Why many people are demanding for riskier home loans even as interest rates soar.

Why many people are demanding for

riskier home loans even as interest rates soar

CASE SCENARIO ONE ALTERNATIVE SOURCING OPTIONS

Many people in the United States purchase their homes using mortgages , but in recent times, many more are running towards alternative financing arrangements for instance rent-to-own which obviously are much more riskier. But it makes sense why people are preferring the riskier options, after all, it better than none. The problem that I seee with renting-to-own option for homeownership is that its a costly option and also, when compared to traditional methods of homeownership, it is subject to far weaker consumer protections and regulatory oversight. evidence that suggest that many small mortgages, typically those falling below $150,000 are driving borrowers who actually have better credit scores and meet other qualifying criteria to this alternative borrowing arrangements. And the question I get bothered by is why?

There are certainly some factors which include but not limited to the home’s habitability and the ownership if the land beneath todays mobile homes, else known as ‘manufactured homes’ all of which are factors that make it impossible to qualify for the mortgages using the traditional route.

Although the evidence against these financing arrangements is overwhelming, and has been proven to cause harm to the unwitting consumers, very little is known about the prevalence and or scope of these alternate financing options, largely because this is a field where data is not the primary concern meaning that insufficient data that would lead to conclusive results. For instance, the Census Bureau collected data on the number of Americans

using alternate financing options until 2009 and in 2019, the Harvard Joint Center for Housing analysis of alternate financing option revealed that a ‘persistent lack of data has prevented regulators and policy makers from understanding the full scope and scale of the market.’ this study by Harvard center was only done for selected states that require financiers to keep public records.

PEW CHARITABLE TRUST RESEARCH INTO ALTERNATIVE FINANCING

Due to the overwhelming lack of data in this seemingly lucrative industry, Pew Charitable Trusts conducted a national survey of the U.S. adults that aimed to uncover the prevalence of alternative financing and borrower demographics.

The following are the results of the study;

• 1 in 5 home loan borrowers which translates to about 36 million americans have used Alternative Financing at least once in their adult lives. • Of these 36 million people, about 22 percent have used more than one type of alternative financing options across multiple home purchases. This means that multiple borrowers over the course of their adult life face multiple barriers to homeownership when

it comes to mortgage financing. • Also, this data shows that alternative financing varied by race and ethnicity and seemed to be a popular choice for the hispanics. • About 1 in 15 current home borrowers -translating to 7 million U.S. adults have a current arrangement with these alternative financing optiopns. • Among the homeowners currently in arrangement with alternative financing, the people with

HOUSEHOLD incomes below $50,000 were more likely to use these options.

If anything, the data by Pew Researchers underscore the need for a better national data and state data collection that will enable regulators to fully understand the prevalence of alternative financing arrangement and to also ensure that millions of Americans , especially those from low-to-moderate income earners and the minorities are well protected and in policy decisions affecting home borrowers.

WHAT’S ALTERNATIVE FINANCING?

Alternative financing describes a set of financing arrangement that involves land contracts, seller-financed mortgages, lease-purchase agreements and personal property loans that differ significantly from the traditional financing options To better understand what alternative financing is, consider the following;

Typically to buy a home, there is a purchase agreement which must involve a third party lender who has no ‘prior’ interest in the property separate from the loan. And the lender has to strictly follow a specified conde of conduct and comply with the federal and state regulations.

Additionally, mortgage transactions must involve a title that stipulates full legal ownership of the property as detailed in the deed.

In contrast, alterative financing at least in some arrangements for instance land contracts, there arent significant regulations to govern the transactions. In addition to that, purchasing a home using alternative financing, sellers arent required to hand over the deed to the property for the duration of the transaction. Since a buyer isnt fully recognized as an owner of the property until they are in fully custody of the property deed, this structure creates somewhat legal ambiguity making it extremely difficult for buyers to establish clear ownership and to fully establish the responsible party for the property taxes and maintenance.