The pop of the housing bubble helped send this country into one of the worst economic times that it has ever seen. It sent ripples across the world and effected many other countries’ economies. The cause of the crisis was the irresponsible lending and borrowing of mortgage loans. The rise in demand created a need for greater supply, driving the prices higher than ever seen before. The effects of this is the largest amount of foreclosed homes in American history and a crippled economy.
As the economy thrived and many Americans were working well paying jobs the desire for nice homes increased. They were after the dream of owning a home and wanted the best they could afford. When they went to the banks, the lenders said they could get a loan for a home that previously seemed out of their budget. They created loans that made extremely expensive homes appear affordable. These loans consisted of no money down and very low payments for the first few years that slowly increased over time. The borrowers did not know that with the minimum monthly payments they were not paying off any of the balance, but were actually gaining more debt.
The lenders insisted that, with the current housing market, the home would be worth even more money by the time the payments became unaffordable. The borrower could sell the home, make a large profit, and buy another nice home. The lenders did little to no credit check on the buyers because they wanted to push the loans out so they could move onto the next loan and commission.
The lenders were not concerned with the inability of borrowers to pay back the loans. In order to make money quickly the banks were taking these large loans at a high interest rate and were bundling them together. They would take a package of these loans and sell them off to investors (Picayune 2011). An example is the lenders would take twenty million dollars worth of principle loans that would yield ten million dollars of interest payments over thirty years and they would sell them to investors for twenty five million dollars. The lenders instantly made five million dollars and had more money to lend for new mortgages. These investors would take these same mortgage loans and sell them to the governments of other countries for a profit and leave them to collect the profits from the interest paid.
New homes were being built and home owners were selling their homes for prices never seen before. Many Americans were doing anything they could to buy a home because of what a great investment it was. The bubble had hit its prime and was ready to burst when houses hit approximately double their original value. Borrowers suddenly found it difficult to sell their homes because of the new ones being built and many other home owners trying to cash out on the value of their home. When they were unable to sell their homes the increasing mortgage payments became more than they could handle. A flood of foreclosures began as borrowers were unable to pay their mortgage or sell their homes. The investors who had bought up all of the mortgage loans were suddenly left with massive amounts they were not going to be repaid. In a short period of time they had gone from rich to bankrupt from their blind, greedy buying of these loans. The demand for homes dropped and the massive rise in foreclosures increased the supply beyond anything seen before (Hagerty 2010). The housing market had spun a complete 180 degrees as housing prices dropped to almost half of what the home was originally worth. The investors lost massive amounts of money and the lenders did not escape the downfall either. They were left with several packages of loans that investors did not buy and many of the lenders were in danger of falling into bankruptcy. Several of the lenders were bought out by other larger companies while others received bail outs from the government for their irresponsible lending.
The change in the economy was drastic after this event. Many people were trying to stay afloat with their mortgage payments and were unable to spend money on goods, damaging the economy. Demand for new homes, as well as many other products went down because of the lack of disposable income. This drove down the need for workers in many industries and caused massive layoffs. The foreign governments that had bought up mortgage loans were in danger of bankruptcy and also lost many jobs due to the lack of demand for their products by Americans. Lenders have now created very strict home loan standards which make it difficult for even a good candidate to get a home loan. This damages the economy even more as many of these homes sit empty while the lenders continue to lose money on them.
The future for the housing situation has seemed bleak for many years after the bubble popped. On my street of 30 homes 9 of them are empty all of which were foreclosures. The average price on these homes was $250,000 before the prices began to rise, went as high as $450,000 at the peak, and are now being sold by the banks at $125,000. Even at this price only one of them has sold in the last 3 years. According to several mortgage calculators, with zero dollars down and a relatively high interest rate, these homes could be bought with payments under $900 a month. Many of these homes could be bought for mortgage payments lower than most rent payments on 2 bedroom apartments. I think that lenders need to take the alternative route of renting these homes at a low price. They could even give the renters an option to buy the home by putting a percentage of the rent toward paying for the home while the other percentage could be insurance for the bank. If the renter decides to move to a different residence then the percentage toward the home would be forfeited unless the renter moves into another home owned by the bank in which case it could be transferred. This would create the desire to fill these homes and also the incentive to stay with the home or with the lender on a move. If people are given an alternative to mortgage loans and the banks are able to recover some of their lost profits then I think it is a win-win situation where the economy also sees a move in the right direction.
Sources:
Hagerty, James (April 2010). Debate rages over supply of foreclosed homes. The Wall Street
Journal Online. Accessed 11/25/11.
http://blogs.wsj.com/developments/2010/04/28/debate-rages-over-supply-of-foreclosed
-homes/
Picayune Staff (January 2011). Irresponsible lending, marketing is to blame for foreclosure
crisis. Accessed 11/23/11.
http://www.nola.com/business/index.ssf/2011/01/reader_comment_irresponsible_l.html
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