Comparison of Construction Loans in the U.S. and Germany
Specialists and economists mostly agree that the success or failure of any country’s economy is mainly based on the success of its mortgage and home loan market. Germany is as well as the United States presently feeling the squeeze of a declining housing loan market.
Loan Industry and Financial Corporation
In the last ten to fifteen years the sub-prime mortgage loan industry faced an estimated growth by 25% per year. As the result of this increasingly growth, New Century Financial Corporation enjoyed a position as the second largest sub-prime mortgage lender in the United States. In the last term they have witnessed the startling and swift decline of New Century because of increasing defaults and a kind of inability to finance their loans. The company has filed for Chapter 11 Bankruptcy, and amidst charges of criminal conduct, insider trading, and misrepresented annual statements; New Century’s stock has dropped nearly 90%.
Recent statistics indicate that about 4.6% of all sub-prime loans were currently in foreclosure compared to less than one half of one percent of prime loans. Certainly, the sub-prime market has been a risky venture throughout every century and every economic crisis, but, for a period of time, it was highly profitable. The sub-prime market’s massive and speedy growth was near to an end according to some market experts, and the demise of this market is straining the economy of the United States.
U.S. Economy and Loan Payments
A snowball effect got started with New Century’s downfall in the nation’s sub-prime lenders. Primordial, sub-prime lending enabled individuals who would not have qualified for a prime home loan to purchase a home. Most of the targets of sub-prime loans are individuals with poor credit who are likely to have some difficulty making the loan payments. Sub-prime loans have enabled people to purchase homes with adjustable rate mortgages having little or no money down. Predictably these people have subsequently been unable to make their loan payments and are in arrears or foreclosure, as experts say. Statistics indicate that nearly 16% of such loans are currently in past due status.
The questionable sustainability of the sub-prime market did not only lead to bankruptcy and foreclosure of the homeowner, but also to the destruction of the lender. As the FED considers raising interest rates in the coming months, the strain on already overtaxed homebuyers is likely to increase resulting in an even higher rate of foreclosures.
German Lenders compared to the U.S
In the early 1980s a housing construction boom hit Germany and the homeowner rate peaked at 66%, which led to a market decline in new home construction. Although Germany’s economy remains relatively strong, because the country’s housing industry results in the largest investment impact, a decline in the industry would end in a weakening of the economy.
Compared to the United States, the German housing market is at the opposite end of the economic spectrum. New construction has stalled for a number of reasons including high interest rates on home loans, or “kredite”, and financing costs, high increases in land values and of course a general decrease in the availability of land in some desirable areas, an almost 200% increase in construction prices, and the German government’s cessation of savings incentive programs that reduced construction loan costs. Compared to those who actually are homeowners in Germany the real number of those who would like to own a house is twice as high, but the costs of financing their homeownership are so high as to price many individuals out of the market.
Financing for German construction loans (translated into German "Baufinanzierung") are increasingly more difficult to get than those in the United States. German lenders require a minimum of 20% of the purchase price of the home to be provided by the buyer and interest rates are often locked for more than ten years. Additionally, the tightly locked interest rates prevent the purchaser of a new home from refinancing and enjoying the benefits of a lower rate and therefore a lower payment. Finally, German lenders, unlike the swarm of sub-prime and what are often considered predatory lending practices of U.S. lenders, have to follow strict guidelines considering buyer credit rates.
Comparison of Lending Practices
The United States and Germany are not just geographically torn apart but also in regard to lending practices. It is quite interesting to note that recently discussing began in order of Germany lowering its stringent standards to promote more new housing construction. Currently though, the German standards ensure that few homeowners default on their home loans and that only qualified buyers are eligible for home and construction loans. The U.S. situation, where sub-prime lending has led to a precarious economic position for an increasing number of people and businesses must surely be a lesson in how not to handle sub-prime lending.