$400,000
HOUSE VALUE
$400,000
MORTGAGE LOAN
NOTE:
BOB AND MARY HAVE ZERO EQUITY IN THE HOUSE
$400,000
LOAN
$450,000
HOUSE VALUE (HOUSING VALUES APPRECIATE)
BOB
AND/OR MARY LOSE JOB (S)g
BOB
AND MARY ARE ABLE TO SELL THEIR HOUSE FOR A PRICE SUFFICIENT TO PAY OFF THEIR
DEBT (MORTGAGE)
$400,000
LOAN
$360,000
HOUSE VALUE
BOB
AND/OR MARY LOSE JOB (S)
BOB
AND MARY ARE UNABLE TO SELL THEIR HOUSE FOR A PRICE SUFFICIENT TO PAY OFF THEIR
DEBT (MORTGAGE)
THE
BANK MUST FORECLOSE
THE
BANK SELLS THE HOUSE FOR ITS CURRENT VALUE: $360,000
THE
BANK’S NET WORTH FALLS BY $40,000
SCENARIO
TWO:
$400,000
HOUSE VALUE
$400,000
MORTGAGE LOAN
NOTE:
BOB AND MARY HAVE ZERO EQUITY IN THE HOUSE
THE
ORIGINATING BANK SELLS THE MORTGAGE TO FREDDIE MAC (SECONDARY MARKET)
FREDDIE
MAC PACKAGES BOB AND MARY’S LOAN PACKAGE TOGETHER WITH OTHER LOANS TO CREAT A
MORTGAGE-BACK SECURITY
FREDDIE
MAC SELLS THESE MORTGAGE-BACKED SECURITIES TO LONG-TERM INVESTORS: PENSION
FUNDS, INSURANCE COMPANIES, ETC.
$400,000
LOAN
$360,000
HOUSE VALUE
BOB
AND/OR MARY LOSE JOB (S)
BOB
AND MARY ARE UNABLE TO SELL THEIR HOUSE FOR A PRICE SUFFICIENT TO PAY OFF THEIR
DEBT (MORTGAGE)
THE
MORTGAGE-BACKED SECURITIES DECLINE IN VALUE
THE
LONG-TERM INVESTOR’S NET WORTH DECLINES AS A RESULT
COMPLICATIONS:
CONGRESS
ENACTS THE COMMUNITY REINVESTMENT ACT IN 1977
REGULATORS
APPLY PRESSURE ON BANKS TO MAKE HIGH-RISK LOANS
COMMUNITY
ACTIVISTS APPLY PRESSURE ON BANKS TO MAKE HIGH-RISK LOANS TO THE POOR
FREDDIE MAC AND GINNIE MAE REDUCE UNDERWRITING STANDARDS IN ORDER TO ACCOMMODATE LOW-INCOME BORROWERS