How Banks Can Avoid a Repeat of the 2008 Foreclosure Crisis?

How Banks Can Avoid a Repeat of the 2008 Foreclosure Crisis?

Global Pandemic has crashed many economies socially, politically as well as financially. It has marked the onset of the Foreclosure crisis as were seen from 2007 to 2010. The U.S. is one of the most severely hit economies of the world. U.S. homeowners struggle to remain on top of their mortgage payments — and the situation may only get worse. As of now, 4.6 million American homeowners were in some form of non-repayment, comprising 8.7% of all mortgages, according to real-estate data firm Black Knight. If history is something to go by, it is doubtful in many situations that the lenders will ever see any of the funds that they have lent.  Several houses are classified as "Real Estate Owned" or REO for short. There are homes owned by banks that were repossessed on. As a party, they have a real existing deficit which is greater than the loan's original principal value. That is, the creditors who financed those loans lost more money than they lent. During the 2008-09 crisis, 73% of the total loan sanctioned was lost. There were no rare severities of damage greater than 100 percent. In these situations, it was potentially costing some buyers, depending on servicers' jobs, more to repossess properties and then sell them than just giving them away would have done.

With the potential rise in issues with home loans, banks need to avoid falling into the same sort of chaos again and again. The only thing that acts as a stitch in time is the very concept of mitigation.

Is there going to be another recession?

While the global economy appears to have few cracks due to the numerous factors, today's world stands at a stronger footing than it was in 2008. Unlike then, today's banks are expected to hold more resources, so we might assume they are less leveraged and have a stronger financial position. Additionally, we should also note that banks now have less in the way of trading assets and that the risk is significantly reduced.
 

Whatever the reason for Bank of America's mistakes — and indeed several other financial and non-banking financial institutions — one thing is clear: We can't risk a repeat. With hundreds of thousands of unemployed people and loan missed payments higher than ever before, a potential cycle of even more frequent defaults would seem likely. So, if we ever see another major round of defaults, let's note the last time for someone doing it the hard way didn't work well. Lenders will do well, this time around, to put the mitigation concept ahead of moral hazard.

What could be done to prevent it?

To avoid another financial crisis as one seen in 2008, the following things can be done.

Firstly, we need to ensure that the economic recovery seeps to both the middle class and small businesses. The new asset-buying strategy of the Federal Reserve, known as quantitative easing, has been effective in lowering unemployment, improving the economy, and holding interest rates low. Federal Reserve should maintain this plan until there is sufficient proof of sustainable economic growth. Yet the US must step away from the current monetary strategy, which is proving detrimental to that goal, to ensure a more sustainable economic recovery. It includes providing assistance to those already facing bankruptcy through the Federal Home Affordable adjustment and refinancing services, offering cuts in principal on Fannie Mae and Freddie Mac-supported mortgages and promoting incentives to make student loan repayment more manageable.

Secondly, we should be aware that the engines of economic growth, small banks and credit unions, are being overburdened. However, about 60% of legislation deadlines have been skipped in the three years since Dodd-Frank was implemented.

Third, the Federal Reserve needs a chair that can carry on the current growth policies and understand the impact of policies implemented by the Fed on the middle and lower-class people.

Hopefully, these strategies are likely to improve the current and prospects of the financial market.