Microfinance Essay

hat Went Wrong With Our Financial System?

The whole thing was one big scheme.   Everything was great when houses were selling like hot cakes and their values go up every month.   Lenders made it easier to borrow money, and the higher demand drove up house values.   Higher house values means that lenders could lend out even bigger mortgages, and it also gave lenders some protection against foreclosures.   All of this translates into more money for the lenders, insurers, and investors.

Unfortunately, many borrowers got slammed when their adjustable mortgage finally adjusted.   When too many of them couldn’t afford to make their payments, it causes these lenders to suffer from liquidity issue and to sit on more foreclosures than they could sell.   Mortgage-backed securities became more risky and worth less causing investment firms like Lehman Brothers to suffer.   Moreover, insurers like AIG who insured these bad mortgages also got in trouble.

The scheme worked well, but it reverses course and is now coming back to hurt everyone with a vengeance.
The Case Of My Greedy Real Estate Agent

My own experience with these greedy lenders and real estate agents happened about two years ago.   My wife and I were thinking about upgrading our home to something slightly bigger, and in a better neighborhood.   As we go through the process, we resolved not to do it because it would double our monthly mortgage payment and add another 20 years to our mortgage term.

creative-home-loan

Illustration from The Skinny On The Housing Crisis, published with permission. The Skinny On.

When I told the real estate agent I couldn’t afford the monthly payment, he said I could go for a 40 years mortgage with 5% down payment, and apply for more than what I needed so that I’ll have an emergency fund.   Basically, he advised me to decimate my cash flow and savings so that I can pay mortgage into my 70s.   And while I am at it, I should pay private mortgage insurance (PMI) for a couple of...