But when the inevitable collapse came, the banks cried out that they were just as much victims of the market as the homeowners whose properties they were taking. In fact, the banks cried out that they were even larger victims than the homeowners, as the banks faced a drying up of credit and potential collapse. The Federal Reserve, in response, provided generous bailouts to the banking system in the form of direct injections of liquidity and low-interest loans.
But how did the lenders and financial institutions miss the bubble? Or were they planning on the foreclosures for some other end? Did the foreclosure crisis really catch any of the highest executives of the largest banks by surprise? Or did they want the foreclosure crisis rather than continuing to collect mortgage payments from homeowners?
The banks certainly wanted their loans to be paid back, but foreclosures did not bother them at all. The wave of foreclosures sweeping across the country is not materially affecting the business models of the largest financial institutions very much right now, except they have stopped lending money to people who can not afford mortgages (and are cutting off access to credit to homeowners who are not behind yet). But this action was taken only because the real estate markets are in a condition where the banks can not make money from the poor lending and foreclosure scam at this point.
As long as property values kept increasing (which they did for nearly a decade due to the bubble created by the Fed), foreclosures were not a problem. If the banks gave a loan to someone who eventually fell behind, it did not much affect the bottom line. The homeowners got kicked out of the house and the loan was a loss, but the bank ended up with the property through the county sheriff sale, and resold it right away for a higher, quicker profit. Real estate agents, banks, mortgage brokers, appraisers, and the local governments all made out very well during the period of increasing home values.
The main danger the possibility of property values stagnating or beginning to fall. In that scenario, the banks would not be able to regain a loss on the mortgage loan right away through a sale to another gullible home buyer, and the property might sit on the market for months, costing money in property taxes and insurance. But that is the environment the real estate market is in now, where property values are falling and banks have all of these foreclosed properties that are not moving.
But even now with so many foreclosures, the banks have already made their money from originating the loans and packaging dodgy debts to sell to hedge fund managers and investors. So the lenders have not really "lost" much -- they just are not "gaining" as much as they were a few years ago when they were taking advantage of the real estate bubble to pump and dump homeowners out of their homes and resell properties for ever-higher amounts.
When bank profits go down, though, they are very good at crying "Wolf!" to the government and receiving bailout packages, as is happening now. The banks have received hundreds of billions of devaluing dollars in bailouts and below-market-rate loans from the Federal Reserve in order to keep them looking profitable and solvent. With the collapse of Bear Stearns, though, it should be clear to everyone that the financial institutions and Federal Reserve will do whatever it takes to keep the banking system afloat at the expense of the average American.
In the end, the banks have been able to take their profits from making bad loans, take homes from people unable to stop foreclosure, and steal even more money from Americans by giving the government the bad mortgage debts in return for Treasury securities. Our currency, the rapidly-devaluing dollar, is now backed by these bad loans that are not being paid back. This is a far cry from the gold standard or pseudo-gold standard, but probably not that far from the backing of most other fiat currencies.
Foreclosures may not have been part of any sort of centrally-managed "master plan" of the banks for the economy, put forth by wicked idiots or conspirators to rob people of their homes. But foreclosures have definitely not been a great loss of money to the banks, who are receiving more in "assistance" than the people who have been victims of the banks. In fact, the banks are getting their free bailouts paid for by you, me, and even all of the people that they are foreclosing on.