~ asked in Politics & GovernmentPolitics · 7 years ago

why do banks give loans, houses and credit cards to those who can't afford it?

Maybe I am missing the obvious motive but logically, doesn't this hurt the banks? What do they get out of giving a loan/credit card to a person who is unlikely to pay it back? They did this years ago which lead to the bailout, what were the motives?

Update:

Nobody has answered my question. WHY would a bank do this when it causes them to go into debt and they literally gain nothing from it?

Update 2:

Again, the money they receive in the bailout doesn't benefit them because it's spent trying to pay off the debt their customers created for them.

Update 3:

Stephanie that makes no sense, if a person can't pay their bills, chances are they have little of value to pay the debt anyway. Repossessed items are worth much less than what the person paid for them.

Update 4:

And also, a person who claims bankrupcy gets out of the situation free

16 Answers

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  • Anonymous
    7 years ago
    Favorite Answer

    Fannie Mae and Freddie Mac guaranteed a huge portion of the loans, meaning the banks were really risking very little.

    So, combine Fannie and Freddie guaranteeing against losses, and add in the really stupid, but widespread (nearly universal), operating theory that housing prices would continue to rise indefinitely, only slowing in rate of ascent, and never fall and you get a whole industry and their customers speculating beyond good sense in order to get their bucket into the waterfall of easy money. It wasn't just poor people with questionable credit getting loans beyond their means. Well off people with savings, good jobs, and great credit and everyone type in between were buying houses that were larger, more expensive or even 2nd and 3rd homes they could not afford if any sort of hiccup in their finances or the market occurred. Banks gave the loans because they employ people and their shareholders are people and the majority of people in the country were operating on a flawed, illogical, and unrealistically optimistic view of the market.

    A painful, extremely so, wake-up call came and would have cured the mania for a few generations, but the government stepped in with the bailout morphine and took all the pain away (for the execs and investors anyway), basically ensuring that very soon we will again suffer from the same problem...student loans? housing again?

    probably both, student loans first, then housing/banking.

    The banks came out very nicely in the end. The big investors and the executives did anyway. We, the taxpayer, got the shaft and a smaller number of even bigger banks to bail out the next time around. Regional and local banks were, and are, doing quite well throughout this whole deal because they did not have the luxury, ability, and stupidity to drive off the cliff by giving loans to people for homes they couldn't afford without a proof of job, income or credit worthiness and then compounding it by bundling and selling mortgage backed securities.

    I disagreed with the notion of an ever-rising market, seeing the parallel between the attitude of "there is no way the market will go down" and the attitude of speculators in the late 1920's that I learned about in high school history. I read an article in Fortune magazine in 2002 that denounced the notion of a housing bubble and its impending implosion. My takeaway from that reading was that it was 100 percent certain that within 5 years the housing market would suffer a correction. Attitudes of too many people were too similar to the attitude of the speculators of the late 1920s that paved the way for the Great Depression in that people were drunk with the illusion that the sky was the limit and that the only direction was up, completely forgetting that, by its very nature, investing is taking a risk of losing their money. The greater the return on investment, the greater the risk. Period. When the speculation is done with borrowed money, the implosion is exponentially worse.

    The premise of the article was that there was nothing in the foreseeable future that would drastically curb speculative investment in the housing market. Skip ahead five or six years, throw a little 4 buck a gallon gasoline, the attendant increase in the cost of everything remotely related to the use of oil (everything shipped, produced using electricity, produced using something shipped, using an oil based raw material...so...everything except things made by the Amish and shipped by Amish sailing ship or buggy) and a law increasing the minimum payments on credit card debt while simultaneously moving the credit card interest rate cap significantly and... Alakazam! a drastic drop in disposable income and thus speculative investment in the housing market. Evaporated stock portfolios, tight credit, lost jobs, rampant foreclosures and other credit defaults, the dominoes began to fall.

    Source(s): Paying attention and having read, understood and disagreed with a poo-pooing of a housing bubble burst in Fortune magazine (April 1, 2002, Is Housing the Next Bubble?)
  • T_T
    Lv 4
    7 years ago

    If I remember this correctly something like this happened.

    Bank gives $500,000 loan to poor person.

    Poor person intends to pay back $750,000.

    Bank sells contract (or whatever it's called) to investor for $600,000 without telling investor that the person is poor.

    Bank makes $100,000 profit. Investor will (hopefully) make $150,000 profit.

    Poor person defaults on loan.

    Investor gets nothing.

    Bank leaves with extra $100,000.

    All figures are made up. As you can see it's actually the investor who loses out when the person defaults on the loan rather than the bank. This spurred on risky behaviour even more since the bank didn't have to care about whether the person would be able to pay off the loan. They shoved all the risk onto the investor without telling them.

  • zito
    Lv 4
    3 years ago

    Why Do Banks Give Loans

  • 7 years ago

    Because people have no discipline, and neither do the banks. Live beyond your means, invent money out of thin air by inventing $9 in the books for every actual dollar in the bank vault, and if the loans go bad, put the bad ones together with good ones (AAA with CCC or BBB) and sell them off to others who get stuck with them. Borrow money that you know you could never pay back, flip houses and increase the price of homes so high that people have no choice but to get mortgages that they could never pay back. Then redo the kitchen in that home and flip with an extra $20,000 on top of the original price, forcing buyers on the market to buy overpriced homes. Blow your credit cards. Spend, spend, spend. Then, when you can't pay back your bills, declare bankruptcy and stiff all those who you owe money to.

    Why should the banks be responsible when everyone else is irresponsible?????

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  • Anonymous
    7 years ago

    Because they have some hidden lifeline from the government which is unknown, undisclosed and/or not covered by media.

    The DJI has QE4 of 85 billion each month.

    The banks received bailouts when they were about to go out of business.

    Since the government has a habit of throwing a lifeline to them instead of letting free market system take its course, they will engage in loaning practices which are "unnatural" and "unreasonable"

    The bailout saves them from going out of business if they give bad loans. It is a new lifeline. How is that not true? if there is no bailout, these banks would not exist today.

  • Anonymous
    7 years ago

    Hurt the banks? Hahahahaha! Dude, they get bailed out in the tune of billions.

    edit- Okay, for a more detailed answer it's because of high risk optimism. They granted people adjustable rate mortgages. They COULD afford the interest rate initially but as some of them through circumstance defaulted the rate increased for everyone else. Bottom line: the banks were too greedy.

    edit2- Think about it. If everyone payed their mortgage the banks would've profited immensely AND they also knew that in the worst case scenario they'll be bailed out because they're "too big to fail".

  • 7 years ago

    So that when you can't pay because they charge you so much that they know you can't pay, they can come and take it all away from you. Have you read about everything Bank of America has been doing lately. It will scare the daylights out of you.

  • RockIt
    Lv 7
    7 years ago

    They don't do it unless they can insure it, can reinsure it, can back stop it with someone else holding the hot potato, make someone else not find a chair when the music stops.

    Important: The originator of the card, the processor of the card, the risk owner of the card, the risk backer of the card, the ultimate eater of the debt, aren't necessarily the same entity.

  • 4 years ago

    Unlike above....I agree with you that the government told lenders to lower the standards for mortgage approval and low and behold, individuals took it upon themselves to buy something out of their league, and **gasp** now they can't afford it. F no the government should not be involved anymore, it was their fault it happened in the first place.

  • Yes, it does hurt their business. This is called fraud by greedy lenders who are looking to fatten their own pockets by sealing the deal on many loans. Of course the subprime mortgage industry would collapse, but while it was going strong, it was just good business as far as they were concerned.

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