Solving the Foreclosure Crisis: The Banks Essay

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The United States economy is in trouble and the housing market is suffering in a way we have not seen since the great depression. There are many home owners who are having trouble with their mortgage payments, and therefore they have fallen into foreclosure. Additionally, housing prices have gone down, and therefore the amount outstanding on many mortgages is greater than the value of the home underlying the mortgage. I think the goal of the banks and the US government should be to keep people in their homes. If the banks continue to foreclose at such an alarming rate they will end up owning too many houses and in trying to sell them continue to place pressure on the housing market thereby making it even harder for the economy to…show more content…
They took packages of mortgages and split them up to deliver returns to investors commensurate with how much risk the investor was willing to take. There were a lot of investors for this type of product which was made up of pools of individual home loans and the banks had to keep giving mortgages to keep up with the demand from their investors. When all of the good borrowers were taken care of they stretched to lend money to borrowers that were less creditworthy. These borrowers were given teaser rates such that their initial monthly payments were low enough for them to afford.

They also stretched on the amount they were willing to lend against any given house to the point where some houses had mortgages up to 90% or even 95% of their value at the time. Whereas traditionally it was common for a homeowner to put down 20% of the selling price and the bank to lend 80% the banks were allowing the buyer to borrow more since the bigger the loan they provided, the more product they would have for investors on the other end.

Needless to say these aggressive lending strategies are what ultimately caused the foreclosure crisis we are in today. On the one hand, the less creditworthy borrowers started defaulting on their mortgage payments. As the economy weakened these were the first people to lose jobs if, in fact, they had steady jobs to begin with. Additionally, the initial low
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