While I was out running this weekend, it was difficult not to notice all of the new houses for sale in the location, in addition to all the old houses that have but to be sold soon after practically a year. I have small doubt why these properties have not yet discovered buyers, as banks are basically not lending to new loan applicants unless they’ve wonderful credit and a lot of cash. In a community built on manufacturing jobs, those two circumstances are not likely to be met.
But it was also not surprising to notice that gas is now well more than $3.00 a gallon in the middle of the winter. Needless to say, the reality that Americans are spending more of their shrinking supply of dollars on transportation expenses just to get to their increasingly insecure job contributes towards the issue of not getting sufficient dollars to pay the bills, let alone save up for a down payment or overcome a financial hardship.
Why is it that the expense of almost every little thing crucial, like food and oil, has been going up, even as shoppers are saving less money along with the economy is slowing down?
Seeking to the government, the issue really should become obvious. As the banks realized just how much poor mortgage debt they held, panic set in. The Federal Reserve bailed out the banks with newly-created funds, attempting to inject liquidity into the method. But the banks didn’t use that money to keep operating and lending, rather utilizing it to bail out underperforming hedge funds or to serve as a reserve for future losses.
In essence, the banks got free cash which will support them ride through the economic slowdown with out having to make wiser economic decisions to make back their losses. So they’ll not need to supply mortgages to home buyers and generate profits from offering a service which will benefit buyers. They can just use the inflated money to avoid from having to create good lending decisions.
Now the homeowners who’re facing foreclosure are just being shut out by massive lenders, who refuse to lend them money to refinance or work with them to put together a loan modification or repayment plan. With the banking market bailout, the banks have no incentive to complete anything but foreclose on the houses and let them sit till the real estate market recovers and they are able to make a larger profit. After all, the income they would have received from collecting payments on good loans has been provided free of any risk by the Federal Reserve.
Why not just do away using the entire lending process altogether? Banks can now start giving out loans to those that can not afford homes at all, then get the money they would have created on a fantastic loan as a gift from the Fed, and wind up using the real estate, also.
If this sounds like numerous mortgage lenders are parasites using homeowners as their hosts, sucking away as considerably cash as possible and then leaving the house an empty shell soon after the foreclosure victims are evicted, this analogy may not miss the mark by significantly. It is just more evidence of the “Tapeworm Economy” in action.
Of course, not every single homeowner will encounter this in action, but several will discover just how little their bank cares about them when they start missing payments. We get emails each day from homeowners trying to stop foreclosure, asking why the bank isn’t accepting their payment any longer, or why they can not get a call back from the bank, even when they need to work out a resolution.
In an economy exactly where the banking business can do as it pleases, producing loans it knows will never ever be paid by the homeowners, but knowing they will make their money back through inflating the money supply, and end up with the underlying asset, is it any wonder banks would rather make new loans as opposed to present service to their existing buyers?
It would be interesting to examine how banks would act if they were not particular that poor choices would result in a central government bailout.
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