We can all agree that the current downturn in the economy is at least partially caused by the sub-prime mortgage crisis. For those who have been living under a rock, this is basically when banks give homeowners adjustible rate mortgages, so they can buy homes. At first glance this doesn't seem like a huge problem, but the real problem is that banks performed no due diligence when lending money.
Basically this lack of due diligence procedures has led to the current crisis. Joe homeower pretty walk could walk into the bank and say he made 100K and the bank would take him at face value. The problem was Joe Homewoner really only made 40K but decided he wanted a house for the value of his "theoretical" 100K salary. The bank gave Joe the money, but Joe couldn't keep up with the payments. Additionally, with even a minor downturn in the economy, the bank adjusted Joe's mortgage and made Joe's payment schedule that much more difficult to meet.
All these homeowners living above their means in fancy homes default on loan payments, and help create the current banking crisis. (Banks make money on loans).
My suggestion is that the government pass a due diligence law that applies to banks, which would force them to comply with certain procedures and credit checks before issuing loans. These more stringent procedures would catch people like Joe Homeower discussed above.
Much like the Enron scandal spawned the creation of Sarbanes Oxley, I expect the sub-prime mortgage crisis will have a similar result. I only hope that things get done quickly so peope that actually have good credit and don't lie to banks about income can get the homes they have worked hard for.
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