Gustavo is a young doctor who lives in a country with a relatively inefficient legal and financial system. When Gustavo applied for a mortgage, he found that banks usually required collateral for up to 300% of the amount of the loan. Why might banks require that much collateral in a financial system like Gustavo's country?

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Business

Erick Boyer

24 September, 22:52

Gustavo is a young doctor who lives in a country with a relatively inefficient legal and financial system. When Gustavo applied for a mortgage, he found that banks usually required collateral for up to 300% of the amount of the loan. Why might banks require that much collateral in a financial system like Gustavo's country?

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Nicholas Bright · Answer 1

The answer is: Gustavo probably lives in a country where civil cases are too lengthy and take too much time. So the costs for the bank to repossess a real estate property are very high both in lawyers and procedures, and in the cost of money being immobile.

Explanation:

Gustavo probably lives in a country were mortgage repossessions are very lengthy and costly processes. I once lived in a country where a civil case between private parties (for example a bank and its client) could last between 10 to 15 years. That is a very long time for a bank to be able to evict Gustavo and repossess the real estate property. That makes issuing mortgages very risky for the bank, so to lower their risk they ask for an unusually large collateral that can cover all their legal expenses and the cost of the money being immobile.