How are mortgage loans the root cause of the rising number of bank failures.?

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I don’t understand! If a bank lends the home buyer money to purchase a home and the purchaser makes payments for some period of time but ultimately has to default on the loan, doesn’t the bank make money? It receives the payments, forecloses on the home and can then resell the home to another buyer. If the market is depressed, can’t the bank retain the home as an asset until the market returns to normal? So, if these statements are true, how can the bank blame loan defaults as the cause of the failure?

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  1. Reply
    Judy
    May 1, 2011 at 12:16 am

    Since your statements are NOT true, your whole premise falls apart.

    If the bank lends $ 80,000 on a home and the buyer makes payments for a few years, no they haven’t paid back anywhere near the amount they borrowed, so the bank loses money if they can’t sell the home for what’s still owed and that’s often the case. And the bank’s business is lending money, not holding real estate for years hoping it will go back up to what someone owed on it when they quit paying. And you’re forgetting that for that time the bank would have their money tied up in that house.

    On some foreclosures the bank might make money, but in the falling housing market the last few years, typically it’s been a loss. Many loans were given to people who couldn’t afford them in the first place. This is partially the fault of the buyers, partially the lenders who should have known better than to make these loans, and partially the fault of the government who strongly encouraged the lenders to make marginal loans.

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