200+ Years of Financial Services: BMO Harris Bank - Research Paper

Introduction

BMO Harris is an affiliate bank of Canada's Bank of Montreal. In the United States, BMO Harris boasts of having 600 branches that offer a variety of banking services such as fulfilling financial needs and acting as a guide to all its customers' investment needs. ("About BMO Harris Bank | BMO Harris Bank", 2019) The Bank of Montreal has been in existence for approximately 200 years and has been the choice of many customers thanks to their lucrative deals in the world of finance. ("About BMO Harris Bank | BMO Harris Bank", 2019) One major service that is offered by BMO Harris is mortgaged which are the subject matter of this study. A mortgage is simply a type of loan in which customers opt for in the event that they want to purchase a house they cannot afford. The specific bank in which the customer chooses to consult or deal with offers money to the customer who then pays off the outstanding debt with some amount of interest. (Quigley, 1987) Interest, in this case, is the cost incurred by the borrower for securing a loan. If at one point, the borrower seems to have a hard time paying the loan then foreclosure occurs, the tenant or customer is evicted and the house is then sold to cater for the rest of the money not paid for.

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Mortgages can be classified generally into three major groups. The classification type is based upon on how the interest rate is implemented on the loan. The first type of mortgage is known as a fixed rate mortgage. In a fixed rate mortgage, the borrower pays a constant amount of money throughout the whole planned duration. Once the agreed payment is established then the borrower is supposed to abide by this amount until the debt is cleared. The other type of mortgage is the adjustable-rate mortgage. In the beginning, this type of mortgage entails a fixed amount of rate but ends up fluctuating with the shifts in markets. When comparing the affordability of the initial interest amount and the fluctuating amount then the fluctuating amount is less affordable than the initial amount. Just like any other bank BMO Harris offers mortgages to potential homeowners in the area that they wish. In order to determine the number of mortgages that BMO Harris will have in the year 2020 it is vital that an assessment is conducted on all the factors that might change the outcome of the number of mortgages.

Methodology

First of all, the mortgage rates and the effects that mortgages have on the economy will help forecast on the number of mortgages that BMO Harris will have issued in a year to come. Contrary to the thought of many, mortgage rates are not only determined by the lender which is, in this case, the bank. Mortgages are basically determined by mortgage-backed securities or mortgage bonds. A mortgage-backed security is how many financial institutions small and large are able to acquire security for their loans. (Quigley, 1987) This security simply consists of a number of mortgages certified by both crediting agencies and the bank responsible for issuing out the mortgages. They are then sold in the market to potential investors who benefit when the borrower, later on, pays the money with an added interest. Therefore, the fluctuations that are normally experienced in the interest rates of mortgages are closely related to MBS. (Quigley, 1987) This indicates that the bank is only a middleman that oversees these kinds of transactions take place and every person gets his share of the deal. The agencies or the people that are normally behind through the MBS system are normally mortgage loan companies referred to as Fannie Mae and Freddie Mac.

It has hard for banks to keep issuing mortgage loans to every person that anticipates buying a home. If the bank had no security then the number of mortgages to be issued would be fixed and other mortgages would only be issued when the outstanding debt is cleared. Back in history during the Great Depression when housing prices fell drastically, banks began to cry foul of this situation and wanted the mortgage loans to be liquidated in order for the lenders to serve a large number of customers when it comes to loans. What followed next was an act passed by Congress for the existence of two major mortgage loan companies namely, The Federal National Mortgage Association and The Federal Home Loan Mortgage Corporation. These two agencies turned the debt in the form of mortgages into potential investments by offering a secondary market for anyone looking to invest in this field. By doing these banks such as the BMO Harris were able to issue out more mortgage loans since this acted as security to the already issued loans currently available. By liquidating these two loans these two Federal agencies attract more and more customers for investment which thus increases the number of funds available for housing. As a result, the number of mortgages increases in number. When it comes to interest rates Federal reserves are normally the ones fixing these rates in relation to inflation. Generally, a higher interest rate will attract more investors in the secondary market but will discourage borrowers from accessing these loans. (Quigley, 1987) However, if the rates are low then mortgage borrowers will increase but this will cause a ripple effect to the world of secondary market whereby the investors interested in such a deal will be very few. If this year the odds play in the favor of the homeowners then BMO will have an increased number of mortgages by the year 2020.

Even though the Feds seem to have control when it comes to the interest rates that a bank has, there are a number of uncontrollable factors that determine whether or not the interest rates will have to be manipulated by these very organizations. First off on the list is inflation. Inflation is simply the act of prices fluctuating in the market which has a great effect on the currency of a state. Say for instance the interest rates that are offered by The BMO Harris bank is around 6%. and the rate of inflation that year is approximately 2% This means that the return money in form of interest that the bank will earn will only be 4%. (Quigley, 1987) This will obviously need an adjustment on the interest rates since a small effect such as this may create a ripple effect on the secondary market. The return on the Backed Mortgage Securities expected by the investors will be affected hence the amount of money that will be available for financing will be very little since fewer people will be encouraged to invest in this market. Inflation is unpredictable and no one controls its rate, the option that the market has is to control it through adjustments.

The growth of the economy is a key player when it comes to the number of mortgages being issued. A strong economy can be defined as one that records an increased employment rate and gross domestic product. When a lot of people in a state are employed, then they are more likely to spend time and money in purchasing goods for instances houses. Even with high-interest rates placed on mortgages, a number of employees will be able to afford housing finance through banks thus increasing the number of mortgages that will be issued over a period of time. When employees' wages increase by a certain amount, they will not be stopped by a high-interest rate on mortgages in their quest to secure decent housing. A strong economy creates a demand for mortgage loans which then results in a higher number of people accessing these loans.

Housing trends is another influencer on whether or not interest rate in the market will drop or rise. The real estate business at times fluctuates in its demand and this will affect the number of houses that will be built for commercial purposes. An increase in the demand for housing projects will result in an increase in the demand for mortgages. This demand will then result in an increased number of mortgage loans issued by banks. Another factor still on the demand for housing is the rate at which people want to rent or own their own house. Renting greatly affects the mortgage industry since this means that fewer people will have an interest in securing loans due to the fact that they are comfortable with renting a house rather than owning it. Mortgage loans are a crucial part of the banking industry and through the banks are able to make profits and stay operational.

In order to really come up with a prediction on how many mortgages will have been issued in the next year, then some aspects of the population need to be considered. One such aspect is the age bracket. According to research that was conducted ever since the 1960s, adults nowadays are taking a long time in purchasing their first ever home. (Demyanyk & Van Hemert, 2009) In the 1960s the typical age of a home owner was around 23 years old. This is generally a young age for a person to consider owning a house. Nowadays the typical age for home ownership is around thirty years old. (Demyanyk & Van Hemert, 2009) Seven years older than the original number. Even though there is no age limit for an adult to apply for a mortgage, it is difficult for people within the age bracket of 50 and above to acquire a loan. ("http://fortune.com", 2019) This is due to the fact that people in this age bracket are almost retiring and their retirement financial plan may not fully cater to finish off the mortgage debt a person has. When people within this age group apply for a loan, the payment agreement usually consists of a small range of time given which means that the amount of money that the person has to pay in installments is generally high. In comparison with the 1960s then it is evident that the age bracket narrowed down in terms of home ownership and the application of loans. In a normal state, the age bracket between 20 and 30 has higher bulk compared to 30 years and an above and with these constant decrease in the age bracket that anticipates owning a house then the number of mortgages could be on the decline.

The income that a person earns is vital in determining whether or not they will be issued with a mortgage plan. In order for a person to be legible for a loan then they must at least have a good amount of income annually. This will help the lenders determine whether or not they will issue a person with a loan. Research shows that the average citizen in the United States finds it hard to accesses a loan due to low-income earners. People with higher income are more likely to be approved for mortgages and end up owning a home. The credit score is currently high which is as a result of the financial crisis that took place in the year 2008. (Demyanyk & Van Hemert, 2009) Borrowers are now being faced with tougher conditions of owning a home compared to the past. Thee credit score still remains high and according to a recent statistic, the median credit score in America is 756 which is relatively a high figure. Other factors such as race all depend on the number of people in a particular race and their position in the poverty line. Such surveys help reveal the number of mortgages that are likely to be issued to a particular race and based on their performance if the number of mortgages will increase or decrease. Mortgages are more likely to be obtained by married couples compared to single individuals. For married couples, the pressure of settling in a family into a home is too much and this mostly results in an increased pressure for them to apply for loans. Family size also has an impact on the type of mortgage that a borrower is likely to commit themselves into. Those with larger families apply for a high-stake loan compared to small sized families.Discussions and Results

Even though the number of residential mortgage loans increased from 2017 to 2018, the number fell and decr...