Foreclosure Crisis Management Plan Essay

2333 words - 9 pages

For many people, the American dream represents owning a home, a place of warmth and sanctity in which to raise a family. This dream has evolved over time beyond the idyllic visions of the house with the white painted fence, dog, and two-point five children. It has become as simple as having a roof over one’s head to as grandiose as the multi-estate McMansions. Today, the dream of owning a home has turned into a nightmare as millions of Americans face foreclosure. Few words characterize the wide disparity between the vision and the brute realities. The situation, though tragic, is not hopeless. While different solutions have been tried to stem the tide of foreclosures including moratoriums and loan modifications, millions continue to be at risk of losing their homes and feel helpless to the shattering of their American dream. Painful long-term adverse economic consequences can be avoided if the US government intervenes strategically. Unlike the notable legislation that has already been enacted, discussed below is an alternative proposal that merits consideration in light of the continuing economic hardship.
A foreclosure crisis management plan must be both comprehensive in scope, dynamic in nature, and executed with a broad long term view. It must address the causes of the foreclosure crisis and create risk mitigation controls to prevent such a crisis from reoccurring. In examining the precursors to the foreclosure crisis, both macroeconomic and microeconomic factors contributed to an ever increasingly complex scenario of leveraged risk. At the macro level, a sustained period of low interest rates, low defaults, and cheap credit offered new opportunities to spur growth in the housing market making ownership more readily affordable. The growth in complex structured financing products on Wall Street helped add additional excess liquidity to the overall financial system by disguising and transferring risk. At the micro level, several classes of prospective homeowners, who would have generally had difficulty securing financing, were given the opportunity to own a home. These classes include low credit worthy individuals and speculators. As these macro and micro factors converged, predatory lending and loose underwriting controls fed an increasingly complex system. A new level of wealth creation and prosperity ensued, but rarely is such a rapid development without unintended consequences. As economist Milton Friedman would put it “, There’s no such thing as a free lunch.”
The emergence of a credit liquidity crisis is analogous to an earthquake followed by multiple shockwaves causing serious damage throughout the lands. A plunging stock market and the loss of several key institutions spurred asset devaluation across all classes including the once thought impervious real estate. As banks restricted lending, further devaluations occurred as the liquidity was being drained abruptly. Corporations began severe layoffs which also contributed to loan...

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