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Peeling the Onion: How Many Layers of Protection Do Lenders Need?
We've all heard it.  Those darn buyers, leaving the lenders out there holding the bag on these distressed properties, causing the national economic meltdown.  They promised to pay their loans back and now the lenders are taking these horrendous losses! 
Wait a minute.  Didn't the lenders protect themselves from this eventuality?  Let's count the layers of protection lenders used to minimize losses in the event of default on a mortgage.
First, the borrowers creditworthiness offered a layer of protection.  Simply put, could the borrower repay the debt?  Lenders ignored this in recent years and instead gambled that increasing equities would protect them if they ever had to repossess a home.
Second, the borrowers cash down payment offered some insulation.  Again, many lenders were loaning not just 100% of the purchase price but in some instances 125% of the appraised value. 
Third, an appraisal showing the current market value of the home offered some protection against loaning too much against a property.  However, appraisers were hired by lenders who wanted to lend money and who wouldn't be hired back if they became "deal killers". 
Fourth, what about mortgage insurance for high loan-to-value loans?  Buyers were paying for it, didn't the lender get ... more

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