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The importance of property rights

admin — Wed, 22 Jul 2009 13:59:23 +0000

The buyer of an apple, a CD, a television set, or an automobile generally takes the item home. The buyer of a steamship or an office building, though, may never touch it. When exchange occurs, it’s really th the item that change hands.
(1) the right to exclusive use of the property (that is, the owner has sole possession, control, and use of the property-including the right to exclude others);
(2) legal protection against invasion from other individuals who would seek to use or abuse the property without the owner’s permission; and
(3) the right to transfer, sell, exchange, or mortgage the property.
Private owners can do anything they want with their property as long as they do not use it in a manner that invades or infringes on the rights of another. For example, I cannot throw the hammer that I own through the television set that you own. If I did, I would be violating your property right to your television. The same is true if I operate a factory spewing out pollution harming you or your land.5 Because an owner has the right to control the use of property, the owner also must accept responsibility for the outcomes of that control.
In contrast to private ownership, common-property ownership occurs when multiple people simultaneously have or claim ownership rights to a good or resource. None of the common owners can prevent the others from using or damaging the property. Most beaches, lakes, and parks are examples of commonly owned property. The distinction between private- and common-property ownership is important because common ownership does not create the same powerful incentives as private ownership. Economists are fond of saying that when everybody owns something, nobody owns it.
Clearly defined and enforced private-property rights are a key to economic proe Ores because of the powerful incentive effects that follow from private ownership of goods and resources.

The middleman as a cost reducer

admin — Mon, 22 Jun 2009 13:56:40 +0000

Middlemen provide buyers and sellers information at a lower cost and arrange trades between them. Many people think middlemen just add to the buyer’s expense without performing a useful function. However, because of transaction costs, without middlemen, many trades would never happen (nor would the gains from them be realized). An auto dealer, for example, is a middleman. An auto dealer helps both the manufacturer and the buyer. The dealer helps buyers by maintaining an inventory of vehicles for them to choose from. Knowledgeable salespeople hired by the dealer help car shoppers quickly learn about the vehicles they’re interested in and the pros and cons of each. Car buyers also like to know that a local dealer will honor the manufacturer’s warranty and provide parts and service for the car. The dealer helps manufacturers by handling tasks like these so they can concentrate on designing and making better cars.
Grocers are also middlemen. Each of us could deal with farmers directly to buy our food-probably at a lower monetary cost. But that would have a high opportunity cost. Finding and dealing with different farmers for every product we wanted to buy would take a lot of time. Alternatively, we could form consumer cooperatives, banding together to eliminate the middleman, using our own warehouses and our own volunteer labor to order, receive, display, distribute, and collect payment for the food. In fact, some cooperatives like this do exist. But most people prefer instead to pay a grocer to provide all of the goods they want rather than trying to trade with different farmers.
Stockbrokers, realtors, publishers, and merchants of all sorts are other kinds of middlemen. For a fee, they reduce transaction costs for both buyers and sellers. By making exchanges cheaper and more convenient, middlemen cause more efficient trades to happen. In so doing, they themselves create value.

Transaction cost – a barrier to trade

admin — Fri, 22 May 2009 13:55:37 +0000

How many times have you been sitting home late at night, hungry, wishing you had a meal from your favorite fast-food restaurant? You would gladly pay the $4 price for the value meal you have in mind, but you feel it is just not worth the time and effort to get dressed and make that drive. The costs of the time, effort, and other resources necessary to search out, negotiate, and conclude an exchange are called transaction costs. High transaction costs can be a barrier to potentially productive exchange.
Because of transaction costs, we should not expect all potentially valuable trades to take place, any more than we expect all useful knowledge to be learned, all safety measures to be taken, or all potential “A” grades to be earned. Frequent fliers know that if they never miss a flight, they are probably spending too much time waiting in airports. Similarly, the seller of a car, a house, or a ballet ticket knows that finding the one person in the world willing to pay the most money for the good is not worth the enormous effort it would take to find him or her. Information is costly. That is one reason that perfection in exchange, as in most things we do, is seldom worth achieving.
The Internet has significantly lowered transaction costs. The auction Web site eBay enables sellers to reach millions of potential buyers with little effort and few costs. Buyers can easily search eBay for items they want to buy, even if the items are located halfway around the world. Other Web sites, such as MySimon and Pricescan, scour online shopping sites for the lowest prices so buyers don’t have to. Consumers can also readily find detailed information about products on any number of sites. Amazon.com posts prices, product information provided by manufacturers, and reviews from other buyers. By reducing transaction costs, the Internet creates value and wealth. It expands the number of trades that are made, and makes it faster and easier to make them.

Channeling goods

admin — Wed, 22 Apr 2009 13:54:30 +0000

By channeling goods and resources to those who value them most, trade creates value and increases the wealth created by a society’s resources. Because preferences differ among individuals, the value of an item can vary greatly from one person to another. Therefore, trade can create value by moving goods from those who value them less to those who value them more. The simple exchange between Janet and Brad also illustrates this point. Imagine for a moment that Brad and Janet had never met and instead were both eating their salads alone. Without the ability to engage in this exchange, both would have eaten their salads but not had as much enjoyment from them. When goods are moved to individuals who value them more, the total value created by a society’s limited resources is increased. The same two salads create more value when the trade occurs than when it doesn’t. It is easy to think of material things as wealth, but material things are not wealth until they are in the hands of someone who values them. A highly technical book on electronics that is of no value to an art collector may be worth several hundred dollars to an engineer. Similarly, a painting that is unappreciated by an engineer may be of great value to an art collector. Therefore, a voluntary exchange that moves the electronics book to the engineer and the painting to the art collector will increase the value of both goods. By channeling goods and resources toward those who value them most, trade creates wealth for both the trading partners and for the nation.

Pre-closing Preparations (Loan Processing)

admin — Sat, 07 Mar 2009 09:53:49 +0000

Once the lender’s underwriting department has provided final approval, the lender will begin pre-closing preparations. This normally includes the following tasks:

Obtaining certificate of adequate insurance coverage.
Scheduling the closing.
Ordering the closing documents.
Coordinating the closing with all parties involved.

The “Closings and Transactions” article goes into further detail about the closing process and requirements. After the closing, the closing agent will normally be responsible for recording the mortgage deed and title changes. The lender will then collect the loan documents from the title company.

Underwriting (Loan Processing)

admin — Sat, 07 Mar 2009 09:52:09 +0000

Only underwriters can issue a loan approval. Many lenders provide a preliminary approval after a preliminary underwriting review of the applicant data supplied to date.
The complete approval will come after the applicant’s data have been documented and verified. This verification and review stage will analyze the borrowers data in several areas:
1. Income and employment. The “Analyzing Employment and Income” article reviews the typical income and employment requirement.
2. Asset. The “Analyzing Assets”article reviews the typical asset requirement.
3. Liabilities. The “Analyzing Liabilities” article reviews the typical lender requirement for borrower liabilities.
4. Property. The “Analyzing Property Types” article reviews the typical property qualification requirement.
5. Credit history. The “Analyzing Credit Reports” article reviews the typical credit requirements.
6. Appraisal value. The “Analyzing Appraisal Reports” article reviews the typical appraisal requirements.
7. Property title. The “Analyzing the Title Report” article reviews the typical title requirements.
Once the lender has compiled the necessary documents and verifications, the lender will underwrite the completed package to determine its credit-worthiness. Sometimes, the underwriter may request additional information or documents as conditions to its approval. These conditions must be satisfied before the underwriter provides a full approval and allows the loan to close. After reviewing the completed package, the underwriter will issue one of three decisions:

Suspension. If the lender’s underwriter still requires important documents or information to make an accurate decision, the underwriter will suspend the loan application until it receives those additional documents. This suspension is not a rejection, though it may be on the verge of rejection. Instead, it is an indication that the lender requires more documents.

Approval. If the applicant is qualified and the application is relatively complete, the underwriter will issue an approval. Often, the lender’s approval will have certain conditions that must be satisfied prior to the closing. These conditions may include explanation letters, additional pay stubs or supporting documents. The application is basically credit-worthy; the required items are meant to confirm the basic strength of the applicant.

Rejection. If the borrower’s application is not qualified, the lender will reject the loan. If that happens, the borrower will have to try a different program or lender.

Verification (Loan Processing)

admin — Sat, 07 Mar 2009 09:49:58 +0000

The loan processor must verify the applicant’s qualification data, while simultaneously collecting the verification documents. Most verifications are written forms that are mailed or faxed to employers, creditors, landlords, banks, investment accounts and income sources.
For these verifications, the lender will send verification forms to the appropriate parties (borrower’s employer, bank, etc.). However, the applicant can often save time by providing extra bank statements and pay stubs, as well as canceled checks for rent payments and copies of previous appraisals. However, part of the verification process includes third-party reports, such as credit, appraisal and title insurance reports. The processor will request these reports from the appropriate parties. Depending on the applicant’s situation, the verification stage can last as little as two days to as long as three months. However, the typical verification period does last about two to three weeks. The report that requires the longest period of time is usually the appraisal, which usually takes 10 to 14 days to complete. Completed verification forms normally return to the processor within five days, as they are standard procedure for many institutions.
However, some verification forms—such as of mortgage debts, landlord confirmation and pension accounts—may take longer. Again, for faster processing, the applicant should prepare and provide necessary documents at the time of application.

Documentation (Loan Processing)

admin — Sat, 07 Mar 2009 09:48:23 +0000

The processor will examine the application packet and collect any documents still required for processing. If there are any documents still missing from the file, the lender will contact the borrower promptly, as these documents must be collected before the loan can be approved and closed. Depending on the applicant’s situation and data, additional documents may be required, such as explanation of credit problems, copies of canceled checks or additional bank statements.
To ensure speedy processing, the applicant should provide all necessary documents at the time of application. For a list of documents required, please consult the “Borrower Documents Required” article. Practically all conventional conforming loan programs share the same core document requirements:
l Pay stubs for the past two pay period. l Bank statements for the previous two months.
l Tax returns and W-2s for the past two years.
Some programs are called no income verification, no asset verification and no documentation loans. Unfortunately, many homebuyers and investors misinterpret the true program requirements. Contrary to what many people mistakenly believe, these programs will still require a good deal of borrower documents. They just don’t require as much.
The no income verification program will not require income documentation, but lenders will still require documentation of the borrower’s employment. The no asset verification program will not require documentation of the “source” of the asset funds that the borrower must have to qualify for the loan. However, the no asset verfication program will still require documentation of the current funds.
The no documentation loan is a combination of the no income verification and no asset verification programs. The “no doc” will require income and asset-source documentation, but it will still require employment, current asset and other documentation.

Loan Processing

admin — Sat, 07 Mar 2009 09:46:37 +0000

After receiving the mortgage loan application, the lender will immediately begin processing it toward closing.
Loan processing revolves around the information requested in the application and confirming the borrower’s qualification for the mortgage loan.
Most lenders follow a four-step plan when processing a loan application:
1. Documentation
2. Verification
3. Underwriting
4. Pre-closing Preparation