Many factors contributed to the financial crisis of 2008. One significant factor that resulted in many...
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Many factors contributed to the financial crisis of 2008. One significant factor that resulted in many bad loans was a failure by lenders to investigate loan customers sufficiently. For example, Countrywide Financial Corporation wrote many loans. under its "Fast and Easy" loan program. That program allowed borrowers to pro- vide little or no documentation for their income or their assets. Other lenders had similar programs, which earned the nickname "liars' loans." One study found that in these situations, 60% of applicants overstated FORECLOSURE FOR SALE Steve Debenport/E+ Getty Images their incomes by more than 50% in order to qualify for a loan. Crit- ics of the banking industry say that because loan officers were com- pensated for loan volume and because hanks were selling the lans to investors rather than holding them, the lenders had little incen tive to investigate the borrowers' creditworthiness. Sources: Glenn R. Simpson and James R. Hagerty, "Countrywide Lass Focuses Attention on Underwriting Wall Street Journal (April 30, 2008), p. 81; and Michael Corkery, "Fraud Seen as Driver in Wave of Foreclosures, Wall Street Journal (December 21, 2007), p. A1. What steps should the banks have taken to ensure the accuracy of financial information provided on loan applications? (Go to WileyPLUS for this answer and additional questions.) Many factors contributed to the financial crisis of 2008. One significant factor that resulted in many bad loans was a failure by lenders to investigate loan customers sufficiently. For example, Countrywide Financial Corporation wrote many loans. under its "Fast and Easy" loan program. That program allowed borrowers to pro- vide little or no documentation for their income or their assets. Other lenders had similar programs, which earned the nickname "liars' loans." One study found that in these situations, 60% of applicants overstated FORECLOSURE FOR SALE Steve Debenport/E+ Getty Images their incomes by more than 50% in order to qualify for a loan. Crit- ics of the banking industry say that because loan officers were com- pensated for loan volume and because hanks were selling the lans to investors rather than holding them, the lenders had little incen tive to investigate the borrowers' creditworthiness. Sources: Glenn R. Simpson and James R. Hagerty, "Countrywide Lass Focuses Attention on Underwriting Wall Street Journal (April 30, 2008), p. 81; and Michael Corkery, "Fraud Seen as Driver in Wave of Foreclosures, Wall Street Journal (December 21, 2007), p. A1. What steps should the banks have taken to ensure the accuracy of financial information provided on loan applications? (Go to WileyPLUS for this answer and additional questions.)
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Money Banking and Financial Markets
ISBN: 978-0078021749
4th edition
Authors: Stephen Cecchetti, Kermit Schoenholtz
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