Essay on Justly Solving the Foreclosure Crisis - 2580 Words

For millions of people in the United States, the property boom of the 2000’s ended without much warning. All over the country, tent cities are emerging as the abode of those most unprepared for the collapse of housing prices and the resulting decrease in employment opportunities. The housing crisis’ effect on national economies threatens to plunge the global economy into a malaise unseen since the 1930s, according to Alan Greenspan (former Federal Reserve Chairman), the International Monetary Fund, Warren Buffet, and a host of economists around the world. In the United States, financial and real estate sectors’ unethical behavior has done much to produce the crisis, and must be addressed for prosperity to be reestablished. In the spirit of†¦show more content†¦For example, a collateralized debt obligation is a bond that is issued on the performance of a debt obligation, such as an automobile loan, commercial or residential mortgage, credit card loan, or student loan. CDOs, backed by real estate, create a number of ethical quandaries: 1) they are contingent upon the performance of the buyer to fulfill their responsibilities of the contract; 2) they are contingent upon the value of the property; 3) market appetite for these assets can affect the health of the company, possibly triggering a recall of the very loans the bonds are based upon; 4) they are not subjected to rigorous regulation by the SEC or other government agency. Some of these bonds were underwritten, or protected from default, by private banks, while government-sponsored enterprises such as Fannie May and Freddie Mac underwrote the remainder of them. Banks profit from the joy of rising prices when the value of CDOs rise. The operation of buying and selling these assets yields tremendous profits for banks and encourages a continuation of the cycle. When times are good, the property owners are ecstatic about the equity gained by rising prices. Some even choose to take out a second mortgage, creating another opportunity for issuance of a CDO, or similar financial instrument. However, all good things come to