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This episode of “this American life” speaks of how the entire American housing system went into deep mess to a point of almost crumpling. It begins with what can be seen from the narrations by the people involved as a desperate measure by mortgage firms to make huge profits. This makes these firms start giving loans to anyone in need regardless of their financial status. The desperation causes extremely devastating effect as at some point we see 23 dead individuals being approved of mortgages.
What props out surprisingly from this episode, is how an officer with one of the lending institutions speaks of knowing and fully understanding the kind of lending they were undertaking at his organization as being extremely risky but since everyone else was pursuing the same, making it a hugely viable idea. This clearly indicates that there was no research on the part of these institutions concerning the feasibility of the new venture in lending. The main aim of going into this line of lending was because the risks involved were low and there would be high profits.
These firms though appear to have made very many critical assumptions prior to beginning this line of venture (Zandi, 2009). First, it was assumed that any individual who was willing to own a home would be able to repay his mortgage without getting to the point of foreclosure. This led in to poor lending formulas which were thought to be able to bring in large profits. Secondly, the institutions assume that even if these individuals were unable to service the mortgages, the houses would now belong to the firms. This is thought as an advantage to the firm as prices of houses never go down thus the firm would own a house with more value than what they purchased. It turns to be disastrous in the end when the government intervenes and slashes the interest rates in order to save its citizens from bankruptcy.
One thing that comes out very clearly from this episode is that mortgage firms are only concerned with their own profitability and are in no way interested in people owning homes. Giving mortgages to individuals without a proof of financial security was meant to lure many people in to the scheme. Since the firms get paid their fees in percentage of the sales, this was a good move as large volumes translated to large fees.
Most of the people who had been lured into these mortgages realized too late that what had initially appeared to be the perfect plan into home ownership was actually a scheme that had plunged many of them into high debt. The government acted appropriately upon realizing that those loans could not be serviced through the original terms that had been agreed upon. By forcibly reducing the repayment interest rates, the government saved a lot of people from the agony that they were about to face when their homes would be auctioned or repossessed by mortgage firms.
Though this final move by the government did not help improve the economy, it did come as a relief for the many persons who were owed by mortgage firms and were not in a position to pay up. Thanks to the government, those individuals were let to retain their houses.
Work cited
Zandi, M. (2009). Financial Shock. Boston, Massachusetts: FT Press.
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