The year is 2008, there is a presidential election coming up (I assume), the economy is headed into recession (or worse), and the real estate market is in a depression (or worse). How did all this happen? Just a year ago, in 2007, the housing market, to all appearances and according to many of the so-called "experts," was set to keep booming.
But then the bottom fell out of the market as investors realized that people could not afford their homes, and property values started falling dramatically in some areas. Hedge funds at Bear Stearns were bailed out by the Federal Reserve's printing press, investors from Abu Dhabi bailed out Citigroup to the tune of billions of dollars, Bank of America entered the process of bailing out Countrywide Financial Corporation after its subprime portfolio went into meltdown mode. Who is responsible for all of this mess?
To have some inkling as to why so many Americans are facing foreclosure all at once, it is necessary for one just to drive around to the closest shopping center in the neighborhood. Take a look at all the pointless, expensive garbage that people keep buying, because they can just whip out a credit card and never have to think about actually paying for their items. And they have no reason not to keep buying, as getting approved for a new credit card is as easy as ordering from McDonald's.
And when interest rates were lowered close to 0%, to combat the bursting of bubbles in 2000 and 2001, banks started giving out mortgages like they were credit cards. Homeowners, trained from birth to be greedy impulse-buyers, started purchasing houses and refinancing their homes as if they were ATMs. Banks would approve a family for a maximum loan amount, and appraisers would give the house a value of that amount, in order to increase fees and commissions for the mortgage broker and real estate agent. The item of the day was greed and everyone had a place at at the table.
Homeowners, in order to get as much money as possible, just lied on their loan applications, overstating their income by 50% or more. After all, decades of public schools encouraged cheating, and now the teacher-lender was not even attempting to grade the worksheets. Banks, eager to hand out money, approved the loans no questions asked.
It did not take too long for the first homeowners who could never afford their homes to begin with to find out that they could not afford their homes. This had little to do with interest rate increases, as people who make only $2,000 a month, and have $1,000 a month in credit card bills, are unable to afford a $3,000 principal payment, regardless of how much interest they pay every month. But several foreclosures in an area will start to drag down home values. And homeowners with good credit who financed 110% of the purchase price could not sell quickly if they ran into a job loss or medical problem. The fallout from the greed of the subprime buyers and lenders started seeping into the rest of the market, which should have been entirely predictable knowing how many poor loans were being made by banks, securitized, and sold off to hedge fund investors.
Property values declined, making it even more difficult for homeowners to sell to avoid foreclosure. And more foreclosures could not be avoided, pushing property values down even further. A market decline turned into a panic which, despite the best inflationary efforts of the Federal Reserve, turned into a recession which, despite the best interest rate manipulations by the Federal Reserve, turned into the depression now being experienced by homeowners who are now effectively trapped in their homes, with loans amounts much greater than the current value of the property. For years, they will paying for their greed of the past years, instead of building equity in their homes.
So, the real estate market experienced a number of big banks handing out money and homeowners lying to receive money. That imbalance paved the way for the housing market to enter a depression at the first sign of defaults and property value declines. The problem in the first place was created by inflation and interest rate manipulation by the Federal Reserve, in an ill-advised attempt to combat one bubble. Manipulated bubbles, though, can not be effectively dealt with by transferring the problem from one segment of the market to another. And in transferring a massive bubble to homeowners and consumers, the road to further economic crisis that foreclosure victims are walking now was paved by the Fed.
Nick writes for the ForeclosureFish.com website and blog, which attempts to teach homeowners how they can avoid foreclosure before it is too late. The site has hundreds of pages of articles and reference materials describing every method that can be used to save a home, including forbearance agreements, hard money loans, and short sales, among many others. Visit the site today to read more foreclosure articles and download a free e-book explaining how foreclosure works and how it can be stopped: http://www.foreclosurefish.com/
Article Source: http://EzineArticles.com/?expert=Nick_Adama
