The Chasing After Profits Lead Ultimately to Foreclosures
July 7th, 2009
The business class was motivated by an intense search for profits. This insane chasing after profits ultimately led to the foreclosure crisis.
They got their profits but now they did not know what to do with them. Instead of investing and allowing for the improvement of production and creation of jobs, they started looking around for borrowers. The problem was that the non-financial sector did not have any need for borrowing. Into this vacuum walked in the workers. They had low wages and needed money to satisfy many needs. With the strategy chalked out, the financial houses began to focus more and more on the workers cultivating them to become their customers. Accordingly bank lending increased from 30% in 1970 to 50% in 2006. The total worth of residential mortgages increased three times from 1998 to 2006. It was an extraordinary hike – never before noted in the history of USA.
Before long the financial lobby began to run short of ‘credit worthy’ workers who would qualify for the traditional prime mortgages. But they still had loads of money to loan out. So they struck upon the strategy of sub-prime mortgages for those with low credit scores and consequently less income. These sub-prime mortgage loans required little or no down payments and hardly any document. These loans came to be dubbed ‘liar loans’. The proportion of sub-prime mortgages spiked from 7% of all the mortgages to 20% in 2006. The most harmful of these loans came to be nicknamed NINJA loans – no-income-no jobs-no assets. Despite this the borrowers qualified for the deadly loans!
Why did the shrewd financiers hit upon this strategy when it apparently seemed they were sure to lose their capital? The calculation was that when the time of the low teaser rates of interest would expire and the borrowers would be forced to exit unable to pay mortgages, the price of property would have gone up by leaps and bounds. A new mortgage would be drawn up or the house sold with tidy profits. In any case the security was the house. The plan was made on the calculation that property value always increased and never went down. But from 2006 onwards the prices of real estate began to fall. The plan did not work. Old mortgages could not be refinanced. The borrowers were stuck with increasing mortgage rates and decreasing value of property. It was little wonder then that the country became flooded with defaults leading to foreclosures.
- Experts Fail to Reach a Consensus on the Severity of the Foreclosure Crisis in New Jersey
- Foreclosures are Spawning a New Set of Landlords
- Foreclosure Evictions Have Become a Nightmare in Phoenix
- As the Foreclosure Crisis Continues Business for Appraisers are Booming
- Foreclosures are Claiming not Only Human Lives But Also that of Pets
- The Foreclosure Crisis had Led to the Drying up of Funds for new Buildings in New York City
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July 15th, 2009 at 7:02 am
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