If one principle in financial regulation reached a consensus in 2014, it’s that decreased leverage creates stability throughout the system. Leverage describes the amount of debt used to finance a financial institution’s assets. It can significantly increase profits, but it also increases risk. Overleveraged companies turn small setbacks into major events, and their subsequent insolvency can cascade through the financial system and lead to government bailouts. The financial crisis of 2008 was fueled by highly leveraged companies making ultimately unsuccessful bets on the mortgage market.
But there’s still a large — and widening — disconnect between how regulators treat leverage for banks and for homeowners, and a recent move by mortgage giants Fannie Mae and Freddie Mac could reintroduce dangerous risks into the housing market.
f one principle in financial regulation reached a consensus in 2014, it’s that decreased leverage creates stability throughout the system. Leverage describes the amount of debt used to finance a financial institution’s assets. It can significantly increase profits, but it also increases risk. Overleveraged companies turn small setbacks into major events, and their subsequent insolvency can cascade through the financial system and lead to government bailouts. The financial crisis of 2008 was fueled by highly leveraged companies making ultimately unsuccessful bets on the mortgage market.
But there’s still a large — and widening — disconnect between how regulators treat leverage for banks and for homeowners, and a recent move by mortgage giants Fannie Mae and Freddie Mac could reintroduce dangerous risks into the housing market.
- See more at: http://www.thefiscaltimes.com/Columns/2014/12/19/Borrowing-Bad-Risky-New-Mortgage-Rules-Could-Take-Us-Back-2008#sthash.yp1Gk6Hz.dpuf