Solving the Foreclosure Crisis: The Banks Essay

The Great Recession of 2007-2009 was one of the most economically disastrous events in American history. The housing market took a significant downturn during this period. People were not cautious when it came to their money and loans. Larger loans were given out to people, even to those with bad credit and low incomes. These large loans caused many homes to go through foreclosure since people were unable to pay off their mortgage debts. These debts were created by banks increasing the interest rates on the loans significantly in a short period. In 2008, foreclosures were up by eighty-two percent. This increase is significant because the previous percentage of foreclosures was at fifty-one percent from 2007. Unemployment skyrocketed, and people

After the optimistic forecast from the realstate that the houses value were going to increase, many institutions started to make adjustments to take profit from this trend. In some cases, prime mortgages were allowed for subprime borrowers to take. This might look like a great idea to financial institutions because the house values were rising: if a people (who in the first place couldn’t afford a house) stop paying their mortgages then the bank could sell the house for a value greater than the one at the moment of default. Everything was going well, so how is it that the crisis unfolded? Well, these institutions wanted to make more profit

When the housing bubble came tumbling down, there were high defaults rates on the electorate and this led to the emergence of high risk borrowers (Bianco, 2008). These were people with a questionable financial history and may have lacked the sufficient means to sustain their mortgage payments and hence, went under. This occasioned massive loses to all the players in the housing sector. The worst hit was the lenders and the various investors.

The foreclosure crisis that took over the United States a few years ago left many people facing economic hardships. This crisis happened because there was a huge housing bubble that was unsupported by actual home values. The bubble began bursting in spring of 2008 and the crisis culminated in mid-2009. Many lenders went out of business and many home owners began losing their homes. When the government became aware of this problem and began to implement new programs, it was already too late for many homeowners. Those homeowners are not at a point where they might be considering buying a new home. The housing crisis has created new rules, regulations governing the mortgage industry, and has also created a new agency dedicated to consumer protection. This consumer protection agency is called the Consumer Finance Protection Bureau. These dramatic changes have helped to create more responsible lending. The improving market conditions such as low housing costs and competitive interest rates are allowing those affected by a foreclosure to become homeowners again. Prospective buyers have a multitude of programs available to them, so even those with less than clean slate have several options.

The insolvency seen in the Housing Market manifested in the large number of stagnant foreclosures caused a dramatic decline in housing prices, which resulted in many homeowners owing more money on their houses than they are worth. Market-level insolvency is caused by capital flight in a specific market in response to a scare during a decrease in solvency. During the scope of this recession, the initial, progressive decrease in solvency was caused by a negative Net Capital Outflow in conjunction with the cash-vacuum produced by the US Budget Deficit, and the scare was caused primarily by the failure of several significantly-sized corporations and a rapid increase in foreclosures caused by the loss of a large number of jobs.

In a way, isn’t that how the whole foreclosure mess happened? Easy loans were freely granted to families who really didn’t have the knowledge or financial stability to responsibly handle a mortgage. When interest rates began to rise on these easy

A few years later the market took a turn for the worse, where interest rates were on the rise, and homes were losing their value quickly. Now borrowers that were in these interest only ARM’s needed to refinance these loans because the rates were going up, to a point where the homeowner was not be able to afford the payment. The Federal Reserve tried to stimulate the economy by lowering interest rates during the recession in early 2001, from over 6% in 2000, to a rate just above 1.25% in 2002. These low rates encouraged many Americans to apply for loans for homes that a few years ago they would have not been able to. To encourage the homeownership boom, the Bush administration urged Fannie Mae and Freddie Mac to allot more money for low-income borrowers so they could buy their own homes. This resulted in the subprime mortgage

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

Big banks in the middle 2000s were flourishing of the money made from selling the mortgages to big investors. While this was great when the banks were giving money to people who were reliable and were going to pay their mortgages every month. And when the investors were making such a hefty profit they wanted more. This is when Subprime mortgages were widely used, giving less reliable lower credit scores the opportunity to get homes. The banks knew that these people would not necessarily always be able to pay, which was the one of many mistakes (Crash Course.) The banks learned that while it did sometimes work out, the consequences of giving out too many unreliable mortgages can bring the whole nations economy down for the housing market has always been the pillar of the economy. The greed of the extremely wealthy continued to overpower the common sense of the

Within the past three to four years, the United States has seen the dramatic collapse of the housing market. The housing bubble spurred by ill-advised loans to individuals who could not afford a mortgage, complicated contracts which had interest rates and payments changing without reason, and the mass purchasing of bad loans by lending superpowers, had popped. The rapid increase in the value of homes across the country for the previous decade, had been a falsity, in which billions of dollars funded by investments and home purchases were lost within a few months (Wikipedia.org: United States housing bubble). Millions of home owners were found to be unable to pay their mortgages, leading to hundreds of thousands of foreclosures. These

  property. Lenders underwrote the loan against the value of the house with little concern for the ability to repay due to the booming property market and sold the debt as packaged securities on international capital markets spreading the debt overseas. Once the house

The problem was everyone who qualified for a mortgage already had one. Lenders knew if they sold a mortgage to a person that defaults the lender gets the house, and houses were always increasing in value in that market, that would be a valuable asset to sell. To keep up with the demand from investors, lenders started selling mortgages to borrowers who wouldn’t have qualified before because of the risk for default. These mortgages are called sub-prime mortgages and lenders started creating tons of them. In the unregulated market, lenders employed predatory tactics to get more borrowers with attractive offers such as no money down, no credit history required, even no proof of income. People never would have qualified before were now buying large houses, and the lenders sold their mortgages to Investment bankers. The investors packed subprime mortgages in with prime mortgages so credit agencies would still give a AAA rating. The rating Agencies who had a conflict of interest by receiving payments from the investment banks, had no liability if their credit ratings were correct or not. They turned a blind eye to the risky CDOs and kept giving AAA ratings. This worked for a while and everyone was happy including the new homeowners. The housing market became hyper inflated with more homeowners than ever. Wall Street continued to sell their CDO’s which were ticking time bombs. The subprime mortgages began

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.

When the banks see clients leaving or no more new clients, the competitive spirit would come back to life and the banks would lower interest rates, even possibly give out “free loaned money.” Obviously, this would be temporary, but it could definitely affect the economy in a superb way. Once a turn around in the housing sector begins and demands for housing increases, then interest rates could slowly start going back up to ideal bank loaning conditions. If banks understood that they would make money in coming years, without losing money in the present, why not follow this path? This is a possible idea for all homebuyers in the middle and lower class. If a foreclosure is on someone’s record and the foreclosure happened during the recession, it would be especially great for him or her. The banks would see that buyer’s difficulty and in order to keep the client, interest rates would remain low for a longer period. If the foreclosure happened before, then that person would be treated like every other buyer.

One of the first indications of the late 2000 financial crisis that led to downward spiral known as the “Recession” was the subprime mortgages; known as the “mortgage mess”. A few years earlier the substantial boom of the housing market led to the uprising of mortgage loans. Because interest rates were low, investors took advantage of the low rates to buy homes that they could in return ‘flip’ (reselling) and homeowners bought homes that they typically wouldn’t have been able to afford. High interest rates usually keep people from borrowing money because it limits the amount available to use for an investment. But the creation of the subprime mortgage