The Mortgage Crises

The real reason behind the mortgage crises is the inflexibility of the lending institutions. Let's say one is paying $1000 a month on a mortgage, with $950 of that going to interest. The payments are made on time, including an addittional $300 to escrow. Three years later the payment bumps up to $1300 and six months after that it goes up to $1500. Now the house note is $1800, including escrow. The amount going to principal is still the same - $50.00. That is a deal that does not make sense to the borrower. Initially, the borrower - someone with perfect credit and documentation of sufficient income to pay the original note - was sold on this ARM by a broker. The borrower was assured that he was getting a great deal. The house was purchased with no down payment, but there were closing expenses to the borrower of $8000. The broker, title attorney, title company and the lender all got a piece of that pie. During the initial three years, the borrower paid the bank $36000.00 but the balance on the loan only went down by a few thousand dollars. Now, after the loan has adjusted up, the borrower makes another year of $1500 a month payments. So by now the bank has gotten $54,000 plus the $8000 for closing costs. They still have a mortgage on the house. The borrower suddenly finds himself paying $5 for a gallon of milk and $3.70 for a gallon of gasoline. He realizes that he is getting screwed by the bank and can no longer afford to pay $1800 a month on a mortgage.
So the borrower, calls the bank and says, "I can't go on like this, you're screwing me". Of course, the lender is not going to drop one percentage point, much less 2 or 3 in order to keep the customer and obviate foreclosure. So, they go and foreclose and now they still have a piece of real estate. The real estate is not completely worthless. But somehow, the lender declares a total loss and the government steps in to bail them out.
A much better solution would have been for the lender to drop a couple of points off the interest rate. Or for Congress to amend the bankruptcy laws and allow cosumers going into Chapter 13, to restructure the debt in a way that the bank would still profit, get paid, no foreclosure, etc. But we don't live in a sensible world!