar to traditional asset-based borrowing. The debt instrument need not match the cash flow configure ration of any of the assets pledged.

Pass-Through-this is the simplest way to securitise assets with a regular cash flow, by selling participation in the pool of assets i.e. an ownership interest in the underlying assets so that principal and interest in the underlying assets collected are given to the security holders;

Pay-Through debt instrument-this is borrowing instrument and not participation. Investors in a pay-through bond are not direct owners of the underlying assets but simply investors.

One significant thing with SPV is that unlike with ordinary operating companies, whose charters typically provide for maximum flexibility, the charters of SPVs provide for the entity to have only those powers that are necessary to accomplish the purpose of the securitisation transaction. Thus the SPV in a securitisation will have the power only to purchase the particular receivables contemplated by the transaction, issue the related capital market securities, and make the payments on them and so on.

The reason for these restrictions is thought to keep the risks of the SPV’s own bankruptcy as narrow as possible: the smaller the range of the entity’s activities, the smaller the risk of a bankruptcy.

Securitisation is based on the underlying assets being securitised. Rating agencies spend a lot of time to estimate the credit risk for all underlying assets in Securitisation transaction. Other risks considered is the prepayment risk.-the risk that a portion of the assets in the underlying pool may be repaid early. Payments and settlements in Ghana are considered to be good. Prepayments can reduce the weighted average life of the pool and as a result expose investors to considerable uncertainty over future cash flows.This can be mitigated by separating the payment of the principal and interest or the conversion of fixed rate returns to floating rate.

Third Party Risk

Collateral is not the only important factor in structured finance transaction. A servicer risk would be particularly strong in Ghana. This is the case that the collection of payments, distribution to investors and performance tracking will fail. Because in Ghana credit rating is not popular.

In a Securitisation or structured finance transaction, a lot of third parties are involved who must fulfill their various responsibilities to make the transaction go on successfully .”Time is money”, it is said. Other third party risks include trustee managing succession of servicing in case of servicer default, notifying investors and rating agencies of breaches and defaults, and holding cash payments to prevent servicer misuse of cash flows; manager responsible to balance the competing interest within a transaction.

Financial Risks (Interest Rate Risks, Foreign Exchange Rate Risks, Devaluation Risk)

Financial risks usually cover interest rates, foreign exchange rate & availability, currency and inflation risks. Inflation really affects the originator in a Securitisation transaction for reasons like raising the cost of the transaction which can delay its completion. Some governments are also sceptical about foreign investment in their country and sometimes prevent the repatriation of funds by foreigners outside. Devaluation and interest rate just like inflation can also affect Securitisation negatively especially when provision has not been made in the transaction deal for that. Russia is a good example. International funds are often cheaper than local ones, but given the fact that the payment to receivables is sold locally, and paid in local currency, using foreign loans creates exposure to the risk of currency depreciation.

Political Risk

Because cross-border transactions are conducted such that assets generate cash flows in the domestic currency while the securities backed by those assets are denominated in foreign currency, there is the risk that regardless of the credit strength of the underlying assets, the issuer might default on the payment. The following relevant known political risks are identified:

Expropriation risk:

The act of taking something from its owner for public use. This involves the act where a government takes over assets or accounts of local parties in the event of financial crisis.

Nationalisation:

Transfer of business from private to state ownership. This is not usually experienced in the West as in South America and Africa. In relation to Ghana’s political situation, this is not envisaged.

Convertibility risk:

This is the risk that in a national crisis, the government might impose a moratorium on all foreign currency debts because of a financial crisis in the country.

Change of law:

The ruling government can change the laws overnight and this can affect a structured finance. Sometimes for economic and political reasons, tax laws are enacted which might not be to the advantage of the originator in terms of the cost increase to certain elements which could increase the purchase price of the product on completion and can jeopardise the securitisation transaction which must be made cheaper if it is to succeed. For example an increase in the fuel tax can affect the entire transaction because tax neutrality is paramount to securitisation transaction.

Legal & Documentation Risks

Following change of law in political risk discussed above, possible legal risks to a Securitisation transaction include inadequate legal, legislative, and regulatory framework on tax, financial and money market & securities. Sometimes the case and administrative laws in the country concerned are not developed. These issues are of great concern to investors and for that matter the originator will have to deal with this risk.

In asset-backed securities(ABS),however, the legal and documentation risks include uncertainty surrounding the transfer of assets from the seller/originator to the SPV (i.e. ‘true sale’) the need to ensure that holders of ABS receive full control over the underlying assets; the bankruptcy remoteness of the issuing SPV.

This means reviewing all the covenants in relation to the separation of the SPV from the seller; the legal roles of the trustee and servicer across all relevant jurisdiction including Ghana to curtail operational and execution risks associated with the payment and receipts of transactions.

Because of the changes in deal structures and considering the legal and financial framework of Ghana, legal and documentation risk will be very high.

Regulatory Risk

The risk that originators and other lenders will not be treated fairly. There should be a laid down regulation on profit-sharing, regulations on the rated instruments and most importantly what structure should the SPV that issues the securities be.

Liability Structure Risk

This risk is the issues associated in which with the tranching or slicing of securities brings conflicting interests which if not checked may disrupt the appropriate distribution of receivables to end-investors. The key to structured finance transaction is the payment waterfall which set the covenants for paying the interests and principal and allocation of losses among investors. This can be sorted with over-collateralisaton tests which ensure the existence of sufficient collateral in the underlying pool of assets to cover principal payments; and interest coverage test to ensure that there are sufficient interest proceeds to cover interest payments to note holders.

Levels of Risks

Rating agencies usually would have to assess the totality of the risks envisaged in each transaction before assigning a rating to the security. Thus the potential for any shortfalls in receivables and the adequacy of any credit enhancement to ensure that the end-investors are assigned the right level of default risk. Cross-border transactions for example require specific analysis regarding the potential limit that could apply to the rating of the notes because of the potential default of a government and the possible application of a moratorium by a government in times of crisis.

Benefits of Securitisation

The use of Securitisation is not limited to one specific asset or income flow. The application stretches beyond the existing bank-funding products and equity funding arrangements. The challenge is the approach with which a Securitisation is considered and the ability to measure the impact thereof on the future of the business. This stems from the fact that Securitisation is cash flow driven and not earnings-improvement driven.

Generally, securitisation can offer the following benefits and we would later analyse to see whether or not it would benefit Ghana.

Efficient access to capital markets: when transactions are for example structured with credit ratings by a recognised credit rating agency on most debts, pricing is not tied to the credit rating of the originator. This is very significant if the originator is not credit worthy.

Limitation on issuer-specific’s ability to raise capital is reduced: securitisations can minimise an entity’s inability to raise capital because capital raised under securitisation becomes a function of the terms, credit quality or rating, prepayment assumptions and prevailing market conditions.

Illiquid assets are converted to cash: Securitisation makes it easier to combine assets which otherwise could not be sold on their own, to create a diversified collateral pool against which debt can be issued.

Raise capital to generate additional assets: capital can quickly be raised such as releasing long-term capital for any allowable purposes like completing capital project and purchasing additional assets.

Match assets and liabilities to minimise risks: a well-structured securitisation transaction could create near perfect matching of term and cash flow locking in an interest rate spread between that earned on the assets and that paid on the debt. This means that Ghanaian business entities can raise enough funds without necessarily providing collateral for security because of the transfer of risk.

Raise capital without prospectus-type disclosure: A conduit securitisation transaction allows one to raise capital without disclosure of sensitive information of any sort; in fact information is kept confidential.

Complete mergers and acquisitions, & divestitures more efficiently: Assets can be combined or divested efficiently under Securitisation transaction. By dividing assets into smaller parts against which debt is issued it can become possible to do away with other business entities which are no longer profitable.

Transfer risk to third parties: Financial risk on loans and other contractual obligations by customers can be partially transferred to investors under securitisations.

More funding beyond bank lending: A structured Securitisation transaction enables the originator to raise funding while maintaining the right to the profit on the receivables. However, these funds will not be linked to its credit rating but rather the credit rating is on the special purpose entity created for the Securitisation transaction. By incorporating an offshore SPE, many businesses in Ghana with poor credit rating might potentially raise funds for any purpose.

The overall effect of securitisation of bank loans and credit aggregates is likely to be a reduction in the level of credit extension by the monetary sector and a reduction of similar magnitude in the M3 money supply. This is to say that the banking sector closes its balance sheet by setting off some loans against some M3 deposits.However,the original borrowers still have obligations but to the SPV not a bank and institutional investors still own assets which are now tradable securities not M3 deposits.

Structure of Ghana’s Financial System

The financial system comprises of

1. Bank of Ghana

I. Savings and loans bank

II. Discount houses

III. Finance houses

IV. Leasing companies

V. Forex Bureaux

2. Securities and Exchange Commission

I. Stock Exchange

II. Brokerage firms

III. Investment Management companies

IV. Trustees and Custodians

3. National Insurance Commission

I. insurance Companies

II. insurance Brokers

III. reinsurance Companies

The banking system in Ghana is structured to serve the needs of all citizens as much as possible. At the end of 2005,the banking industry was made up of Merchant banks, Universal banks, Commercial banks, development Banks,ARB Apex banks, and Rural Banks; with a total growth of its assets by 17.62%.

The Non-Banking Financial institutions (NBFI) sector is made up of Savings and Loans Companies, Discount Houses, Finance Companies and Leasing Companies. Total assets for the Non-Banking Financial Institutions also grew by 47.98% which were mainly triggered by loans and advances, investments, other assets and fixed assets. The Discount houses hold 82.61% of the overall total investments of the NBFI sector.

The new Banking Law, Act 673, which became operational in 2005 with its higher Capital Adequacy Ratio requirements, new sanctions regime, as well as higher governance standards ensured that banks remained generally compliant with regulatory and prudential requirements.

The Securities Market in Ghana

African stock exchanges face a number of challenges before they could enter a new phase of rapid growth. The most critical issue is to eliminate existing impediments to institutional developments. These include a wider dissemination of information in these markets, the implementation of robust electronic trading systems and the adoption of central depository systems. Ghana has since established a central depository system in November, 2004.

The Ghana securities market is regulated by the SEC. The Ghana Stock Exchange is underdeveloped with reference to exchanges in US, Europe and even South Africa. South Africa for example has market capitalisation of $180 billion, one of the largest in the world with Ghana’s market capitalisation of $11 billion.

Considering that Ghana has had just one Securitisation transaction -structured finance-with no records for research, and the position of Ghana’s macro-economic situation, it was found expedient to look at the Securitisation transaction in South Africa. Even though Securitisation transaction is still at an early stage of development in South Africa, it has grown rapidly in recent years and it would be a suitable “benchmark” after which to carve Ghana’s Securitisation transaction.

According to the available information, the first Securitisation in South Africa was aimed at mortgage Securitisation; developments were very slow over the 11 years. Then in 1992 Securitisation was applied to corporate equipment rentals and leases up until 1997 through 2000s with Securitisation on trade receivables, properties, future rebate flows, future cross-border flows and CLOs.

South Africa’s motive for Securitisation transaction was to benefit from more efficient financing and profit maximisation; improved balance sheet structure and finance ratios; improved risk management; and lower economic and regulatory capital requirements among others.

Although the Securitisation transaction is still in its infancy in south Africa, available records show that issuance involving domestic banks in South Africa (i.e. private banks) has increased from R250 million in 1989 to a whopping R26 billion by the end of October 2005. Based on a recent study conducted on the UK market which suggests that Securitisation provides investors the opportunity to attain a higher after tax return in comparison with after tax returns being generated by equity related property investment , Securitisation in South Africa is being applied as an acquisition tool in acquiring properties and as a portfolio optimisation and value unleashing tool.

Securitisation regulations in South Africa compares to international Regulatory Practices similar to those in the United States of America and regulate the manner with which Securitisation assets and income flows are transferred from the originator to the SPV and operational aspects and efficiencies of the SPV.

Different opinions exist in the South African market regarding conformity to Securitisation regulation. One centres on the use of specific words “Bank or deposit-taking Institution” that only South African banks can originate a securitisation.The other opinion is on non-conformity as appropriate if a company or business other than a bank originates a Securitisation.

The onus of the matter is that Securitisation transaction is also designated within the regulation as an activity which is not limited to the business of a bank under certain conditions; thus allowing companies other than a bank to embark on Securitisation transaction.

The Ghana Securities Exchange Commission’s annual report for 2004 does not mince words about the position of the Ghana Securities market. It reported that “despite the modest decline in index performance in percentage terms, the GSE still maintained its position as one of the best performing stock exchanges in the world in 2004 for the second time running.” Market capitalisation of listed Companies on the Ghana Stock Exchange increased by 84.90 trillion cedis to 97.61 trillion cedis from just 12.6 trillion cedis.In dollar terms, market capitalisation went up by 654.0% from US$1.43 billion at the beginning of 2004 to US$10.8 billion at the end of 2004.

Unlike the stock market, the bond market in 2004 was relatively low posing “a serious market development challenge to the commission”. The turnover value of listed corporate bonds in 2004 declined from US$606,600 in 2003 to US$73,414 a decline of 87% whilst government bonds also declined by 71%.The value of listed corporate bonds in 2004 was US$6.79 million compared to US8.98 million in 2003.

The corporate bond market remained relatively quiet. However, the US dollar denominated corporate bonds traded on the market increased by $41,783 to $115,200.

The government of Ghana is determined to use municipal, corporate, government and agency bonds to improve activity in the primary market. As a result of that, the Bank increased accountability and transparency in line with International Financial reporting Standards (IFRS) best practices in its financial reporting and disclosures in 2005.

Coupled with this, other relevant Government policies were strengthened to reinvigorate revenue collections and consolidate public expenditure aimed at reducing the domestic debt in relation to GDP .As a result of that the government started a programme of reducing domestic debt in relation to GDP to enable the private sector access credit and lead the growth process.

The significance of Bank of Ghana in the financial system is that the bank is the provider of technical support for the legal and regulatory reform of the financial system to minimise risks and ensure legal certainty especially for electronic transactions; and also monitor various financial laws at different stages of development.

There is no doubt that people learn from experiences of others so do nations about the successes and failures of other nations especially with regard to something new and complex like the concept of Securitisation transaction. It is recommended that Securitisation in Ghana is modeled on the experience of South Africa’s Securitisation transactions with some changes in the legislations to fit the situation in Ghana.

Ghana’s private sector is beset with many constraints for no doubt, however, the other side is that, there are so many opportunities either untapped or unidentified comparative as well as other natural and mineral resources already in large quantities. There is potential for more effective exploitation of these endowments. But continued reliance on a few commodities with low prices and wages subject to fierce international competition in slow global markets have left the country vulnerable to hardship. These products could be structured and securitised.

Training of players of Securitisation transactions like, the originator, servicer, legal advisers, accounting adviser, tax advisers and others must be continuous about the technicalities of Securitisation transaction from now till the take-off. There should not be any mediocrity as is the characteristics of government and government agencies.

Investors and potential originators must also be educated on the benefits of Securitisation as an alternative for traditional capital formation besides equity and debt which is common to the Ghanaian business community. Providing better understanding of, cash flow drivers behind Securitisation transactions, credit rating agencies and also credit enhancement issues. This would trigger a strong desire for this form of capital formation to put Ghanaian businesses in the race to compete favourably on the international scene.

The technicalities of grasping the intrinsic techniques of properly analysing the segregation of assets and income flows from the company that owns them to the SPV which is meant to control the assets for the benefit of investors, must be well understood by the investment community.

A lack of genuine understanding of the drivers behind a Securitisation transaction, the ability to measure the impact on future operations as well as the initial costs involved in Securitisation creates difficulty in clearly defining the true incentives for conducting Securitisation amongst South African companies. Thus a comprehensive understanding of such amongst Ghanaian companies will boost Securitisation transaction.

One issue that needs to be tackled very well is the Tax Laws to make the Securitisation transaction work. Ghana operates a free-zone scheme and this can be extended to encourage Securitisation transaction. Certain areas within the country could be assigned as ‘free zone for Securitisation’and ‘use as tax haven’ to nurture and groom Securitisation in Ghana.

The regulatory environment through which Securitisation is conducted, coupled with capital market infrastructure to support adequate pricing of all risks associated with all forms of Securitisation transaction-conduit, synthetic or “whole-business”.

Finally, it is recommended that, research into the legal framework on bankruptcy, tax, and commercial laws relating to structured finance and Securitisation in particular should be encouraged among the Ghanaian academia.

Ghana indeed has an enabling environment suitable for Securitisation transaction. Key issues to drive this on might include as mentioned above extension of existing laws like Tax, Bankruptcy and commercial Laws to include treatment of Securitisation transaction.

Ghanaians are strong-willed, forceful and patient. When the expertise is acquired for Securitisation with the training of the players above, good governance of the other key government policies like MIDR and Strategy for 2004-2008‎, improvement on the Ghana School Financing activity‎ they will serve as catalyst for Securitisation.

Considering the experience of South Africa over the past decade, the experience of the developed economies in Securitisation transaction and the macroeconomic and the investment climate continue to improve as it is now ,in the next 10 years, Ghana will not be too farther away from engaging in Securitisation transaction if not already there.

Reference:

1. ‘Securitisation in South Africa-a revolution for local funding’, by Bagley et al(2003) Fitch Ratings available online accessed 20/07/2007

2. ‘Securitisation: A public tool?’ Treasury working paper, by Davis,N ,available online treasury.govt.nz/workingpapers/ accessed on 20/07/2007

3. ‘Securitization.’Wikipedia, the free encyclopaedia. Reference.com accessed 25 Feb. 2007.

4. “Consider Securitisation to improve liquidity in the South African property market” by Eugene G van den Berg, accessed on vinodkothari.com accessed on 04/08/07

5. “Note on the impact of securitisation transaction on credit extension by banks” in Quarterly Bulletin December 2005 by N. Gumata and J .Mokoena

6. “The awakening of securitisation in south Africa”, by Van Vuuren online available vinodkothari.com/secafric.htm

7. Africa -Ghana organising in the informal sector(on line) Available from oecd.org/dataoecd/html (accessed 29th April 2006)

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Mortgage Post Closing Services: Describing What They Entail

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Could you be interested in mortgage post closing services? They entail strict reviews and audits to ensure compliance and completeness of documents. It is only after total confirmation of documents that the lender can fund the loan. The service provider selected by your company must be very experienced and good at their work. They must know how to correct documents from various origination stages and review them. The only documents that providers of mortgage post closing services could correct are those that have been signed and funded. The work of hired professionals also is to review legal, loan processing and other documentation for regulatory conformity.

They follow origination and underwriting rules to the letter, making sure missing information, if any, is retrieved. Mortgage closing services also entails data integrity checks so as to generate quality control reports. While doing integrity checks on loan information, service providers also state any possible exceptions. Basically their major activities entail the following. Tracking all documents (trailing document retrieval) associated with the mortgage post-closing is the first critical step. The documents that need to be trailed include assignments, assumption agreements, judgments, tax records, trust deeds, modifications, and UCC (Uniform commercial code) among others.

After the completion of this, issuance of final title policy, lien and assignment take place. The second activity offered during delivery of Mortgage closing services is the assembly of post closing loan package. What this entails is compilation of all loan documents that are usually submitted during the whole origination process. It means therefore that the provider of mortgage post closing services will work together with underwriters, loan officers, loan processors, mortgage brokers, home appraisers, property sellers and any other involved parties. The assembling work is rather tiresome and lengthy and that is why you want it to be done by a big company with many employees.

Another activity includes post closing data integrity audit as aforementioned. The main reason why this audit is done is to tackle possible home loan deficiencies. They verify and address red flags that were raised during the underwriting process. After this, all loans that have been fully approved are registered with a given mortgagee system. This whole process of registering approved loans prevents future assignments on loans. It also saves lenders from incurring future correction and tracking costs or facing document penalties among others. This step of mortgage post closing services also ensures faster execution of loans, zero errors on documentation and an easy closing process.

Mortgage quality control audit is also part of mortgage post closing services. There are automated audit systems used for this task. The service you will be offered in this step include pre-funding, post-closing, servicing, compliance, foreclosure loans, fraud investigation, preparation of the QC plan, cancel or reject, and commercial loans audit among others. It is imperative to make sure that the provider of the post closing service can audit and review the loans you normally process. Many outsourced companies deal with FHA, VA, Fannie Mae, and Freddie Mac among other home loans. Their basic auditing process entails file document review, evaluation of underwriting process, credit risk analysis and third party verification.

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All You Want To Know About Mortgage

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A mortgage is a kind of agreement. This allows the lender to take away the property if the person fails to pay the cash. Generally, a house or such a costly property is given out in exchange for a loan. The home is the security which is signed for a contract. The borrower is bound to give away the mortgaged item if he fails to make the repayments of the loan. By taking your property the lender will sell it to someone and collect the cash or whatever was due to be paid.

There are several types of mortgages. Some of them are discussed here for you –

Fixed-rate mortgages- These are actually the most simple type of loan. The payments of the loan will be exactly the same for the whole term. This helps to clear the debt fast as the borrowers are made to pay more than they should. Such a loan lasts for a minimum of 15 years to a maximum of 30 years.

Adjustable rate mortgages- This type of loan is quite similar to the earlier one. The only point of difference is that the interest rates might change after a certain period of time. Thus, the monthly payment of the debtor also changes. These kinds of loans are very risky and you will not be sure that how much the rate fluctuation shall be and how the payments might change in the coming years.

Second mortgages- These kinds of mortgage allows you to add another property as a mortgage to borrow some more money. The lender of the second mortgage, in this case, gets paid if there is any money left after repaying the first lender. These kinds of loans are taken for home improvements, higher education, and other such things.

Reverse mortgages- This one is quite interesting. It provides income to the people who are generally over 62 years of age and are having enough equity in their home. The retired people sometimes make use of this kind of loan or mortgage to generate income out of it. They are paid back huge amounts of the money they have spent on the homes years back.

Thus, we hope that you are able to understand the different kinds of mortgages that this article deals with. The idea of mortgage is quite simple- one has to keep something valuable as security to the money lender in exchange for getting or building some valuable thing.

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What Insurances Can I Have With My Mortgage?

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Life Cover

Life Cover provides a lump sum if you die during the policy term. This can be used to pay off your mortgage so your family do not have to worry about making any further repayments.

Critical Illness Cover

Critical Illness Cover is designed to insure against critical illnesses which could have a severe impact on your ability to earn a living. It should pay out if you are diagnosed with one of the critical illnesses or disabilities listed on the policy. You could then use the lump sum to repay your mortgage or help pay expensive medical costs. Some policies pay out on death during the period of cover if you are eligible to claim.

Accident, Sickness & Unemployment Cover

Accident, Sickness & Unemployment Cover is a short-term income-protection policy. It pays you a tax-free monthly sum for up to 12 months if you are unable to work due to an accident or sickness or if you become unemployed through no fault of your own. Policies are available that protect you against all of these events or just cover you for accident and sickness only, or unemployment only.

This type of insurance is expensive so to reduce the cost you can choose to have a ‘deferred period’. Then, in the event of a claim, you will not receive any benefit for a period of time at the beginning. This deferment could be for 30, 60 or 90 days for all three types of claims. You can also have a longer deferred period of 180 days for accident and sickness cover. To help you decide which deferred period is best you should take into consideration such things as any savings you may have and any sick pay you get from your employer.

You can choose the amount of monthly benefit you wish to receive up to 65% of your gross monthly income. Gross income is your wages before deductions have been taken such as income tax and National Insurance contributions. Of course the higher the benefit you require the higher the cost of the insurance. Cover provided by some companies may be limited due to individual circumstances.

Just as an example, Accident, Sickness and Unemployment Cover typically costs £4.71 a month for every £100 of monthly benefit. This is based on a 36-year-old customer choosing £850 of accident, sickness and unemployment monthly benefit with claims paid after a 30-day deferred period.

The cost of this insurance depends on a number of factors including your age, your occupation and where you live.

A number of companies offer short-term income protection and other products designed to protect you against loss of income.

Buildings Insurance

This covers the structure of the home such as the roof, walls, windows and permanent fittings.

Contents Insurance

This covers household goods, personal possessions and valuables within the home.

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Tips to Choosing a Mortgage Broker

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When you’re searching for a new home, you go through a number of properties to find that perfect match for you and your family. Once the excitement settles, it’s time to secure your financing.

You have two choices, you can approach your bank and hope that they are offering loans right now or you can approach a mortgage broker, someone who specializes in property financing and works with a host of leading banks, financial institutions and credit unions to secure you the best deal available to meet your budget.

When you first start looking for someone to help you secure the financing you need, it’s advisable to speak to family and friends that have recently purchased property in the area. They may be able to recommend an experienced broker that they dealt with, who secured them their financing. Word of mouth is usually the best way to find the best of the best.

Another option is to search online. You will be welcomed by hundreds of mortgage brokers who all want to assist you in getting the finance you need to secure your new home. If you choose online, there is some additional research you will have to do to ensure you will be working with someone who has experience and knowledge in the industry and has a good reputation with their customers.

There are a number of different brokers out there, some will be tied to certain estate agencies, some will work independently and some will work for large lending centers that are working closely with a number of the leading lenders in the country. Try and steer clear of the first two, rather go with the one that can work alongside a large number of banks and financial institutions to find you the money you need in the shortest period of time.

The mortgage broker should be focused on finding you the best possible deal. They may present you with a number of offers, enabling you to choose the one you feel meets your specific requirements.

One of the most important considerations is that they have extensive industry experience and an excellent reputation. You want your mortgage broker to work for you, they should provide you with all the information and advice you need, also providing you with outstanding customer service. This is so important as a first time buyer when you are unsure about the processes that lie ahead.

Determine if they charge any upfront fees. Some mortgage brokers will charge fees for their efforts. Ensure you are aware of the percentage they charge and how the payment is to be made. Is it upfront? Do you have to pay it straight away? This may reduce your down payment slightly, so take this into consideration.

Always do your own research as well, don’t rely on what they tell you. Even if you have chosen to use a mortgage broker because they can secure the best deals, approach the banks and find out what they are offering right now. Don’t settle for the first offer that comes you way, by doing some research, you can ensure you find the best mortgage with the best interest and terms to suit your budget.

Never assume your loan is secure. Ensure everything is provided to you in writing. This should be the offer from the lending institution, the mortgage broker’s fees and anything else imperative to your decision.

With everything in writing, you are set to go ahead and place an offer on your new dream home with the confidence that your financing should be approved within the shortest period of time.

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STAR Servicer – Total Achievement and Rewards Program for Mortgage Servicers

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As the fall out continues with the countrywide 50 state investigations, lending servicers who are responsible for bill collection of mortgage payments and other aspects of mortgage servicing for investors, it has come to the attention of the government how badly these companies are run. Fourteen companies have been under review and all of them have been found to violate foreclosure laws. Fannie Mae and other government agencies have been discussing how to best improve our mortgage servicing and lending here in the United States. Fannie Mae has come up with a performance program to help assist mortgage servicers’ to get it right and to stay within the boundaries of the law. This ultimately will help ensure the health of our housing economy and help support the housing recovery.

Not only will servicers be facing no procedures, they will also be facing harsh fines as a group entity. These fees could total over 20 million; however, this is just an estimation of what they could be paying for violating foreclosure laws.

Fannie Mae on Wednesday announced the STAR (Servicer Total Achievement and Rewards); the program is designed to better assist and will help examine how the servicers help homeowners avoid foreclosure. The goal of this new program is to set clear expectations and specific measurements to help Fannie Mae and servicers increase focus on avoiding foreclosure.

As more and more news comes out about how servicers’ have violated foreclosure laws, this program is an ongoing effort to hold servicers accountable. So how will this work? Each servicer will be given a servicer performance scorecard, which in turn will provide feedback on a monthly basis. With this program it should help servicers see where they need improvement and overall performance. Top ranking servicer’s will become eligible to receive monthly incentive awards and recognition. Also, top ranking servicer’s performance will be made public in an annual scorecard. Many believe this program will help gear better customer service to home owners, help with the housing recovery, and keep the servicers on the right track.

This will also help the federal government to set guidelines and regulations in place for the mortgage servicing industry. As the mortgage industry and bank industry is reviewed by the government to find a solution and to prevent another financial crises,it seems many changes are going to happen over the next few months and years. As we wait and see if the HAMP program and other federal programs will stick around, it is good to know servicers will now be regulated better in hopes of making the homeowner ship experience safer for everyone.

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Foreign National Mortgages: Things To Keep In Mind

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A foreign national mortgage refers to a loan for non-us residents. Even the government can issue loans to non-residents of the States. Let’s find out more.

First of all, if you are in the States legally, you can apply for the loan. However, for illegal residents, there are zero chances of success. The reason is that main lenders always require ID before reviewing an applicant. And these requirements include visas, work permits, green cards and social security numbers as well.

Rules for the resident foreigners

Generally, it’s not difficult for non-us residents to look for a mortgage. There are two primary categories that they fall in:

1. Permanent residents: they have green cards and the rights to live in the States with all the long-term residency rights

2. Non-permanent residents: Generally, your residency rights are based on your employment.

Regardless of which category you fall in, you can apply for a mortgage. However, you may need to put in a little more effort if you are not a permanent resident.

Permanent vs non-permanent

If you are a non-permanent resident, you may have to show a proof that you will live in the country for at least another three years. If your visa or work permit has fewer than 12 months of expiry date, your lender can find out how likely you may be to stay.

FHA loans are designed for non-permanent residents. According to the rules, if you have a renewed visa or work permit, you can be a good candidate for approval.

Refugees or those in the asylum

If you have been in the asylum or have the refugee status, we have good news for you. With this status, you have the right to work, and you have greater chances of getting a mortgage approval. So, this is important to keep in mind.

Non-resident foreign buyers

If you have no right to live in the USA, you may still be eligible for the loan. However, you may have credit score problems to face. Actually, lenders have concerns as how they can enforce a debt in case of these non-residents.

So, you can’t get the type of deals a resident or citizen can get. In fact, you may have to make a down payment up to 50% to get this type of loan. Aside from this, the mortgage rate can be quite higher unlike the rate charged to a resident.

Welcome to the States

Immigrants were the founders of the States. Therefore, American has always been quite welcoming to immigrants.

Typically, lenders make their lending decisions based on the risk factors, such as the financial resources, down payment size, and creditworthiness of the borrower. As far as determining the best deal is concerned, you can be on the level playing field irrespective of the citizenship status you may have.

Long story short, if you are non-resident in the United States, you can still apply for a mortgage but you need to meet the requirements set by the lender. Hope this helps.

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Tips To Choose a Mortgage Lender

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No matter how rich you are emergency situations can crop up at any time. Thus, you have to consider taking a loan either from an individual or from a financing company or a bank. Most of the people of now like to opt for the latter options rather than going for the first option. This is because the financing companies or banks are more reliable than a person. But the high interests that are charged on the loans are really a burden. So, a better alternative that you can look for is mortgaging your property against the loan you take. This will relief you from being taxed with high charges and you can pay the loan amount at your convenience within the time limit that the company has offered you. To choose a proper loan lender you can follow some of the tips that we have provided in this article.

Prepare a List

While you consider risking your personal property, why plan everything in haste. Some companies would try to persuade you to take quicker decisions by offering attractive rates but let them be as they are and take your time to take your decision. Research well and make a list of the companies that you find.

Check the Terms and Conditions

Not only choosing the company but knowing the terms and conditions through which the loan to be completed are important. Remember that you are risking your property for money and the slightest carelessness in this respect can cause you to lose your money.

How Quickly They Respond

The next thing that should be your determining factor is that how quickly they respond to your queries. Emergency situations don’t give you a lifetime opportunity. A delay can make the problems to increase. So, instead, you should go for the ones that respond quickly to your needs.

Compare and Choose

After you check with several companies you can compare the interest rates and also the time period they are allowing you to make the repayments. You also have to ensure that the company that you are thinking of dealing with should have a good reputation in the market. Check their client reviews and the years the company has been in the market. If you find that the company is a genuine one then you should go ahead with finalizing the deal with the company.

We hope that just by reading this article you have got an idea about choosing the mortgage provider. This will help you in choosing a better lender for your needs.

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Credit Card Processing: How the System Works

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Establishing a merchant account for your business enterprise is the wisest financial decision you will ever make for the growth, expansion and success of your business. Once you’ve set up a merchant account, you can accept credit and debit cards payments from your clients for your products and / or services. You can also arrange to accept online and mobile banking payments for your products and / or services.

A merchant account opens up new avenues for your business; therefore, giving your business many more opportunities to flourish. But, have you ever understood how the credit card processing system works? Have you tried to perceive the complexities of the players involved in the process and the intricacies of the system?

While it is not entirely essential for you to know the inside and outside of the card processing system because your Merchant Service Provider will do the needful for you; it is good for you to acquaint yourself with the system on a general basis.

The Participants Involved in a Card Transaction

A typical credit or debit card transaction involves the following players:

• The customer

• The merchant

• The payment gateway

• The customer’s credit card issuer

• The credit card interchange

• The processor at the acquiring bank

• The merchant’s acquiring bank

The Route the Money Takes from the Customer to the Merchant

Let’s take an example to understand how the card processing system works.

Suppose that a customer walks into a clothing store and she finds a bag that catches her eye. She immediately proceeds to the payment counter and makes a payment of $100 towards her purchase with her cards.

The cashier at the merchant’s store accepts the cards and uses a card swiping machine to set the process into motion.

• The $100 amount makes its first stop at the payment gateway where the payment is first authorized with a minor deduction in the amount.

• Now, $99 travels to the appropriate processor and after a minor deduction is submitted to the card interchange as $98.5.

• Once the transaction gets a clear at the interchange, it moves on to the issuing bank with a further deduction where the issuing bank verifies the availability of funds in the customer’s credit / debit card.

If the transaction is declined, it makes its journey back to the customer from here.

• If the transaction is approved, $98 reaches the processor at the acquiring bank, just one step closer to the merchant account.

• Once authorized, $97.5 gets deposited into the merchant’s account, which is now at the merchant’s disposal.

(The figures and fees involved in card processing are based on the number of players in the process, merchant type, card type and risk factors)

In the present age, quite a number of payments are made electronically, especially with the extensive use of credit and debit cards and online funds transfer. Although typical card processing takes seven participants, the entire transaction amazing takes a maximum of five seconds for approval.

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5 Tips to Consider When Refinancing Your Mortgage

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Here are 5 tips to consider when refinancing your mortgage.

Is it the right move?

When conditions are right, financially and economically, you might be considering a refinance of your mortgage. Before you jump into what seems like a good idea, it’s best to know exactly what the refinancing process is, and just what it entails. You should know that when you are going to refinance, it involves starting the loan application process right from the start, as if you are buying a new home. Will you be taking the loan with a new lender, setting up a new deal, or should you shop around and see what’s on offer from other loan providers? The best person to lead you through what is now a veritable minefield of lenders, is your mortgage broker. They are far more up to date with what’s on offer than if you spent hours scouring the internet looking for the best deals.

Why Refinance?

What are your reasons for refinancing? There could be a variety of reasons. Lower interest rates on offer? A difference of a point or two in the rate may seem small when you look at it, but that couple of points can save you thousands over the years because your repayments will go on for 15 to 30 years for a typical mortgage.

Another reason some may decide to refinance is to get a shorter term, which also saves thousands of dollars. For example, things have never looked rosier personally, and both you and your partner are working, and your income is higher. So, a change in your financial situation can be used to save money on higher monthly payments. Conversely, you might be after a lower monthly payment or have that fixed rate changed to a variable rate, or vice versa.

Refinancing Costs

There are some obvious things to look at when considering refinancing. One of the first things is the actual cost of refinancing. Look at the fees you will be paying and divide it by the months of your mortgage and see whether there is a saving as a result of the refinancing. Sometimes you are ahead straight away, other times you might have to work out when you will hit the break-even point.

Penalties

Are there any penalties in your mortgage terms and conditions that apply if you pay out the mortgage early? Lenders do NOT like mortgages paid out early. Remember, when you refinance, you are paying off one loan and applying for another completely new loan. Add any penalties to your total costs for refinancing and calculate that break-even point again. Be certain that you are not losing money overall when you refinance.

Your Equity

An important factor in this whole process is to work out the equity you have in your home. A negative equity is when you owe more on the home than what the house is worth. If you have been in your home for a number of years, the annual increase in your home’s value will stand you in good stead. But if this is a refinance taken out after only a short time into your mortgage, price fluctuations may have worked against you. If your lender is offering less than the equity, you will not be able to get the refinance, unless, of course, you have the money to pay the difference. Current markets indicate an overall rise in prices, but there have been some downward movements as well over the year and that may have had a negative effect on your home’s value.

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Get Over from Your Credit! Credit Debt Management

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Credit arises when you spend without paying. And how it is done? Yes, you are right, it’s through credit cards. Here, we are going to discuss how can we control that small plastic card which can make us happy with its service and can lead us to bankruptcy if goes out of control. Credit debt management can suggest us the way to get back that control and maintain it.

Credit card handling tips which you can follow for efficient credit debt management:

o Use your credit cards wisely; this will help you build a good credit history.

o Reviewing of credit card bills helps you pay them on time simultaneously finding errors (if any) in the bill.

o Get your credit report and analyze it. Contact credit rating agencies if there is any mistake in the report regarding credit card or any other debts.

o If you are already having balances on your credit cards, don’t apply for more cards.

o Get your balance transferred to a card with lower interest rate, if you use more than one credit card.

o If you are late on payments to another creditor, your credit card company can raise your

interest rate. So, always pay your bills on time for all your debts.

o Special cards such as gas and petrol cards, departmental store cards or rewards cards carry higher rates as compared to normal cards, so avoid them

o If your credit debts are getting out of hands, contact credit debt management agencies for help.

Along with the measures specified above you can take the help of credit debt management companies. You can search among numerous credit debt management companies available online along with the services they offer. These services include credit counseling, credit card education and credit card debt consolidation services. Under a credit card debt consolidation service, you make a single monthly repayment to these agencies for all your credit card bills. Further, this agency pays your creditors from that amount at negotiated amounts. Yes for getting this service, you will be charged with a certain percentage of the total debt payment for credit cards.

You can enroll for a credit debt management agencies within 15 to 20 minutes. After the enrollment the consultants from these agencies will contact you with the services and credit debt management plan while discussing your credit card spending with you. The services of these agencies will continue till all your debts are in control or you have decided you withdraw voluntarily from this service. A credit debt management besides erasing your debts can also erase your stress due to credit cards.

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