Importance of Liquidity
Traditional mortgage underwriting has been based on metrics which assure the lender of a sufficient asset base to cover the loan value, and the borrower’s financial profile based on a snapshot of time. This is not always an accurate representation of the borrower and misses the inevitable changes to a homeowner’s financial profile over the course of a 30-year mortgage. The JPMorgan Chase Institute publication “Trading for Liquidity” focuses on the important role that liquidity plays in a homeowner’s ability to stay current on their mortgage payments. When a homeowner with insufficient liquidity experiences an income or expense shock, they lack the funds to make their mortgage payment regardless of how much equity they have in the home. On the other hand, evidence shows that homeowners with sufficient liquidity tend to make their mortgage payments even when they have limited equity in the home.
