termpaperwarehouse.com | August 5, 2014
How did the Securitization of Loans Contribute to the Housing Crisis?
“Worm or beetle - drought or tempest - on a farmer's land may fall, Each is loaded full o' ruin, but a mortgage beats 'em all” (Will Carleton 1845-1912). A mortgage is the greatest investment the average individual will make in their entire life-time. However, according to today’s standards, the true magic of a mortgage is not when one signs the note and mortgage but what the lender does with it after it has been conveyed. In almost every case after a mortgage is signed, it is almost immediately sold to the secondary market, this is where the loans become securitized. This is where most Americans believe is the root of our current housing crisis. This paper will analyze (1) why most Americans believe that loan securitization is the reason why we are in a housing crisis. (2) How lax screening processes by lenders played a part (3) Risky lending practices and (4) finally, the opposing views on securitization and our current crisis.
Why do most Americas believe loan securitization is the problem?
In most cases, when we can’t laugh at our mistakes, we have already started looking for someone to blame. In the case of our current mortgage crisis, we have engaged in a myriad of who’s to blame. Some say the lenders failed to properly screen borrowers, while others say the government protected the secondary market as they bought and sold one bad note after another. Most people believe that securitization started in 2004 and continued until the housing market crashed. However, securitization can be traced back for decades without issues that we face today. Banks and lenders often rely on a borrower’s Fair Isaac Corporation Score also know as FICO score which is another name for a credit score. By 2005 most banks and lenders used the FICO of 620 as a threshold to approve mortgage loans. FICO scored under 620 typically would not be approved....
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