Investment Musings

Traditionally, US mortgage lenders checked the creditworthiness of borrowers and then provided 80% of the home loan amount; the remaining 20% had to be paid by the borrower. So, even if the price of the house dropped it would still be higher than the bank’s loan thus giving an incentive to the borrower to repay it. However, in the recent years in order to increase lending volumes and profits the US banks followed a relaxed approach (many lenders even stopped checking the creditworthiness of the borrowes) by giving loans that were EQUAL to the entire value of the house, so the borrowers had no personal stake at all. Ultimately, this led to loans that were given to people who did not have any documented income, job or assets.