The Crisis Caused by Mortgage Bonds
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by: stickystebee
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Word Count: 342
When a person decides to purchase a home in America, the deal often necessitates acquiring a mortgage. The potential home owner will have to borrow money from either a bank or mortgage lending company. The borrower signs a promissory note which says that he or she will pay back the loan along with a certain percentage of interest.
In order to give a client these loans, the mortgage lending company may need to borrow money from a larger financial institution. The mortgage lending company will proceed to offer a certain number of mortgage agreements in a group package format to this larger financial institution. This institution then issues mortgage bonds in return. With this mortgage bond, the larger financial institution is in essence purchasing the mortgage agreement from the original mortgage lender. In return, the larger financial institution receives the borrower's monthly payment. Recently, anyone who watches the evening news has no doubt heard about the mortgage crisis. This was brought about when mortgage lending companies gave mortgage loans to borrowers who were not credit worthy. This practice presented high risk but also offered a high return to the larger banks who issued those mortgage bonds.
During the housing boom which hit an all time high in 2005, the larger financial institutions bought significant quantities of mortgage loans. The problem is that these not so credit worthy borrowers had secured loans with adjustable interest rates. As the interest rates went up, they were unable to make their mortgage payments. This leads us to the financial mess that America is in now.
The larger financial institutions who issued the mortgage bonds are now stuck with the securities(homes) that are worth much less than what is owed. This now leaves many large banks in a solvency crisis. The original intent of a mortgage bond is definitely to produce a win-win situation. Both the mortgage lender and larger financial institutions should make money from the person receiving a mortgage. We only run into problems when these institutions get greedy.
About the Author
It is smart business to require people who wish to secure a mortgage to put a certain percentage up front for a home. People need to produce proof of employment and have adequate capabilities to pay that money back. This is only common sense. Let's hope that large financial institutions remember this lesson when it comes to issuing mortgage bonds in the future.
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