Task #5

The main problem is that mortgage companies lent money to people that could not continue to make payments on their homes. Most of these loans were called “subprime” loans because the borrowers have less than perfect credit histories. A large portion of the borrowers defaulted on the loans. The defaults were partly because the interest rate on the loans increased sharply after the first year. This sharp increase was likely not disclosed to the borrower in such a way that they would easily understand the difficulty in being able to afford their home after the adjustment in rate.

The large number of foreclosures has seriously damaged the lenders and investors that fund real estate loans. Because housing is so important to our economy, one of eight jobs is related to the housing industry, the federal government has had to step in to shore up the collapsing real estate market. Termed the mortgage bailout plan, the Congress has passed a measure giving the U. S. Treasury Department the power to step in and assist Fannie Mae and Freddie Mac, the mortgage giants that hold over fifty percent of the nation’s home loans. Under the legislation, the Federal Housing Administration is granted the authority to insure up to $300 billion in refinanced mortgages hoping to reduce the rising number of foreclosures.  Because one in eight homes is projected to enter foreclosure in the next five years, the hopes of the bailout are to address broader economic problems by helping to reform the housing sector.