How to Solve the Foreclosure Crisis

Better Essays
Presently in the United States millions of homeowners are facing the prospect of losing their homes due to bank foreclosure. An event if allowed to occur has the potential of collapsing not only our financial system, but our social fabric as a nation.

The unfolding crisis has prompted the US Government to enact aggressive monetary stimulus designed to reverse the downward spiral of home values. Unfortunately this approach has failed to achieve any meaningful results and perhaps has acted more as a red herring to conceal the real issues causing this debt implosion. With billions of dollars being pumped into the banking system why then are banks still timid to continue financing home loans?

1. They are concerned that home prices will continue to fall, adding further risk to their bottom line.

2. Due to the immense derivative (OTC- Over the Counter) losses banks are simply faced with using taxpayer bailout money to stay afloat and continue manufacturing these exotic instruments that Warren Buffett has labeled as “Weapons of Mass Financial Destruction” . These complex, high risk instruments have accounted for much of the banking system’s profits over the past decade.

3. Currently it is politically unacceptable for interest rates to increase, therefore bank profits from home loans will continue to remain insignificant to improving balance sheet health.

Furthermore with the failure of the US Government’s loan modification program, (out of the 4 million homeowners at risk of foreclosure only 30,000 have received assistance) banks will not willingly sacrifice the principle value of the home in order to keep homeowners with negative equity from simply walking away. It simply boils down to everyone acting in their best inter...

... middle of paper ...

...nd the debt ceiling being raised to higher and higher levels, will politicians have the will to act accordingly?

If politicians are looking for an incentive other than the obvious perhaps the massive job creation HEART would provide on both the state (local) and federal level would be enough to entice them to act. HEART would serve the public as a threefold entity acting as a property manager, lender, and real estate acquisition holder, requiring thousands of jobs to be filled.

The most important factor though still remains the reversal of the downward affect now taking hold. If the US Government can put aside its differences and come to terms with how much more this will cost if little to nothing is done to address the root cause, than America will look no different than a banana republic before the end of the next decade.
Get Access