REIT

A Real Estate Investment Trust



A Real Estate Investment Trust

Introduction

The American specialist of risky mortgages, New Century Financial Corporation, has filed for bankruptcy and is now under protection of Chapter 11 of the Bankruptcy Court.

The second-largest provider of home loans to high-risk borrowers (sub prime) in the US collapsed amid rising delinquencies and defaults: in recent years, when housing prices were rising, millions of people used such mortgages to buy homes they otherwise could not afford.

Once home prices leveled off, borrowers started to default on their mortgages. That wreaked havoc on the sub prime sector, which accounted for about a fifth of all new mortgages last year.

In addition to this sector crisis, the Californian Company has cheated its lenders by making deliberate mistakes in its accounting. The company is under investigation by a number of federal authorities, including the Security and Exchange Commission, for its stock trading.

The principles of the mortgage loan Mortgage can be granted to you to finance the purchase of your main or secondary residence.

The borrower will have to reimburse the principle as well as some interests, according with the terms of the contract. These installments are most of the time monthly and fixed.

The bank nearly always gets a privilege on the financed asset

In case of payment's default, a penalty will be applied. It is a supplement to be paid, calculated on the amount that has been default. If the borrower cannot finally pay, the asset bought can be seized by the creditor and sold in public auctions.

Personal contribution

When you want to buy a new house, you cannot borrow the total amount you need to pay frowning the accommodation. You need to bring some personal contribution. The amount of the credit allowed follows the rule of the Loan to Value (LTV). It measures the percentage that the credit contracted represents in the total investment, i.e. the total borrowing secured against the property as a percentage of the value of the property. For example, a property valued at 100 with a mortgage of 80 would have an LTV of 80%.

The percentage is different depending on the habits of the country, (in Great Britain it is usually 90%, usually 80% in France and in the United States, and 70 to 85% in Switzerland). (HSBC, 2007)1.1.4 Different interest rates Interest rate can be fixed, variable or calculated on the money market.

Fixed rate are applied for a mortgage that has a specified time, usually from one to ten years.

It permits to the borrower to know in advance what will be his installments, so you can exactly budget. Mortgage with fixed rate can be re-negotiated before the due date. In opposition to the fixed rate's system, variable rate of mortgage can be terminated at anytime. The credit institution adjusts periodically (usually each year) the interest rate to the market's evolution and its base rate index, in general LIBOR/EURIBOR1, rate at which banks lend money to each other on the money market.

A banker cannot propose a loan that has an interest rate superior ...