Subprime Mortgage Crisis: How Did Financial Institutions Contribute to the Problem?In 2008 and 2009, a subprime mortgage crisis began that caused countless Americans to personally suffer injurious consequences, including losing their homes, explains a lawyer. The crisis affected people throughout the nation, but states hit hardest included California, Florida, and Nevada. The crisis was prompted by relaxed lending standards and by new creative mortgage financing methods that were made possible in large part as a result of the secondary mortgage market.
Although a series of complex behind-the-scenes financial transactions occurred, essentially, the roots of the crisis can be explained as follows: banks began lending money to people who clearly could not afford the loans they were being offered. The banks then repackaged those loans into bonds, which were given the same credit rating as safe debts like U.S. Treasury bonds. The bonds were then sold to investors. Everyone on Wall Street began making money. This created an almost endless demand for more bonds, which led to more people being offered loans they were unable to afford.
Banks used a number of different methods to find borrowers to take on mortgages. One technique was offering loans that came to be known as NINA loans or NINJA loans. Respectively, this stood for no income/no assets, or no income/no job/ no assets. While the actual name for these types of loans was "stated income" loans, essentially it meant that people would put down whatever incomes they wanted on their mortgage applications and no one would check them. This was typically used in conjunction with offering adjustable rate or balloon mortgages. The mortgage would begin with a very low interest rate, making payments on a home seem affordable to borrowers. Then, the rate would adjust upward—often to an amount that was equal to many times what the homeowner/investor's actual income was.
The ease of available credit contributed to a steep increase in property values, leading people to begin viewing their homes as bank accounts. Borrowers were encouraged to take "cash-out" refis on their homes, getting creative new loans and walking away with the equity in their homes stripped. It also became more expensive for anyone to get into the housing market, leading to even more creative financing. Unfortunately, many of the people who took out loans to buy or refinance a home had no idea what they were getting into or what their payments would be, as the banks did not adequately explain any of the process to them.
People naturally began to default on their mortgages, setting off a tide of foreclosures and collapsing the artificially inflated prices. This, in turn, resulted in countless homeowners ending up "underwater" on their mortgages or owing more than their home was worth. They could thus not sell or refinance, and they too began to default.
Banks were not able to keep up with the vast numbers of foreclosures, which was far greater than at any time in history. As such, many banks began using improper foreclosure tactics and failing to follow the foreclosure laws.
One improper foreclosure method has been dubbed robo-foreclosures. Robo-foreclosure refers to the fact that "foreclosure specialists" or other bank employees were signing off on thousands of foreclosure affidavits each month without actually verifying that the homes should be foreclosed on.
Banks also used a database called the Mortgage Electronic Registration System both in initially granting problematic loans and then in foreclosing on many of those same loans. The system had originally been devised as a way to track ownership and servicing of residential mortgages, but was used to evade fees and requirements of publicly recording mortgage transfers, as well as to quickly sell mortgages on the secondary market. Although the System had helped to create the mess in the first place and was plagued by inaccuracies, many banks relied on it in identifying properties to foreclose on, leading to personally injurious consequences for homeowners in California and elsewhere, specifically wrongful foreclosures, explains a lawyer.
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