Home and construction loans - USA and Germany compared

Home loans market

The mortgage and home loan market is an integral part of any country’s economy. The sudden decline in this sector in the US market and the decline in real estate industry in Germany has put a big question mark onto the existence of the whole sector.

The crisis

The United States market is suddenly plunging down due to the heavy losses in the sub prime mortgage group; this has led to a chain of events along the financial sector and the investments and banking.

The entire chain of events was triggered by the crisis in New Century  Financial Corp debacle. The company is now under investigation for stock sales and accounting error and New York Stock exchange has halted the company’s stock trading. Their share lost almost 78% values over last month.

This California based firm is famous for lending to borrowers with weak credits. Lending to homeowners and buyers with bad credit has become a threat for the healthy U.S. economy. Many of the sub prime lenders are filing for bankruptcy. The main reasons attributed for this major crisis in the market are:-
Lending for bad credit - In US the last two years has seen a surge in these phenomena. People, who already have a mortgage loan to pay off, started taking another one to pay off the earlier loan. This was for the very simple reason that loan rates were going down and it was a retort to save money. But the means backlashed on to the whole economy. Many people now who had got home approved with help of loans are in distress.

No fixed locks rates - There are no fixed lock rates in the home and construction loan market. A lock rate is an agreement between the borrower and the lender specifying number of days for which a loan's interest rate and points will be guaranteed by the lender. The not-so-strict US loan rules helped in borrowers getting lower interest rates. However, these rates proved to be unsustainable for the lenders. FED may raise loan rates in the upcoming year and this will burden the borrowers to the extreme limit. Thus more borrowers will default in interest and loan repayment. This eventually will bankrupt the lenders.

Germany’s state

In Germany the situation has not ended into a crisis. But the problems in the home and construction loan market still looms high above. Germany is exactly at the other end of the pole with regards to this sector. There are certain clauses here because of which market is declining here:-

Long locked periods - Germany has a lock period for almost 10 - 15 years for construction loans (aka Baufinanzierung).This prevents the client from benefiting from any changes in the interest rates in world market. The borrower is tied up to the same monotonous rate for the whole period.

Real estate decline - The market for real estate has gone down to a considerable limit in the last part of the decade. The loan market lapse has affected the industry badly.

Eligibility for a Darlehen - The borrower has to have at least 20% of the entire loan amount with him to take a loan. This reduced the chance of mortgage loans to the needy with a necessity for the money.

Comparison of the US and German markets

Both the markets are poles apart. The very same point where US offers loans to clients even with bad credit, Germany goes for higher options in the case of a mortgage (aka Hypothek) asking them to show proof that they have at least 20% of the requested amount. The lock rates in US are not fixed yet but in Germany they are fixed for as long as ten to fifteen years. The market decline in US has shown its effect even on the markets in Germany. US is suffering a backlash in the mortgage sector and Germany in the real estate and the Finanzierung for the mortgage sector.

Tougher standards

With regards to the decline in the markets worldwide, the US regulators have set up new standards for the sector.  New Federal Rules  have been issued to the lender, like:

The borrower should be more careful now. Many are still in their fixed rate period, after it gets over they will have to pay a huge interest and they are in for a shock. They could find themselves unable to afford monthly payments after the initial "teaser" rate expires and may have to make extra payments for taxes and other expenses.


They can even be at the risk of losing their home. So with no demarcation between the US or the German market, the thing that public should keep in mind is to avoid getting into loan deals which would prove risky later.