The Finatical

Week of March 7th, 2023 - Mortgage Approval, Fed Hikes Slow, Consumer Debt Peaks

Aniket Bose

Finatic

Aditya Bagga

, and 2 others

Mar 07, 2023

Topic Breakdown - Mortgage Approval

Introduction

The majority of people who purchase a home utilize a mortgage. If you cannot pay the whole cost of a property out of pocket, a mortgage is essential. Along with this, if you want to purchase an investment or rental property, you will probably be getting a mortgage, but how exactly does the approval process work? Getting approved for a mortgage can be a complex process, but there are some basic steps that can help simplify it. In this article, we will cover these steps to better your understanding of mortgage approval. First, you will need to gather the necessary documents to support your application. This includes proof of income, employment history, and credit score. You may also need to provide documentation related to your assets and debts.

Why They Are Created

Once you have all the necessary documents, you can apply for a mortgage. This involves submitting your application to a lender or mortgage broker. They will review your application and determine if you meet their lending criteria. This can include factors such as your credit score, debt-to-income ratio, and employment history. Once the lender has reviewed the borrower's financial information and determined that they are eligible for a mortgage, they will issue a pre-approval letter. This letter will state the maximum amount that the borrower can borrow and the terms of the loan. The borrower can then begin shopping for a home and make an offer on a property.

How To Use Them

When you find a property that you want to purchase, you will need to submit a formal application for the mortgage. This will involve a more detailed review of your financial history and creditworthiness. The lender will also conduct a home appraisal to verify that the property is worth the amount of the loan. If the appraisal is satisfactory and everything checks out, the lender will provide you with a mortgage loan commitment letter, which is a promise to lend you the money you need to buy your home. With this letter in hand, you can close on your home and begin the process of homeownership!

Financial Trends

Fed Interest Rate Hikes Slow Down But Persist

At their most recent meeting, Federal Reserve officials stated that their indicators of inflation levels are starting to decline, but not enough to counter the need for more interest rate hikes. The minutes stated that inflation remained above the Fed’s target of 2% caused by the labor market being very tight contributing to higher pressures on wages and prices. As a result, the Fed approved a 0.25 percentage point increase, making it the smallest interest rate hike since the interest rate hikes were imposed in March 2020. This decision brought the fed funds rate to a target range of 4.5% to 4.75%, but this new pace came with a high level of concern with inflation remaining a large threat.

According to a report by the Federal Reserve during this meeting, “Participants noticed that inflation data received over the past three months showed a welcome reduction in the monthly pace of price increases but stressed that substantially more evidence of progress across a broader range of prices would be required to be confident that inflation was on a sustained downward path”. Stock prices continue to fall due to the fact that Treasury yields shed the majority of their losses from earlier this quarter. There has been some dispute amongst the Federal Reserve members regarding how much the next interest hike should be, with a few members proclaiming a 50 basis point hike (1 basis point = 0.01%), which would be a drastic increase to reduce inflation levels.

Consumer Debt Reaches Historic $16.9 Tillion

This Thursday, The New York Federal Reserve reported that consumer debt hit a new threshold totaling $16.9 trillion, more than $1.3 trillion compared to last year, while rates for delayed debt payments rose through the forms of several types of loans. Despite there being a decline in originations, mortgage balances continue to increase, at a value of $11.9 trillion, more than $250 billion compared to the third quarter. Currently, mortgage loans are in serious levels of delinquency, rising to a rate of 0.57%, double the rate from last year. Additionally, automobile loan debt delinquencies rose by 0.6 percentage points to 2.2% along with credit card debt increasing by 0.8 percentage points to 4%.

According to economic research advisor at the Federal Reserve, Wilbert Klaauw, “Credit card balances grew robustly in the fourth quarter, while mortgage and auto loan balances grew at a more moderate pace, reflecting activity consistent with pre-pandemic levels”. In the past, low unemployment levels translated to keeping consumers’ financial status strong. The high prices on goods coupled with rising interest rates have been putting immense pressure on borrowers’ ability to pay off their debts. The rise in consumer balances came at the cost of aggressive interest rate hikes imposed by the Fed, as the economy continues its battle with inflation. The exponential growth of consumer debt came amid the ongoing increase in federal government borrowing, where the U.S.’s national government debt is nearly $31.5 trillion.

Financial Guidance

“Without leaps of imagination or dreaming, we lose the excitement of possibilities. Dreaming, after all, is a form of planning.” ― Gloria Steinem

While being realistic and critical is an essential part of creating plans, imagination and dreaming can give us hopes of visions we would like to see come true. Innovators and trailblazers didn’t revolutionize the world by being overly critical and limiting; rather, they had a healthy blend of seeing new visions through hopes and dreams, while also taking into consideration present limitations.

Term of the Week

Dumping: Dumping refers to foreign firms selling products at a price lower than the cost of the same good when created by domestic producers due to lower production costs. This puts domestic firms at a huge disadvantage, and is something that is strictly monitored by national governments worldwide.