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Why do banks need bailout money?
Everyone who obtains a mortgage with less than 20 percent cash down payment is required to buy an insurance policy that protects the bank from any financial loss in the event of default.
If an individual defaults, the bank gets the insurance proceeds AND the house. I smell a skunk,here.
1 Answer
- 1 decade agoFavorite Answer
Because of the way economics work, a bank can lend out money to a company, even though that bank may only have as little as 10% of the money it is lending out. That company is now the banks asset, worth whatever the bank lent it. If that company nosedives (As many are because of the recession), then the bank has lost that money that it didn't even have in the first place.
Now apply that to a bank that lends out to 1000 companies that all have fallen. The banks not only lose that 10% of money that they actually had, but also lose the money that they DIDN'T have!
In terms of housing, the bank has purchased the house, and is almost leasing it to the owner, in the form of a mortgage. That bank has invested in the house.
If the house is no longer worth what the bank paid for it, and the owner defaults, then the bank has lost money since the house isn't worth nearly as much as it originally was during the housing boom. The bank cannot mortgage the house at its original price.
Its very complicated, and this is the best of what I understand.