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From Wikipedia, the free encyclopedia
Mortgage

Property law
Part of the common law series
Acquisition of property
Gift � Adverse possession � Deed
Lost, mislaid, and abandoned property
Bailment � Licence
Estates in land
Allodial title � Fee simple
Life estate � Fee tail � Future interest
Concurrent estate � Leasehold estate
Condominiums
Conveyancing of interests in land
Bona fide purchaser � Torrens title
Estoppel by deed � Quitclaim deed
Mortgage � Equitable conversion
Action to quiet title
Limiting control over future use
Restraint on alienation
Rule against perpetuities
Rule in Shelley's Case
Doctrine of worthier title
Nonpossessory interest in land
Easement � Profit
Covenant running with the land
Equitable servitude
Related topics
Fixtures � Waste � Partition
Riparian water rights
Lateral and subjacent support
Assignment � Nemo dat
Other areas of the common law
Contract law � Tort law
Wills and trusts
Criminal Law � Evidence
A mortgage is a method of using property as security for the payment of a debt.
The term mortgage (from Law French, lit. dead pledge) refers to the legal device used in securing the property, but it is also commonly used to refer to the debt secured by the mortgage.
In most jurisdictions mortgages are strongly associated with loans secured on real estate rather than other property (such as ships) and in some cases only land may be mortgaged. Arranging a mortgage is seen as the standard method by which individuals or businesses can purchase residential or commercial real estate without the need to pay the full value immediately.
In many countries it is normal for home purchase to be funded by a mortgage. In countries where the demand for home ownership is highest, strong domestic markets have developed, notably in Great Britain, Spain and the United States.
Contents
1 Participants and variant terminology
1.1 Creditor
1.2 Debtor
1.3 Other participants
2 Legal Aspects
2.1 Mortgage by demise
2.2 Mortgage by legal charge
3 History
4 Repaying the capital
4.1 Capital & interest
4.2 Interest only
4.3 No capital or interest
4.4 Interest and partial capital
5 Mortgages in the United States
5.1 Mortgage loan types
5.2 United States Mortgage Process
5.3 Predatory mortgage lending
5.4 Costs
5.5 The United States mortgage finance industry
6 Mortgage in the UK
6.1 Mortgage types
6.1.1 Self Cert Mortgage
6.1.2 100% Mortgages
6.2 UK Mortgage Process
7 Islamic mortgages
8 See also
8.1 General, or related to more than one nation
8.2 Related to the United Kingdom
8.3 Related to the United States
8.4 Other nations
8.5 Legal details
9 References
10 External links

Participants and variant terminology
Each legal system tends to share certain concepts but vary in the terminology and jargon they use.
In general terms the main participants in a mortgage are:

Creditor
The creditor has legal rights to the debt secured by the mortgage and often make a loan to the debtor of the purchase money for the property. Typically, creditors are banks, insurers or other financial institutions who make loans available for the purpose of real estate purchase.
A creditor is sometimes referred to as the mortgagee or lender.

Debtor
The debtor or debtors must meet the requirements of the mortgage conditions (and often the loan conditions) imposed by the creditor in order to avoid the creditor enacting provisions of the mortgage to recover the debt. Typically the debtors will be the individual home-owners, landlords or businesses who are purchasing their property by way of a loan.
A debtor is sometimes referred to as the mortgagor, borrower, or obligor

Other participants
Due to the complicated legal exchange, or conveyance, of the property, one or both of the main participants are likely to require legal representation. The terminology varies with legal jurisdiction; see lawyer, solicitor and conveyancer.
Because of the complex nature of many markets the debtor may approach a mortgage broker or financial adviser to help them source an appropriate creditor typically by finding the most competitive loan.
The debt is sometimes referred to as the hypothecation, which may make use of the services of a hypothecary to assist in the hypothecation.

Legal Aspects
There are essentially two types of legal mortgage.

Mortgage by demise
In a mortgage by demise, the creditor becomes the owner of the mortgaged property until the loan is repaid in full (known as "redemption"). This kind of mortgage takes the form of a conveyance of the property to the creditor, with a condition that the property will be returned on redemption.
This is an older form of legal mortgage and is less common than a mortgage by legal charge. It is no longer available in the UK, by virtue of the Land Registration Act 2002.

Mortgage by legal charge
In a mortgage by legal charge, the debtor remains the legal owner of the property, but the creditor gains sufficient rights over it to enable them to enforce their security, such as a right to take possession of the property or sell it.
To protect the lender, a mortgage by legal charge is usually recorded in a public register. Since mortgage debt is often the largest debt owed by the debtor, banks and other mortgage lenders run title searches of the real property to make certain that there are no mortgages already registered on the debtor's property which might have higher priority. Tax liens, in some cases, will come ahead of mortgages. For this reason, if a borrower has delinquent property taxes, the bank will often pay them to prevent the lienholder from foreclosing and wiping out the mortgage.
This type of mortgage is common in U.S. and, since 1925, it has been the usual form of mortgage in England and Wales (it is now the only form - see above).
In Scotland, the mortgage by legal charge is also known as standard security.

History
At common law, a mortgage was a conveyance of land that on its face was absolute and conveyed a fee simple estate, but which was in fact conditional, and would be of no effect if certain conditions were not met --- usually, but not necessarily, the repayment of a debt to the original landowner. Hence the word "mortgage," Law French for "dead pledge;" that is, it was absolute in form, and unlike a "live gage", was not conditionally dependent on its repayment solely from raising and selling crops or livestock, or of simply giving the fruits of crops and livestock coming from the land that was mortgaged. The mortgage debt remained in effect whether or not the land could successfully produce enough income to repay the debt. In theory, a mortgage required no further steps to be taken by the creditor, such as acceptance of crops and livestock, for repayment.
The difficulty with this arrangement was that the lender was absolute owner of the property and could sell it, or refuse to reconvey it to the borrower, who was in a weak position. Increasingly the courts of equity began to protect the borrower's interests, so that a borrower came to have an absolute right to insist on reconveyance on redemption. This right of the borrower is known as the "equity of redemption".
This arrangement, whereby the mortgagee (the lender) was on theory the absolute owner, but in practice had few of the practical rights of ownership, was seen in many jurisdictions as being awkwardly artificial. By statute the common law position was altered so that the mortgagor would retain ownership, but the mortgagee's rights, such as foreclosure, the power of sale and the right to take possession would be protected.
In the United States, those states that have reformed the nature of mortgages in this way are known as lien states. A similar effect was achieved in England and Wales by the Law of Property Act 1925, which abolished mortgages by the conveyance of a fee simple.
In the United States, mortgages became widely used starting in 1934. In that year, the Federal Housing Administration (FHA) lowered the down payment requirements by offering 80% loan-to-value loans. Next, banks, insurance companies, and other lenders followed the example. The FHA also lengthened loan terms by first introducing 15-year loans to supplant 3, 5, and 7-years loans which ended with a balloon payment. Until the 1930s only 40% of U.S. households owned homes; the rate today is nearly 70%. In 2003, total U.S. residential mortgage production reached a record level of $3.8 trillion through record low interest rates (though these continue to vary according to credit rating.)

Repaying the capital
There are various ways to repay a mortgage loan; repayment depends on locality, tax laws and prevailing culture.

Capital & interest
The most common way to repay a loan is make regular payments of the capital (also called principle) and interest over a set term. This is commonly referred to as (self) amortization in the U.S. and as a repayment mortgage in the UK. Depending on the size of the loan and the prevailing practise in the country the term may be short (10 years) or long (50 years plus). In the UK and U.S., 25 to 30 years is typical. Mortgage repayments, which are typically made monthly, contain a capital element and an interest element. The amount of capital included in each repayment varies throughout the term of the mortgage. In the early years the repayments are largely interest and a small part capital. Towards the end of the mortgage the repayments are mostly capital and a small part interest. In this way the repayment amount determined at outset is calculated to ensure the loan is repaid at a specified period in the future. This gives borrowers assurance that by maintaining repayment the loan will definitely be cleared at a specified date.

Interest only
The main alternative to capital and interest mortgage is an interest only mortgage, where the capital is not repaid throughout the term. This type of mortgage is common in the UK, especially when associated with a regular investment plan. With this arrangement regular contributions are made to a separate investment plan designed to build up a lump sum to repay the mortgage at maturity. This type of arrangement is called an investment-backed mortgage or is often related to the type of plan used: endowment mortgage if an endowment policy is used, similarly a Personal Equity Plan (PEP) mortgage, Individual Savings Account (ISA) mortgage or pension mortgage. Historically, investment-backed mortgages offered various tax advantages over repayment mortgages, although this is no longer the case in the UK. Investment-backed mortgages are seen as higher risk as they are dependent on the investment making sufficient return to clear the debt.
It is not uncommon for interest only mortgages to be arranged without a repayment vehicle, with the borrower gambling that the property market will rise sufficiently for the loan to be repaid by trading down at retirement (or for other less well thought-out reasons.)

No capital or interest
For older borrowers (typically in retirement), it is possible to arrange a mortgage where neither the capital nor interest is repaid. The interest is rolled up with the capital, increasing the debt each year.
These arrangements are variously called reverse mortgages, lifetime mortgages or equity release mortgages, depending on the country. The loans are typically not repaid until the borrowers die, hence the age restriction. For further details, see equity release.

Interest and partial capital
In the U.S. a partial amortization or balloon loan is one where the amount of monthly payments due are calculated (amortized) over a certain term, but the outstanding capital balance is due at some point short of that term. In the UK, a part repayment mortgage is quite common, especially where the original mortgage was investment-backed and on moving house further borrowing is arranged on a capital and interest (repayment) basis.

Mortgages in the United States
Mortgage loan types
There are many types of mortgage loans. The two basic types of amortized loans are the fixed rate mortgage (FRM) and adjustable rate mortgage (ARM).
U.S. Historical mortgage rates for a 30-year FRM.In a FRM, the interest rate, and hence monthly payment, remains fixed for the life (or term) of the loan. In the U.S., the term is usually for 10, 15, 20, or 30 years. The only increase a consumer might see in their monthly payments would result from an increase in their property taxes or insurance rates (paid using an escrow account, if they've opted to use an escrow). But payments for principal and interest will be consistent throughout the life of the loan using an FRM.
In an ARM, the interest rate is fixed for a period of time, after which it will periodically (annually or monthly) adjust up or down to some market index. Common indices in the U.S. include the Prime Rate, the London Interbank Offered Rate (LIBOR), and the Treasury Index ("T-Bill"). Other indexes like 11th District Cost of Funds Index, COSI, and MTA, are also available but are less popular.
Adjustable rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where unpredictable interest rates make fixed rate loans difficult to obtain. Since the risk is transferred, lenders will usually make the initial interest rate of the ARM's note anywhere from 0.5% to 2% lower than the average 30-year fixed rate.
In most scenarios, the savings from an ARM outweigh its risks, making them an attractive option for people who are planning to keep a mortgage for ten years or less.
Additionally, lenders rely on credit reports and credit scores derived from them. The higher the score, the more creditworthy the borrower is assumed to be. Favorable interest rates are offered to buyers with high scores. Lower scores indicate higher risk to the lender, and lenders require higher interest rates in such scenarios to compensate for increased risk.
A partial amortization or balloon loan is one where the amount of monthly payments due are calculated (amortized) over a certain term, but the outstanding principal balance is due at some point short of that term. This payment is sometimes referred to as a "balloon payment". A balloon loan can be either a Fixed or Adjustable in terms of the Interest Rate. Many Second Trust mortgages use this feature. The most common way of describing a balloon loan uses the terminology X due in Y, where X is the number of years over which the loan is amortized, and Y is the year in which the principal balance is due. A contract could be written up so there would be more than one "ballon payment" required to be paid during the life of the loan.

Other loan types:
blanket loan
bridge loan
budget loan
Commercial Loan
deed of trust
equity loan
hard money loan
package loan
participation mortgage
piggyback loan
reverse mortgage
repayment mortgage
seasoned mortgage
term loan or interest-only loan
wraparound mortgage
Negative amortization loan

United States Mortgage Process
In the U.S., the process by which a mortgage is secured by a borrower is called origination. This involves the borrower submitting an application and documentation related to his/her financial history to the underwriter. Many banks now offer "no-doc" or "low-doc" loans in which the borrower is required to submit only minimal financial information. These loans carry a slightly higher interest rate (perhaps 0.25% to 0.50% higher) and are available only to borrowers with excellent credit.
Sometimes, a third party is involved, such as a mortgage broker. This entity takes the borrower's information and reviews a number of lenders, selecting the ones that will best meet the needs of the consumer.
Loans are often sold on the open market to larger investors by the originating mortgage company. Many of the guidelines that they follow are suited to satisfy investors. Some companies, called correspondent lenders, sell all or most of their closed loans to these investors, accepting some risks for issuing them. They often offer niche loans at higher prices that the investor does not wish to originate.
If the underwriter is not satisfied with the documentation provided by the borrower, additional documentation and conditions may be imposed, called stipulations. The meeting of such conditions can be a daunting experience for the consumer, but it is crucial for the lending institution to ensure the information being submitted is accurate and meets specific guidelines. This is done to give the lender a reasonable guarantee that the borrower can and will repay the loan. If a third party is involved in the loan, it will help the borrower to clear such conditions.
The following documents are typically required for traditional underwriter review. Over the past several years, use of "automated underwriting" statistical models has reduced the amount of documentation required from many borrowers. Such automated underwriting engines include Freddie Mac's "Loan Prospector" and Fannie Mae's "Desktop Underwriter". For borrowers who have excellent credit and very acceptable debt positions, there may be virtually no documentation of income or assets required at all. Many of these documents are also not required for no-doc and low-doc loans.

Credit Report
1003 � Uniform Residential Loan Application
1004 � Uniform Residential Appraisal Report
1005 � Verification Of Employment (VOE)
1006 � Verification Of Deposit (VOD)
1007 � Single Family Comparable Rent Schedule
1008 � Transmittal Summary
Copy of deed of current home
Federal income tax records for last two years
Verification Of Mortgage (VOM) or Verification Of Payment (VOP)
Borrower's Authorization
Purchase Sales Agreement
1084A and 1084B (Self-Employed Income Analysis) and 1088 (Comparative Income Analysis) -- used if borrower is self-employed

Predatory mortgage lending
There is concern in the U.S. that consumers are often victims of predatory mortgage lending [1]. The main concern is that mortgage brokers and lenders, operating legally, are finding loopholes in the law to obtain additional profit.

Costs
Lenders may charge various fees when giving a mortgage to a mortgagor. These include entry fees, exit fees, administration fees and lenders mortgage insurance. There are also settlement fees (closing costs) the settlement company will charge. In addition, if a third party handles the loan, it may charge other fees as well.

The United States mortgage finance industry
Mortgage lending is a major category of the business of finance in the United States of America. Mortgages are commercial paper and can be conveyed and assigned freely to other holders. In the U.S., Federal government created several programs, or government sponsored entities, to foster mortgage lending, construction and encourage home ownership. These programs include the Government National Mortgage Association (known as Ginnie Mae), the Federal National Mortgage Association (known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (known as Freddie Mac). These programs work by buying a large number of mortgages from banks and issuing (at a slightly lower interest rate) "mortgage-backed bonds" to investors, which are known as or Mortgage Backed Securities (MBS).
This allows the banks to quickly relend the money to other borrowers (including in the form of mortgages) and thereby to create more mortgages than the banks could with the amount they have on deposit. This in turn allows the public to use these mortgages to purchase homes, something the government wishes to encourage. The investors, meanwhile, gain low-risk income at a higher interest rate (essentially the mortgage rate, minus the cuts of the bank and GSE) than they could gain from most other bonds.
Securitization is a momentous change in the way that mortgage bond markets function which has grown rapidly in the last 10 years as a result of the wider dissemination of technology in the mortgage lending world. For borrowers with superior credit, government loans and ideal profiles, this securitization keeps rates almost artificially low, since the pools of funds used to create new loans can be refreshed more quickly than in years past, allowing for more rapid outflow of capital from investors to borrowers without as many personal business ties as the past.

For more information on Mortgages, please visit Wikipedia

From Wikipedia, the free encyclopedia
Loan
A loan is a type of debt. All material things can be lent but this article focuses exclusively on monetary loans. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower. The borrower initially receives an amount of money from the lender, which they pay back, usually but not always in regular installments, to the lender. This service is generally provided at a cost, referred to as interest on the debt.
Acting as a provider of loans is one of the principal task for financial institutions. For other institutions issuing of debt contracts, such as bonds is a typical source of funding. Bank loans and credit are one way to increase the money supply.
Other types of debt include mortgages, credit card debt, bonds, and lines of credit. A mortgage is a very common type of debt instrument, used by many individuals to purchase housing. In this arrangement, the money is used to purchase the property. The bank, however, is given the title to the house until the mortgage is paid off in full. If the borrower defaults on the loan, the bank can repossess the house and sell it, to get their money back.
Abuse in the granting of loans is known as predatory lending. It usually involves granting a loan in order to put the borrower in a position that one can gain advantage over him or her.

Criticism of banks and bank loans
The neutrality of this section is disputed.
Please see discussion on the talk page.
Most people believe that bank loans are generally funded by deposits -- or other people's money. This is true for Islamic banks, but not for Western banks. The source for the majority of the money supply in western economies is through the loans issued by banks much like the one down your street. However, regardless of the size of the loan, according to a former Chairman of the Federal Reserve Board, western bank loans are actually based on fraud. Why? Because bank loans are funded not by deposits on hand, but by the borrower's own future credit or "promise to pay". Robert Hemphill, former Credit Manager of the Federal Reserve Bank in Atlanta said "If all the bank loans were paid, no one could have a bank deposit, since there would not be a dollar of coin or currency in circulation... If the banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless situation is almost incredible -- but there it is" [1]. Mr. Hemphill is saying that the act of issuing the loan itself is the process of creating "synthetic money", meaning the bank is actually creating money when a loan is issued. The loan itself is all credit or "debt" and is created out of thin air with a few keystrokes on the keyboard. [2] Hemphill also admits that if all the bank loans were paid, then there would be no money in circulation. The corollary to that is that because there is always money in circulation, it is evidence that there are always loans outstanding -- debts which will never be paid without entirely extinguishing the money supply
Few people realize that at the moment any loan is requested, there is no money in existence to cover the loan. This is substantiated by G. Edward Griffin (President of American Media) who says "When banks place credits into your checking account, they are merely pretending to lend you money. In reality, they have nothing to lend".[3] This is by definition a pure fiat[4] money supply. Herein lies the fraud, and it is virtually the same thing as check kiting, except this is loan kiting on the grandest scale. When the borrower signs the promissory note as part of the loan application process, the borrower rarely understands that after leaving the bank, the bank uses that promissory note as the very asset by which the loan is funded. The asset used is the signature of the borrower, where they commit to pay the bank over time the legal tender the bank has just created in exchange for their signature. Modern bank loans are no different to the money changing that has been going on for thousands of years where one asset is exchanged for another, liquidated, and returned to the original asset bearer (encumbered with a charge in the form of compound interest).
The problem with generating loans by this method is that the bank always generates the principal, but it never generates the interest. It is like a dog chasing it's tail -- it can never catch it. In order for the economy of the nation to continue to prosper, ever larger sums (loans) must be continually created and debt must ever increase (in nearly exponential fashion) in order for those who have loans to be able to pay them, and for there to be enough money in existence to carry on day to day commerce across the nation and the world. "The only way new money (which is not true money, but rather credit representing a debt), goes into circulation in America is when it is borrowed from the bankers. When the State and people borrow large sums, we seem to prosper. However, the bankers "create" only the amount of the principal of each loan, never the extra amount needed to pay the interest. Therefore, the new money never equals the new debt added. The amounts needed to pay the interest on loans is not "created," and therefore does not exist! Under this system, where new debt always exceeds new money no matter how much or how little is borrowed, the total debt increasingly outstrips the amount of money available to pay the debt. The people can never, ever get out of debt!" [5]
However, a thinking person will now realize that if all the loans were called in at once, the system would collapse because not enough money has been created to pay the debts as only the principal was created by the bank, but not the interest. Herein lies the fraud as well, since it is readily apparent that since the banks involved in this system do not have enough assets to cover their liabilities, they must be insolvent. Currently, laws in the US and Canada forbid banks from conducting business in a state of insolvency, but they continue to do so anyway because there appears to be no other choice available.
There has been considerable effort in the past to hide the fraudulent way in which loans are generated, but that is changing with the advent of the internet. Books have been written and websites are available offering documentaries that have been recommended and validated by famous individuals such as Milton Friedman (Nobel Laureate in Economics), Arun Gandhi (M.K. Gandhi Institute for Nonviolence), famous scholar Cleon Skousen (author of the Naked Capitalist and the Naked Communist), and G. Edward Griffin (author of the Creature from Jekyl Island).

For more information on Loans, please visit Wikipedia

From Wikipedia, the free encyclopedia
Bank
A bank is an institution that provides financial service, particularly taking deposits and extending credit.
Currently the term bank is generally understood as an institution that holds a banking license. Banking licenses are granted by bank regulatory authorities and provide rights to conduct the most fundamental banking services such as accepting deposits and making loans. There are also financial institutions that provide certain banking services without meeting the legal definition of a bank, a so called non-banking financial company.
Banks have a long history, and have influenced economies and politics for centuries.
The word bank is derived from the Italian banca, which is derived from German language and means bench. The terms bankrupt and "broke" are similarly derived from banca rotta, which refers to an out-of-business bank, having its bench physically broken. Money lenders in Northern Italy originally did business in open areas, or big open rooms, with each lender working from his own bench or table.
Traditionally, a bank generates profits from transaction fees on financial services and from the interest it charges for lending. In recent history, with historically low interest rates limiting banks' ability to earn money by lending deposited funds, much of a bank's income is provided by overdraft fees and riskier investments.
Contents
1 Services typically offered by banks
2 Types of Bank
2.1 Types of retail banks
2.2 Types of investment banks
2.3 Both combined
2.4 Other types of banks
3 Banks in the economy
3.1 Role in the money supply
3.2 Size of global banking industry
3.3 Bank crises
4 Regulation
5 Public perceptions of banks
6 Profitability
7 Bank Size Information
7.1 Top ten banking groups in the world ranked by tier 1 capital in 2004 (in U.S. dollars)
7.2 Top ten banking groups in the world ranked by assets in 2003 (in U.S. dollars)
7.3 Top ten bank holding companies in the world ranked by profit in 2003 (in U.S. dollars)
7.4 Top ten bank holding companies in the U.S. ranked by deposits (in U.S. dollars)
8 History of banking

Services typically offered by banks
Although the type of services offered by a bank depends upon the type of bank and the country, services provided usually include:
Taking deposits from the general public and issuing checking and savings accounts
Making loans to individuals and businesses
Cashing cheques
Facilitating money transactions such as wire transfers and cashiers checks
Issuing credit cards, ATM, and debit cards
Storing valuables, particularly in a safe deposit box

Types of Bank
Banks' activities can be characterised as retail banking, dealing direct with individuals and small businesses, and investment banking, relating to activities on the financial markets. Most banks are profit-making, private enterprises. However, some are owned by government, or are non-profit making.
In some jurisdictions retail and investment activities are, or have been, separated by law.
Central banks are non-commercial bodies or government agencies often charged with controlling interest rates and money supply across the whole economy. They act as Lender of last resort in event of a crisis.

Types of retail banks
Commercial bank, is the term used for a normal bank to distinguish it from an investment bank. Since the two no longer have to be under separate ownership, some use the term "commercial bank" to refer to a bank or a division of a bank that mostly deals with corporations or large businesses.
Community development bank are regulated banks that provide financial services and credit to underserved markets or populations.
Postal savings banks are savings banks associated with national postal systems.
Private banks manage the assets of high net worth individuals.
Offshore banks are banks located in jurisdictions with low taxation and regulation, . Many offshore banks are essentially private banks.
Savings banks traditionally accepted savings deposits and issued mortgages. Today, some countries have broadened the permitted activities of savings banks.
Building societies and Landesbanks both conduct retail banking.
Ethical banks are banks that prioritize the transparency of all operations and make only social-responsible investments.

Types of investment banks
Investment banks "underwrite" (guarantee the sale of) stock and bond issues and advise on mergers.
Merchant banks were traditionally banks which engaged in trade financing. The modern definition, however, refers to banks which provide capital to firms in the form of shares rather than loans. Unlike Venture capital firms, they tend not to invest in new companies.

Both combined
Universal banks, more commonly known as a financial services company, engage in several of these activities. For example, First Bank, is a very large bank, is involved in commercial and retail lending; finally, its subsidiaries in tax-havens offer offshore banking services to customers in other countries. Almost all large financial institutions are diversified and engage in multiple activities. In Europe and Asia, big banks are very diversified groups that, among other services, also distribute insurance, hence the term bancassurance.

Other types of banks
Islamic banks adhere to the concepts of Islamic law. Islamic banking revolves around several well established concepts which are based on Islamic canons. Since the concept of Interest is forbidden in Islam, all banking activities must avoid interest. Instead of interest, the Bank earns profit (mark-up) and fees on financing facilities that it extends to the customers. Also, deposit makers earn a share of the Bank�s profit as opposed to a predetermined interest.

Banks in the economy

Role in the money supply
A bank raises funds by attracting deposits, borrowing money in the inter-bank market, or issuing financial instruments in the money market or a capital market. The bank then lends out most of these funds to borrowers.
However, it would not be prudent for a bank to lend out all of its balance sheet. It must keep a certain proportion of its funds in reserve so that it can repay depositors who withdraw their deposits. Bank reserves are typically kept in the form of a deposit with a central bank. This behaviour is called fractional-reserve banking and it is a central issue of monetary policy. Some governments (or their central banks) restrict the proportion of a bank's balance sheet that can be lent out, and use this as a tool for controlling the money supply. Even where the reserve ratio is not controlled by the government, a minimum figure will still be set by regulatory authorities as part of bank regulation.

Size of global banking industry
Worldwide assets of the largest 1,000 banks grew 15.5% in 2005 to reach a record $60.5 trillion. This follows a 19.3% increase in the previous year. EU banks held the largest share, 50% at the end of 2005, up from 38% a decade earlier. The growth in Europe�s share was mostly at the expense of Japanese banks whose share more than halved during this period from 33% to 13%. The share of US banks also rose, from 10% to 14%. Most of the remainder was from other Asian and European countries.
The US had by far the most banks (7,540 at end-2005) and branches (75,000) in the world. The large number of banks in the US is an indicator of its geographical dispersity and regulatory structure resulting in a large number of small to medium sized institutions in its banking system. Japan had 129 banks and 12,000 branches. In Western Europe, Germany, France and Italy had more than 30,000 branches each. This was twice the number of branches in the UK. [1]

Bank crises
Banks are susceptible to many forms of risk which have triggered occasional systemic crises. Risks include liquidity risk (the risk that many depositors will request withdrawals beyond available funds), credit risk (the risk that those that owe money to the bank will not repay), and interest rate risk (the risk that the bank will become unprofitable if rising interest rates force it to pay relatively more on its deposits than it receives on its loans), among others.
Banking crises have developed many times throughout history when one or more risks materialize for a banking sector as a whole. Prominent examples include the U.S. Savings and Loan crisis in 1980s and early 1990s, the Japanese banking crisis during the 1990s, and the bank run that occurred during the Great Depression, and the recent liquidation by the central Bank of Nigeria, where about 25 banks were liquidated.

Regulation
Main article: Bank regulation
The combination of the instability of banks as well as their important facilitating role in the economy led to banking being thoroughly regulated. The amount of capital a bank is required to hold is a function of the amount and quality of its assets. Major banks are subject to the Basel Capital Accord promulgated by the Bank for International Settlements. In addition, banks are usually required to purchase deposit insurance to make sure smaller investors are not wiped out in the event of a bank failure.
Another reason banks are thoroughly regulated is that ultimately, no government can allow the banking system to fail. There is almost always a lender of last resort�in the event of a liquidity crisis (where short term obligations exceed short term assets) some element of government will step in to lend banks enough money to avoid bankruptcy.

Public perceptions of banks
In United States history, the National Bank was a major political issue during the presidency of Andrew Jackson. Jackson fought against the bank as a symbol of greed and profit-mongering, antithetical to the democratic ideals of the United States.
Currently, many people are outraged due to various banking policies that take advantage of customers. Specific concerns are policies that permit banks to hold deposited funds for several days, policies that permit banks to apply withdrawals before deposits, policies that permit applying withdrawals from greatest to least, which is most likely to cause the greatest overdraft, policies that allow backdating funds transfers and fee assessments, and policies that authorize electronic funds transfers despite an overdraft.
In response to the perceived greed and socially-irresponsible all-for-the-profit attitude of banks, in the last few decades a new type of banks called ethical banks have emerged, which only make social-responsible investments (for instance, no investment in the arms industry) and are transparent in all its operations.

Profitability
Large banks in the United States are some of the most profitable corporations, especially relative to the small market shares they have. This amount is even higher if one counts the credit divisions of companies like Ford, which are responsible for a large proportion of those company's profits. For example, the largest bank, Citigroup, which for the past 3 years has made more profit than any other company in the world, has only a 5% market share. Now if Citigroup were to be as dominant in its industry as a Home Depot, Starbucks, or Wal Mart in their respective industries, with a 30% market share, it would make more money than the top ten non-banking U.S. industries combined.
In the past 10 years in the United States, banks have taken many measures to ensure that they remain profitable while responding to ever-changing market conditions. First, this includes the Gramm-Leach-Bliley Act, which allows banks again to merge with investment and insurance houses. Merging banking, investment, and insurance functions allows traditional banks to respond to increasing consumer demands for "one stop shopping" by enabling cross-selling of products (which, the banks hope, will also increase profitability). Second, they have moved toward risk based pricing on loans, which means charging higher interest rates for those people who they deem more risky to default on loans. This dramatically helps to offset the losses from bad loans, lowers the price of loans to those who have better credit histories, and extends credit products to high risk customers who would have been denied credit under the previous system. Third, they have sought to increase the methods of payment processing available to the general public and business clients. These products include debit cards, pre-paid cards, smart-cards, and credit cards. These products make it easier for consumers to conveniently make transactions and smooth their consumption over time (in some countries with under-developed financial systems, it is still common to deal strictly in cash, including carrying suitcases filled with cash to purchase a home). However, with convenience there is also increased risk that consumers will mis-manage their financial resources and accumulate excessive debt. Banks make money from card products through interest payments and fees charged to consumers and companies that accept the cards.
The banks' main obstacles to increasing profits are existing regulatory burdens, new government regulation, and increasing competition from non-traditional financial institutions.

Bank Size Information
Top ten banking groups in the world ranked by tier 1 capital in 2004 (in U.S. dollars)
Citigroup � 73 billion
HSBC � 71 billion
JP Morgan Chase � 69 billion
Royal Bank of Canada � 68 billion
Credit Agricole Group � 63 billion
Royal Bank of Scotland � 43 billion
Mitsubishi Tokyo Financial Group � 40 billion
Mizuho Financial Group � 39 billion
HBOS � 36 billion
BNP Paribas � 35 billion

Top ten banking groups in the world ranked by assets in 2003 (in U.S. dollars)
Mizuho Financial Group � 1,265 billion
Citigroup � 1,097 billion
Allianz � 1,002 billion
UBS � 907 billion
Sumitomo Mitsui Financial Group � 903 billion
Deutsche Bank � 892 billion
Fannie Mae � 888 billion
ING Group � 843 billion
BNP Paribas � 835 billion
Mitsubishi Tokyo Financial Group � 832 billion

Top ten bank holding companies in the world ranked by profit in 2003 (in U.S. dollars)
Citigroup � 21 billion
Bank of America � 15 billion
HSBC � 10 billion
Royal Bank of Scotland � 8 billion
Wells Fargo � 7 billion
JP Morgan Chase � 7 billion
UBS AG � 6 billion
Wachovia � 5 billion
Morgan Stanley � 5 billion
Merrill Lynch � 4 billion

Top ten bank holding companies in the U.S. ranked by deposits (in U.S. dollars)
As of June 30, 2004. These are U.S. deposits only. This is not a ranking of the largest U.S. based global banks.
Bank of America Corp. � 526 billion
Wells Fargo & Co. � 256 billion
Wachovia Corp. � 238 billion
J.P. Morgan Chase & Co. � 227 billion (1)
Citigroup Inc. � 193 billion
Bank One Corp. � 150 billion (1)
U.S. Bancorp � 112 billion
SunTrust Banks, Inc. � 78 billion
BB&T Corporation � 67 billion
National City Corp. � 64 billion
(1) Since this report, J.P. Morgan Chase & Co. has acquired Bank One Corp., making the combined 6/30/04 deposit total for the merged company $377 billion, vaulting it to second place on the list.

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From Wikipedia, the free encyclopedia
Debt
Debt is that which is owed. A person or company owing debt is called a debtor. An entity to whom debt is owed is called a creditor. Debt is used to borrow purchasing power from the future. Companies use debt as a part of their overall corporate finance strategy.

1 Payment
2 Types of debt
2.1 Securitization
3 Debt, inflation and the exchange rate
3.1 Inflation indexed debt
4 Debt ratings, risk and cancellation
4.1 Risk free interest rate
4.2 Ratings and creditworthiness
4.3 Cancellation
5 Effects of debt
6 Arguments against debt
7 Levels and flows
8 See also
9 External link

Payment
People or organizations often enter into agreements to borrow something. Both parties must agree on some standard of deferred payment, usually a sum of money denominated as units of a currency, but sometimes goods. For instance, one may borrow shares, in which case, one may pay for them later with the shares, plus a premium for the borrowing privilege, or the sum of money required to buy them in the market at that time.

Types of debt
There are numerous types of debt obligations. They include loans, bonds, mortgages and promissory notes. It is common to borrow large sums for major purchases, such as a mortgage, and pay it back with an agreed premium interest rate over time, or all at once at a later date (balloon payment). The amount of money outstanding is usually called a debt. The debt will increase through time if it is not repaid faster than it grows. In some systems of economics this effect is termed usury, in others, the term "usury" refers only to an excessive rate of interest, in excess of a reasonable profit for the risk accepted.
Large organizations can issue debt in the form of securities, known as bonds. Each bond entitles the holder to interest and principal repayments. Bonds are traded in the bond markets, and are widely used as relatively safe investments.

Securitization
Main article: securitization
Securitization occurs when a company lumps together a group of assets or receivables usually in different tranches determined by the riskiness of the debtor and sells them to the market through a trust. The cash flows from these receivables are used to pay the holders of this paper. Companies often do this in order to remove these assets from their balance sheets and monetize an asset. Although these assets are "removed" from the balance sheet and are supposed to be the responsibility of the trust, that does not end the company's involvement because the company often maintains what is called an interest only strip or first lost piece in the securitization. The piece that the company maintains gets hit first with any losses the trust may incur before any of the other investors see a loss, meaning that the investor in a securitization would get paid in case there are massive defaults and the company who securitized the assets would not get paid on its portion. The aforementioned brings into question whether the assets are truly of balance sheet given the company's commitment to keeping losses to investor at a minimum. Many rating agencies consider securitization debt because of their commitment to keeping these trusts loss free. If it has a cash flow coming in it can be securitized.

Debt, inflation and the exchange rate
As noted above, debt is normally denominated in a particular monetary currency, and so changes in the valuation of that currency can change the effective size of the debt. This can happen due to inflation or deflation, so it can happen even though the borrower and the lender are using the same currency. Thus it is important to agree on standards of deferred payment in advance, so that a degree of fluctuation will also be agreed as acceptable. It is for instance common to agree to "US dollar denominated" debt.
The form of debt involved in banking gives rise to a large proportion of the money in most industrialised nations (see money and credit money for a discussion of this). There is therefore a complex relationship between inflation, deflation, the money supply, and debt. The store of value represented by the entire economy of the industrialized nation itself, and the state's ability to levy tax on it, acts to the foreign holder of debt as a guarantee of repayment, since industrial goods are in high demand in many places worldwide.

Inflation indexed debt
Borrowing and repayment arrangements linked to inflation-indexed units of account are possible and are used in some countries. For example, the US government issues two types of inflation-indexed bonds, Treasury Inflation-Protected Securities (TIPS) and I-bonds. These are one of the safest forms of investment available, since the only major source of risk � that of inflation � is eliminated. A number of other governments issue similar bonds, and some did so for many years before the US government.
In countries with consistently high inflation, ordinary borrowings at banks may be inflation indexed also.

Debt ratings, risk and cancellation

Risk free interest rate
Main article: risk-free interest rate
Lendings to stable financial entities such as large companies or governments are often termed "risk free" or "low risk" and made at a so-called "risk-free interest rate". This is because the debt and interest are highly unlikely to be defaulted. A textbook example of such risk-free interest is a US Treasury security - it yields you the minimum return available in economics, but you get the security of the knowledge that the US has never defaulted on its debt instruments. A risk-free rate is commonly used in setting floating interest rates, floating interest rate is usually calculated as risk-free interest rate plus a bonus to the creditor based on the creditworthiness of the debtor.
However if the real value of a currency has changed in the meantime, the purchasing power of the money repaid may vary considerably from that which was expected at the commencement of the loan. So from a practical investment point of view, there is still considerable risk attached to "risk free" or "low risk" lendings. The real value of the money may have changed due to inflation, or, in the case of a foreign investment, due to exchange rate fluctuations.
The Bank for International Settlements is an organisation of central banks that sets rules to define how much capital banks have to hold against the loans they give out.

Ratings and creditworthiness
Debt of countries as well as private corporations is rated by rating agencies, such as Moody's, A.M. Best and Standard & Poor's. These agencies assess the ability of the debtor to honor his obligations and accordingly give him a credit rating. Moody's for example uses the letters Aaa Aa A Baa Ba B Caa Ca C, where ratings Aa-Caa are qualified by numbers 1-3. Munich Re, for example, currently is rated Aa3 (as of 2004). S&P and other rating agencies have slightly different systems using capital letters and +/- qualifiers.
A change in ratings can strongly affect a company, since its cost of refinancing depends on its creditworthiness. Bonds below Baa/BBB (Moody's/S&P) are considered junk- or high risk bonds. Their high risk of default is compensated by higher interest payments. Bad Debt is a loan that can not (partially or fully) be repaid by the debtor. The debtor is said to default on his debt. These types of debt are frequently repackaged and sold below face value.

Cancellation
Short of bankruptcy, very often debts are wholly or partially forgiven. Traditions in some cultures demand that this be done on a regular (often annual) basis, in order to prevent systemic inequities between groups in society, or anyone becoming a specialist in holding debt and coercing repayment. Under English law, when the creditor is deceived into forgoing payment, this is a crime: see Theft Act 1978.
International Third World debt has reached the scale that many economists are convinced that debt cancellation is the only way to restore global equity in relations with the developing nations.

Effects of debt
Debt allows people and organizations to do things that they otherwise wouldn't be able or allowed to. Commonly, people in industrialised nations use it to purchase houses, cars and many other things too expensive to buy with cash on hand. Companies also use debt in many ways to leverage the investment made in their private equity.
This leverage, the proportion of debt to equity, is considered important in determining the riskiness of an investment; the more debt per equity, the riskier. Debt as a whole is a sign of optimism, a society believes in its future (earnings especially), and of lack of work ethic, a society postpones the solution to present problems (when it compensates a fall in revenues, perceived as short term, by an increase in debt for instance)
Excesses in debt accumulation have been blamed for exacerbating economic problems. For example, prior to the beginning of the Great Depression debt/GDP ratio was very high. Economic agents were heavily indebted. This excess in debt, equivalent to excessive expectations on future returns, accompanied asset bubbles (stock market). When expectations corrected, deflation and credit crunch followed. Deflation effectively made debt more expansive and as Fisher explained this reinforced deflation again. In order to reduce their debt level, economic agents reduced their consumption and investment. The reduction in demand reduced business activity and caused further unemployment. Also in a direct sense, more bankruptcies occurred due to increased debt cost caused by deflation, and the reduced demand.
It is possible for some organizations to enter into alternative types of borrowing and repayment arrangements which will not result in bankruptcy. For example, companies can sometimes convert debt that they owe into equity in themselves. In this case, the lender hopes to regain something equivalent to the debt and interest in the form of dividends and capital gains of the borrower. The "repayments" are therefore proportional to what the borrower earns and so can not in themselves cause bankruptcy. Once debt is converted in this way, it is no longer known as debt.

Arguments against debt
Main article: criticism of debt
Some argue against debt as an instrument and institution, on a personal, family, social, corporate and governmental level. Economics criticism focuses on debt fostering inequality. Muslim religion forbids lending with interest, the catholic church long did, and the torah wrote that all debts had to be erased every 7 years and every 50 years. Debt from a religious view point is condemned because by tying past and future it cuts from the present where God is to be found. Feminism concentrates on the perceived coercive nature of debt contracts. Environmental critics point out the disparity between material use of resources from economic growth and the limited resources of natural production. Examples would be the low ecological yield of natural resources and the limited usable energy from the sun.

Levels and flows
Main article: debt levels and flows
Global debt underwriting grew 4.3% year-over-year to $5.19 trillion during 2004.

Bond (finance)
Consumer debt
Credit
Debt consolidation
Debt-snowball method
Default (finance)
Derivative (finance)
External debt
Financial markets
Foreign debt
Global debt
Government debt
Interest
List of finance topics
On the Genealogy of Morals
Public debt
Third world debt
Thomson Financial league tables
Time value of money
Usury

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From Wikipedia, the free encyclopedia
Consolidation
Consolidation is the act of merging many things into one. In business, it often refers to the mergers or acquisitions of many smaller companies into much larger ones. The financial accounting term of consolidation refers to the aggregated financial statements of a group company as consolidated account. The taxation term of consolidation refers to the treatment of a group of companies and other entities as one entity for tax purposes.

Contents
1 Business Consolidations
1.1 Types of Business Consolidations
1.2 Common Terminology Used in Business Consolidations
2 Accounting treatment
2.1 Reporting Intercorporate Interest � Investments in Common Stock

Business Consolidations
Types of Business Consolidations
There are three forms of business combinations:
Statutory Merger: a business combination that results in the liquidation of the acquired company�s assets and the survival of the purchasing company.
Statutory Consolidation: business combination that creates a new company in which none of the previous companies survive.
Stock Acquisition: a business combination in which the purchasing company acquires the majority, more than 50%, of the common stock of the acquired company and both companies survive.

Common Terminology Used in Business Consolidations
Parent-subsidiary relationship: the result of a stock acquisition where the parent is the acquiring company and the subsidiary is the acquired company.
Controlling Interest: When the parent company owns a majority of the common stock.
Non-controlling interest or Minority interest: the rest of the common stock that the other shareholders own.
Wholly-owned subsidiary: when the parent owns all the outstanding common stock of the subsidiary.

Accounting treatment
A company can acquire another company in two ways:
By purchasing the net assets.
By purchasing the common stock of another company.
Regardless of the method of acquisition direct costs, costs of issuing securities and indirect costs are treated:
Direct costs: the acquiring company capitalizes direct costs paid to outside parties as part of the total acquisition cost.
Costs of issuing securities: these costs reduce the issuing price of the stock.
Indirect and general costs: the acquiring company expenses these costs as they are incurred.
Purchase of Net Assets
Treatment to the acquiring company:
When purchasing the net assets the acquiring company records in its books the receipt of the net assets and the disbursement of cash, the creation of a liability or the issuance of stock as a form of payment for the transfer.

Treatment to the acquired company:
The acquired company records in its books the elimination of its net assets and the receipt of cash, receivables or investment in the acquiring company (if what was received from the transfer included common stock from the purchasing company). If the acquired company is liquidated then the company needs an additional entry to distribute the remaining assets to its shareholders.
Purchase of common stock
Treatment to the purchasing company
When the purchasing company acquires the subsidiary through the purchase of its common stock, it records in its books the investment in the acquired company and the disbursement of the payment for the stock acquired.
Treatment to the acquired company:
The acquired company records in its books the receipt of the payment from the acquiring company and the issuance of stock.
FASB 141 Disclosure Requirements FASB 141 requires disclosures in the notes of the financial statements when business combinations occur. Such disclosures are: The name and description of the acquired entity and the percentage of the voting equity interest acquired. The primary reasons for acquisition and descriptions of factors that contributed to recognition of goodwill. The period for which results of operations of acquired entity are included in the income statement of the combining entity. The cost of the acquired entity and if it applies the number of shares of equity interest issued, the value assigned to those interests and the basis for determining that value. Any contingent payments, options or commitments. The purchase and development assets acquired and written off.

Reporting Intercorporate Interest � Investments in Common Stock
1. 20 % ownership or less:
When a company purchases 20% or less of the outstanding common stock, the purchasing company�s influence over the acquired company is not significant. (APB 18 specifies conditions where ownership is less than 20% but there is significant influence).
To account for this type of investment the purchasing company uses the cost method to account for this type of investment. Under the cost method the investment is recorded at cost at the time of purchase. The company does not need any entries to adjust this account balance unless the investment is considered impaired or there are liquidating dividends, both of which reduce the investment account.
Liquidating dividends: Liquidating dividends occur when there is an excess of dividends declared over earnings of the acquired company since the date of acquisition. Regular dividends are recorded as dividend income whenever they are declared.
Impairment loss: An impairment loss occurs when there is a decline in the value of the investment other than temporary.
2. 20% to 50% ownership
When the amount of stock purchased is from 20% to 50% of the common stock outstanding the purchasing company�s influence over the acquired company is significant. (FASB interpretation 35 underlines the circumstances where the investor is unable to exercise significant influence). To account for this type of investment the purchasing company uses the equity method. Under the equity method the purchaser records its investment at the original cost. This balance increases with income and decreases for the dividends from the subsidiary that accrue to the purchaser.
Treatment of Purchase Differentials: At the time of purchase, purchase differentials arise from the difference between the cost of the investment and the book value of the underlying assets.
Purchase differentials have two components:
Goodwill: the difference between the cost of the investment and the fair market value of the underlying assets.
The difference between the Fair market value of the underlying assets and their book value.
Purchase differentials need to be amortized over their useful life.
3. More than 50% ownership
When the amount of stock purchased is 50% of the outstanding common stock, the purchasing company has control over the acquired company. Control in this context is defined as ability to direct policies and management. In this type of relationship the controlling company is the parent and the controlled company is the subsidiary. The parent company needs to issue consolidated financial statements at the end of the year to reflect this relationship. Consolidated financial statements show the parent and the subsidiary as one single entity. During the year, the parent company can use the equity or the cost method to account for its investment in the subsidiary. Each company keeps separate books. However at the end of the year a consolidation working paper is prepared to combine the separate balances and to eliminate the intercompany transactions, the subsidiary�s stockholder equity and the parent�s investment account. The result is one set of financial statements that reflect the financial results of the consolidated entity.

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