During the 20072009 recession, many people who had taken out mortgages to buy homes had trouble making
Question:
During the 2007–2009 recession, many people who had taken out mortgages to buy homes had trouble making the payments on their mortgages.
Because housing prices were falling, the amount that people owed on their mortgages was greater than the price of their homes. Significant numbers of people defaulted on their mortgages. The following appeared in an article discussing this issue in the Economist magazine:
Since foreclosures are costly for lenders as well as painful for borrowers, both sides could be better off by renegotiating a mortgage. The sticking-point, according to conventional wisdom, is securitization. When mortgages are sliced into numerous pieces it is far harder to get lenders to agree on changing their terms.
Why might both lenders and borrowers be better off as a result of renegotiating a mortgage? How does securitization result in mortgages being “sliced into numerous pieces”? Why would securitization make renegotiating a loan more difficult? How would these difficulties affect the services that securitization provides to savers and borrowers?
Step by Step Answer:
Money, Banking, and the Financial System
ISBN: 978-0134524061
3rd edition
Authors: R. Glenn Hubbard, Anthony Patrick O'Brien