The financial crisis that our economy has experienced over the
last years began when the economy started to slow down and many of the large
banks and financial institutions found themselves exposed to a huge amount of sub-prime loans that were about to go under.
Sub-prime loans were a way for banks to advertise the idea of
buying a house to lower income families who would not have been able to afford
a permanent residence without this new opportunity. Banks lent money to these
families, who may or may not have had a history of bad credit so that they
could buy a house with a small down payment and a low interest rate in the
first few years. As a result families who bad credit scores and already in debt
and sought after by medical collections or other debt collections agencies were
given loans.
As housing prices started to drop in many regions of the country,
all of a sudden many banks found themselves holding mortgages on homes that are
worth far less than the value of the mortgage. At the same time, the homeowner did
not want to continue making payments on a house that is worth less than what
they owe for it. So many homeowners, real estate investors, and speculators
decided to stop paying their mortgages and decided to turn the property over to
the lending bank.
The bank in most cases did not want the house back because they
had no opportunity to resell the house. Each mortgage default incident
created a chain reaction. Once other sub-prime homeowners hear about what
happened, they too recognized the financial incentive to walk away from their
house as well. All of a sudden, the banks were faced with a shortfall of
assets to liability ratio on their books. The banks now had all these real
estate assets that were dropping in value and they had no money coming in to
counter balance.
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Its the first time I read about it and understand it perfectly. Thanks for sharing this!
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