The Mortgage Banking Crisis
In most cases mortgage banking crisis results from errors in financial modelling and a lot of borrowing. These errors are mainly triggered by frauds and greed in acquiring properties. For instance, in America, owning a home is the dream of many people because it helps one to establish a permanent residence. As a result, people tend to go extra miles to ensuring that they achieve this dream and borrowing from banks is one of the options for such people.
On the other side, lenders understand the need for people in such situations and they become active participants in the buying process. This participation by lenders is due to believe that an asset such as a house is perfect collateral especially for a huge loan. There are times, when conditions are favourable for a buyer to take loans, especially when mortgage interest rates go down and in such situations people flock in banks in order to get huge loans with low monthly payments.
Borrowing at this momentum poses the risk of mortgage crisis since homeowners are subject to greed and many decide to refinance in order to take advantage of the demand by taking second mortgages. The demand for homes also entertains fraudsters who may come in as mortgage brokers or homebuyers. Since the demand may also make banks to design easy access to loans, long procedures such as documentations are made unnecessary and this makes the situation more convenient for the fraudsters.
2) Logical; Show that the conclusion is base on faulty use of evidence
As instance of a mortgage banking crisis is one which occurred in America in 2007 (Pritchard, 2013). The mortgage crisis was said to have resulted from errors in money lending by banks and defaults on loans by homebuyers. Availability of easy credits by banks seemed convenient to the buyers but later on, it came out as a weakness of banks. To begin with, it made it easier for fraudsters to conduct their activities and secondly, it exposed the banks to loss from defaulters in case of mortgage crisis.
In the economic crisis of 2007, high-profile banking institutions panicked from the increased rate of defaults from borrowers (Pritchard, 2013). Homebuyers had stopped paying loans since home prices had started going down and majority could no longer afford to pay the monthly payments for their loans. The defaulters were left with no option but to wait for the banks to come and foreclose in order to recover the loans. However, since the home prices had significantly gone down, even after foreclose, the banks could not recover the loans fully and they ended up suffering hefty losses (Pritchard, 2013).
3) Conflict of values; one value is more important than another
Conflict of values in mortgages contributes fairly to mortgage crisis. Take for example the case of 2007 mortgage crisis in America. Banks were generous with loans since they realized that it is the dream of majority of Americans to own homes. Banks also realized that they have key responsibility in ensuring economic development of the country and by helping citizens to achieve development projects; they would be performing their duty. This principle by the banks led to offering of loans with easy procedures which required few documents and sure enough citizens benefitted from this kind of arrangement by financial institutions. However, the value of securitization was lost during this generous act by financial institutions. Mortgage securitization was overlooked and this was later realized after the hefty losses by banks in the mortgage crisis of 2007.
Securitization is a crucial feature in housing financing and it serves to screen potential defaulters of loans (Hirst, 2011). Going about housing financing without securitization is therefore a potential economic hazard (Hirst, 2011), as it was evident in the 2007 America’s mortgage crisis. The “affordable housing” policy was rather impressive in the move to increased home ownership; but the poor loan quality, characterized by lack of securitization, which at first seem convenient in achieving the homeownership goal impacted negatively on financial institutions. This is the case of 2007 America’s mortgage crisis after careful analysis and is one of conflicting values.