108. What do you know about mortgage in Western markets?

Mortgage is a loan, used to purchase a home, where the property serves as the borrower’s collateral. A mortgage is just a promise to pay the loan back over a long period of time using you house as collateral. In simple terms, the bank or mortgage lender loans you a large chunk of money (typically 80% of the price of the home), which you must pay back with interest over a set period of time. If you fail to pay back the loan, the lender can take your home through a legal process known as foreclosure.

In the western market, mortgage market is very complicated segment in financial service market, which has many players, who use and reused the collateral from mortgage loan to issue mortgage-backed securities, CMO’s (collaterazed mortgage obligations), floater etc. This available mortgage tools make mortgage market less risky, more liquid, with lower mortgage rates and make mortgage market bigger.

Key players. There are the homeowners, there are the banks who are giving mortgage loan. But then, there are the number of other players that are invisible to much of the public, but which really dominate the market. There are the government agencies (Fannie Mae and Freddie Mac), which buy the mortgages from lenders, and then sell them as the securities in the bond market; investment banks like Kidder Peabody and Goldman Sachs, and others individual investors and legal entities, which buy these mortgage-backed securities and get their interest; hedge funds which buy the most complicated, residual piece, and try to hedge it, creating more and more pieces and try to allocate the risks.

Primarily mortgage market in western markets proposes very flexible condition of the mortgage loans: Max 80% loan to value ratio, Max term 30 years, rates various from 3 to 5% and depends on the type of mortgage (Fixed-rate mortgage: principal and interest stays the same over the life of the loan; Adjustable-rate(ARM) or variable-rate: interest rate starts lower, but can fluctuate after a set initial period, balloon mortgage etc.

109. What do you know about due diligence and its role at financial markets?

Due diligence is an investigation of a business or person prior to signing a contract, or an act with a certain standard of care.

The theory behind due diligence holds that performing this type of investigation contributes significantly to informed decision making by enhancing the amount and quality of information available to decision makers and by ensuring that this information is systematically used to deliberate in a reflexive manner on the decision at hand and all its costs, benefits, and risks.

A common example of due diligence in various industries is the process through which a potential acquirer evaluates a target company or its assets for an acquisition. 

The three main categories of due diligence are legal, financial and commercial. Although these have traditionally been distinct, the best due diligence programmes maintain an element of close cooperation as the work in one area can often inform the checks being carried out elsewhere. Many practices now offer an integrated service that brings these strands together.

Legal due diligence seeks to examine the legal basis of a transaction, for example to ensure that a target business holds or can exercise the intellectual property rights that are crucial to the future success of the company. Other areas that would most likely be explored include: legal structure, contracts, loans, property, employment, pending litigation.

Financial due diligence focuses on verifying the financial information provided and to assess the underlying performance of the business. This would be expected to consider areas such as: earnings, assets, liabilities, cash flow, debt, management

Commercial due diligence considers the market in which a business sits, for example involving conversations with customers, an assessment of competitors and a fuller analysis of the assumptions that lie behind the business plan. All of this is intended to determine whether the business plan stands up to the realities of the market.

Other types of due diligence cover areas such as taxation, pensions, IT systems and intellectual property.

In today’s precarious financial market, it is no surprise that the number of mergers and acquisitions has significantly declined. Understandably, buyers and lenders have become more cautious, patient and selective, but most would readily admit that opportunities and “good deals” still exist. Therefore, now more than ever, buyers and lenders should rely on thorough financial due diligence for answers and guidance. Effective financial due diligence has always been a key component of a successful merger or acquisition.