Tough to refinance a $ 500 000 house with a $ 450 000 mortgage when the price of the home drops to $ 400 000 in value. Value of the home is smaller than the loan amount. The $ 450 000 mortgage note held by the lender could not be bundled and sold to a re mortgage company because they cannot come up with a discount price for the mortgage. If the lender cannot sell off his mortgage notes, he cannot go to the bank to borrow more money to lend to new home buyers. The cash flow starts to freeze up, making the money available to new homebuyers, carbuyers and business to borrow. Economy starts to gum up.
But if the lender has excess inventory, would he not be forced to sell at a discounted price? And would that not make housing more affordable and cause cash flow to increase, lubricating the economy?
I admit I'm weak in economics, but I’m struggling to see a national crisis. It looks like a crisis to the lenders, but that’s a risk they took in making these loans.