Mortgaging Lending: Are Promises Meant To Be Broken?

I shall return. This, arguably, is one of the most famous promises in world history. American General Douglas MacArthur made it after his fortress in the Philippines became the target of Japanese air attacks during World War II. MacArthur was then forced to flee to Australia. On March 20, 1942, MacArthur made his famous promise to return to the Philippines to continue helping to defend the islands. About two and a half years later, MacArthur proved that he did not just talk the talk. He walked the walk - literally! On October 20, 1944, about two and a half years after making his famous promise, MacArthur waded through the waters near Leyte Island in the Philippines.

Like MacArthur, you, too, made a promise when you borrowed from your mortgage lender. While this promise is not as historic, it is no less binding or serious. In fact, your home backs up the vow you make to your mortgage lender.

I Shall
In modern times, we rarely hear people use the word "shall" when they make a promise. Today, the word could make its user seem a little old-fashioned or even arrogant. But the word certainly makes one's vow to keep a promise, seem absolute. Promising with the word "shall" is equivalent to someone saying "mark my words," "my word is my bond," or "my word is as good as gold." The "shall" in mortgage lending is the collateral you put up to secure your loan. When you use the services of a mortgage lender, your collateral fortifies your promise to repay.

From Hens to Houses
What is collateral? Collateral can be as informal as holding onto our friends' Michael Jordan rookie card or tissue box cover collection until they pay back money that is due. In a nutshell, collateral is a type of security to the lender, such as a mortgage lender. This is reserved for situations wherein the borrower neglects to pay back the loan taken out. Four forms of formal collateral are used in secured lending:

* business proceeds (in cash)
* intangibles (of which contract rights and accounts are two examples)
* paper (such as documents)
* trade goods (products)

What is special about the home mortgage that a mortgage lender provides is that the collateral and the asset being financed are the same object!.

Lending Without Collateral
What happens when borrowers of loans have no collateral? Instances like these sometimes arise when one does business with a mortgage lender.

In developing countries where many people lack collateral, microfinance and microlending have become a fad. Dr. Muhammad Yunus won a Nobel Prize in 2006 for his work in the field. He discovered in the 1970s that giving out small loans not only improved the lives of poor businesspeople, these loans were also returned with interest, and promptly! Microfinance is not a new concept. In fact, microlending may have existed since currency was invented. For example, Jonathan Swift, Irish author of "Gulliver's Travels" in 1726 - on which a Disney cartoon was based - created his own microlending system. The amount and term of the loan was limited, and the interest rate was low. In the case of Swift's system, the rate was 8%. While microlending is practical in developing countries, the higher cost of living in industrialized nations makes it necessary for a mortgage lender to require collateral.

Today, we rarely use the term "shall" when making verbal promises to our bosses, teachers, or friends. Still the saying that a person is as good as his or her word holds as true now as when MacArthur made his famous vow in 1942. So when we take out a mortgage from a mortgage lender, collaterals such as houses help ensure we strive to keep our end of the bargain.