Solving the Foreclosure Crisis

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The images of the foreclosure crisis are startling: families forced out of their homes, bank executives begging Congress for bailouts, government officials scrambling to put the nation’s financial system back together. Such disarray, however, arises from a very simple moment – when a hopeful family sits down with a loan officer at their local bank. In that moment, the collective fates of the family, the bank and national financial system are sealed. For better or worse, the outcome of the meeting determines the fates of all involved. The family can embark on a path of either independence and homeownership or ruin and dislocation. The bank can either invest in the community or partake in its unraveling. The national financial system can…show more content…
Alternatively, a borrower educated in the procedures and perils of mortgages may be more likely to take out a reasonable home loan and successfully avoid foreclosure. By incentivizing borrowers to take this course, regardless of their income level, society will benefit from lower foreclosure rates across the socioeconomic spectrum. A second component for borrowers is a web site that helps borrowers calculate key aspects of the mortgage transaction. It would request information very similar to that requested by a loan officer at a bank such as household income and expenses, current debt burden, employment status and credit history as well as information about the home in which they are interested, including price, minimum down payment and location. Then it would provide users with an interactive timeline, allowing users to project futures based on potential changes in employment or income, changes in family composition, and changes in interest rates or home value. Based on all this information, the website could offer rough estimates of the viability of the home purchase, when the mortgage would be paid off and what circumstances might result in foreclosure. This website would not be intended to replace consumer education programs but could provide a more accessible alternative. The Lenders To avoid offering potentially dangerous mortgages, lenders need to be bound by socially optimal incentives. Short of changing the laws

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