Recent events are good for our economy
Article source: Rob Arnott - www.ft.com
Just over a year ago, Mr. Chuck Prince, the then Chief Executive Officer of Citigroup, was still rejoicing as a result of the buoyant mortgage backed financial market. More recently, after spending a lot of time trying to figure out what had taken place, he had come to the conclusion that the credit crunch and its severe consequences could not have been pre-determined.
This mayhem of the credit crunch and market chaos came up as a result of the mortgage market. If you really try and ask yourself what a mortgage gives you, what would your answer be? One thing is for certain, it does not buy you a house, not, in most cases, for at least 25 years anyway. What it definitely does buy you is years of monthly mortgage payments with a truck load of interest thrown in.
If a home buyer decides to purchase a house for £500,000, with a £400,000 mortgage against it, would it be correct to say that this person owns that particular house? The plain and simple answer is no and here is the reason why. The mortgage lender would be in a position to sell this house to another potential client against the will of the home buyer, should the client fail to continue making his mortgage repayments on the same basis as was agreed with the lender. It is plain to see from this example that the mortgage lender is still the owner of this house until the client pays off the entire home loan as per the mortgage agreement.
While this client owns the money that he or she has paid for the home; what this has in fact bought the client, in the case of mortgage products where there are no tie in periods, is an in the-money call option to repay the outstanding amount of £400,000 when the client is so able. The client can choose to pay the mortgage lender £400,000 any time that this client wishes to own the house. The mortgage client has paid for that call option with his or her £100,000 down payment and continues to retain the call option by upholding their mortgage agreement and making their monthly mortgage payments. This is not unlike paying a half percent monthly premium on your mortgage payments (i.e. what you are being charged as a lending rate) to roll that option forward.
The important thing to remember with a mortgage product is that there are associate terms and conditions, such as: ‘If you fail to keep up with your mortgage repayments your home could be repossessed.’ If this situations arises not only would you loose your home but you would also, most likely loose your £100,000 deposit which you placed against your home as well.
About Citigroup
Citigroup is a World Wide Financial Corporation which operates in six continents and over 100 countries world wide. The group employs more than 350 thousand staff world wide. Citigroup operates under a number of different brands, these include: Citibank, Citi Cards, Citi Financial and Citi Mortgage. The group operates within a number of different financial sectors including Personal Banking, Business Banking, Mortgages, Investments Banking, Commercial Banking as well as Shares Trading to name but a few. The groups’ sheer reach and product diversification means that it controls over 200 million customer accounts across the globe.
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