The Family Of The Smith Family

1516 Words Dec 16th, 2015 7 Pages
In a town in the United States, the Smith family has just moved into their new, 2500 sq. ft. home. The year is 2006, and this family of four has just paid the down-payments toward buying their new $500,000 house. It’s more spacious then they need, but when their mortgage broker told them they could qualify to purchase a house for that amount, they decided to go for it. In order to finance their home, the Smiths took out an adjustable-rate mortgage, which they figured they could always refinance later. And they put all of their money into their new house, knowing that a home is always an investment and the value of their home would only go up, value that they could eventually borrow against to pay for things they would have otherwise paid for with their income, income that is now tied up in paying their mortgage. If worse came to worst, the Smiths knew, they could just sell the house, capture the difference between what they owe and the rising value of the home, and buy something else. They had friends and relatives who had done the same and so they figured, what could go wrong?
A lot could go wrong. Unfortunately for the Smiths, they were just one of many millions of US families who took advantage of easy credit and swiftly rising home prices to buy into homes that they wouldn’t be able to afford for long. Because banks were taking risky mortgage loans and combining them with other assets to obscure their true risk level, it took some time for investors and institutions to…

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