All About The Bailout

Okay, this is going to be long... Has anyone been wondering why the government would have a 700 BILLION dollar bailout? If you're that person, I'm here to help.

Before I begin, lets reminisce a little. Years ago you had to put money down on a house before the bank would give a loan on that house. They did this because it showed them that you were able to afford that house and could pay off the loan (low risk). A long time ago, it was around 20%. The problem with people was that if they wanted a 100,000 dollar house, they would have to give the bank, up front, 20,000 dollars before they could get the rest of the loan. For the average person, getting 20,000 dollars in cash takes a long time to save up, and as we all know, America is very impatient.

Then, an organization came out (government run), named Fanny May and Freddie Mac. This organization's goal was to let people get loans without having to put so much money down. They did this by guaranteeing banks they will pay the money back if the customer can not afford the payments (the person still looses there house). Over time, they moved the percentage to pay up front from 20% to 10 % to 5%, and now you can get a house with zero down and get a 120% loan in case you have to make repairs or anything as such. This means for a 100,000 dollar house, you can get a loan for 120,000 dollars with zero down. Now, I know what your thinking...If they can't pay it, then the bank forecloses the house and they get there money... WRONG!! That would work if the value of houses were increasing or even stayed the same, but they don't, and for the past few years, the housing market has been horrible!

Now, here comes the bailout part. Lets say you have someone that buys a 100,000 dollar house using a 120% loan (meaning the bank forks up 120,000 dollars). Now, over time something happens to the person (lets say he looses his job) and he cant pay for the house payments. Now, the bank forecloses on the house, but it's only worth 80,000 now. So the bank just lost 40,000 dollars. This is where Fanny May and Freddy Mac step in and pays that 40,000 that they guaranteed the bank. Well... The problem is that this is happening all over America. Fanny May and Freddie Mac are bankrupt, but people are still loosing there houses, and at the same time, the bank is not being reimbursed like Fanny May and Freddie Mac promised because they are bankrupt. So, over time, the banks become bankrupt and can't afford to give out loans. That's horrible! How so you ask? Well... lets say you are a small business owner that gets a 20,000 dollar loan every year for his business (and always pays it back). He goes to get that small business loan, but the banks are bankrupt, therefore they have nothing to give him. Now he has to fire his employees (so people are out of jobs), and he has to shut down his business. If you didn't know, it's the great depression all over again. So, the government had to pay billions of dollars to help these banks out. Now, this once again shows how a government run organization can't do anything right, but yet Obama wants to incorporate more government organizations and even wants the government to be over the medical aspects of our lives. Do you see the problem here? But that's for another blog.