Essay on Justly Solving the Foreclosure Crisis

The world’s financial system was almost brought down in 2008 by the collapse of Lehman Brothers that was a major international investment bank at that time. The government sponsored these banks’ bailouts that were funded by tax money in order to restore the industry. Before the crisis, banks were lending irresponsible mortgages to subprime borrowers who had poor credit histories. These mortgages were purchased by banks and packaged into low-risk securities known as collateralized debt obligations (CDOs). CDOs were divided into tranches by its default risk. The ratings of those risks were determined by rating agencies such as Moody’s and Standard & Poor’s. However, those agencies were paid by banks and created an environment in which agencies were being generous to ratings since banks were their major clients.

The private label mortgage securitization collected a series of assets – most of them are high-yield junk bonds, mortgage securities, credit-default swap with varying degrees of risk. The securitization of subprime mortgages was attractive to investors due to high interest rates and high return features. More and more financial institutions started to sell private label mortgage securitization, including banks, insurance companies and so on. In 2006, the CDO market ranged from $0.5 trillion to $2 trillion (boundless. Com). Also, by 2007, about 70% of subprime borrowers used hybrid adjustable-rate mortgages (ARMs).

Rep. Barney Frank (D-MA) explains the old system of lending and the new securitization process. Matt Demon narrates how the home buyers repaid their loans to lenders, and consequently, the lenders sold the loans to the investment banks which combined the mortgage loans with other credit loans creating a collateral debt obligation a complex derivative. The collateral debt obligation sold to investors who paid the rating agency to evaluate the CDO's. The home buyers were now paying investors through this

The foreclosure crisis in America has impacted everyone- even those who don’t own homes. Our nation is currently struggling with high unemployment, a relatively illiquid credit market, and a deficit that raises serious concerns about the value of the US Dollar in the not too distant future. With interest rates already at historic lows and the government pursuing an unprecedented policy of quantitative monetary easing, options for government intervention are limited. While there is no simple solution to this problem, I think that we must look at the reasons the housing market went into crisis, and based on that develop a regulatory system that will allow us to avoid another situation like this in the future. If Americans believe

The solution to the Foreclosure Crisis is the implementation of continual, mandatory education classes that must be attended and passed, or penalties will be applied to the homeowners. A little tough love from the lender and the government is necessary. Just as our parents follow through and continue to teach us throughout our lives, so must the lenders and the government take the time to “sit” every homeowner down to make them learn and realize that being a homeowner comes with big responsibilities. Whether people are just on the verge of purchasing their homes or their foot is already close to stepping into the state of foreclosure, lenders and the government must take the time to really educate people about the responsibilities and

The foreclosure crisis in America is only an effect of a much deeper underlying problem: egotistical materialism. The “American Dream” has unfortunately promoted this problem by affecting Americans everywhere, convincing them that it is possible to get whatever they want, at whatever cost. In itself the dream to succeed is not completely wrong—but the cost it often takes is devastating. Americans are realizing that merely getting what they want is not always enough; there are factors which must be considered beyond the end they strive for. These factors often include the ability to provide monetary support and upkeep…taxes, anyone? However, inflation has made the success of even the most meticulous planning exceedingly difficult. In

Although Mortgage Backed Security (MBS) and Collateralized Debt Obligation (CDO) are very similar, they are not the same. MBS are a type of bond or securities that represent an investment in a pool of mortgage loans. For example, if I want to buy a house the first thing I will need to do is go to a bank to request a mortgage for the amount of money I need. Then, after the bank approves me the mortgage (plus interests), the bank will sell my mortgage to an investments bank which eventually will sell it to more investors. The MBS is a way to lend money to people without worrying about they have the money to pay or not.

In 2007 the real estate market collapsed leaving homeowners doomed. The collapsed had a negative impact on the United States economy and it also had a negative impact on five million families nationwide. Today, the real estate and mortgage market has significantly improved. This improvement allowed previous homeowners to have a clean start. The situation of the market has changed and advanced since the collapse. The homeowners that were affected by the real estate and mortgage market collapse were known as boomerang buyers because most of the families are or were allowed a second chance. As a result of the collapse, there were many mistakes that are avoidable today as to lessons learned. The market crash was a devastation but over the years the silver linings began comforting the nation. Today, many boomerang buyers are benefiting from their past mistakes. Consequently, there were lessons learned,

purchase homes that were 63 percent more expensive.” (Dokko, et. al., 2009) These risky loans

Imagine a young couple was married and bought a house together. They were happy they made an investment together that they would never regret. A few years later, the company the husband worked for suffered critically by the recession and he was one of the hundreds of people who got their job cut. They now have two babies to feed and have to choose between food and the mortgage. They soon began to miss their monthly payments. They waited until things became unbearable to negotiate the loan or an extension to repay the bank but their efforts failed. Another family had a home, they had an adjustable rate mortgage, the two year introductory rate is almost expired and the payments are nearly impossible

The current foreclosure crisis that our nation is experiencing has become a great hardship on many people in America. People that have lost their jobs due to cut backs, people with families for whom they need to provide shelter, people who are otherwise very responsible but have been put in a position from which they cannot escape, these are the people that are suffering.

Foreclosed homes have become a menacing commonality in nearly every neighborhood in the United States. These foreclosed properties problems range from unkempt yards, broken doors and windows, as well as becoming dangerous havens for drugs and violent acts of vandalism. In addition, empty foreclosed homes drive down property values of surrounding homes and neighborhoods.

Collateralized debt obligations (CDOs) refers to a kind of innovative derivative securities product which simply bundling mortgage debt, bonds, loans and other assets together and then rearranging these assets into different tranches with different credit ratings, interest rate payments, risks, and priority of repayment to meet the needs of different investors. As borrowers began to default, investors in the inferior tranche of the CDOs took the first hit, so the owner of this tranche of CDOs may be riskier. In order to compensate for the higher risk, the subordinate tranche receives higher rate of return while the superior tranche receives lower rate but still nice return. To make the top even safer, the banks ensured it small fee called the credit default swap (CDS). The banks do all of the works so that creating rating agencies will stamp the top tranche since as a safe, triple A rated

The United States economy has been in trouble for the past couple of years. The foreclosure crisis is a condition that began due to the inability of homeowners to pay their mortgages. Foreclosure is a legal proceeding whereby a lender obtains a legal termination of a debtor’s right to redemption. The foreclosure rates have been increasing for a considerable period and certain steps have been put into place to solve the problem. While the government, financial institutions and the general public are highly aware of the crisis, the steps taken to combat the problem are still not sufficient as the foreclosure rates are still increasing.

In the new system, an investment banker buys the mortgage from the lender, borrowing millions of dollars to buy thousands of mortgages, and every month he gets payments from homeowners for each of the mortgages. The banker then consolidates all the mortgages and splits the final product into three sections: safe, okay, and risky mortgages, which make up a collateralized debt obligation (CDO). As homeowners pay their mortgages, money flows into each of the sections, with the safe filling first and the risky filling last, contributing to their respective names. Credit agencies stamp the top two safer mortgages with a triple A or triple B rating, which are then be sold to investors who want a safe mortgage, while the risky slice is sold to hedge funds who want a risky investment. The bankers make millions, pay back their loans, and investors also make a worthwhile investment. So pleased are the investors, however, that they want more. Unfortunately, back at the beginning of the cycle, the mortgage broker can no longer find qualified mortgagers