There’s no question we have a foreclosure crisis in America. One out of every 248 households in the United States received a foreclosure notice in September of 2012, according to RealtyTrac. Between 2007 and 2009 over 8 millions homes were foreclosed on. That number could reach 25 million before it’s all over.
And that doesn’t even count the number of homes that are “underwater” where what’s owed on the mortgage is far more than the homes are worth on the market. Those folks face many years before there investments will have any positive equity again.
Yes, the real estate market is a mess and this has effected the entire economy. Jobs have been lost and retirement investments are gone. It will be years before we put this all behind us.
But how did we get here?
Economists will be arguing this for years. But some of the factors are pretty clear.
If your home is facing foreclosure, or you’re having problems making your payments on your home, you may be well aware of your particular situation. But you may not be fully aware of all the market and other factors that lead to this problem.
The Housing Boom
It all started with the housing boom of the early 2000′s. Of course if you bought your home or invested in real estate because of this boom, you were not alone. Housing prices almost doubled between 1998 and 2007. Many of us believed it would continue this way forever.
But any student of real estate history knows that “what goes up, must come down.” At least, when it goes up that quickly. Yes, we expect our homes to be great investments in the long run, but to double in 7-8 years is unheard of in the housing markets.
But that didn’t keep many of us from buying homes we really couldn’t afford, or refinancing to get cash out, or investing in real estate, generally believing that this was real wealth and money in our pockets. But it was only “paper” wealth and not something we really should think of as “real money”.
And investors, both on wall street and in the housing market, all bit on the same hook. Lenders also became part of the feeding-frenzy and started lending money to people they never should have and in ways that were at the least bad business practices.
Here’s a list of some of the things that happened that lead to the problems.
Subprime Mortgage Programs
Lenders offered loans at rates that were below the prime rates available that required little or no down payments. This lured people into homes and mortgages they could not really afford. Many of these were adjustable rate mortgages. When housing prices collapsed or rates adjusted up, reality struck and homeowners and lenders were stuck with bad loan that defaulted.
Weak Economic Conditions
The underlying economy, apart from those working in real estate related professions, was not solid. The manufacturing sector was eroding, and had been for years, so homeowners who took out loans often found their jobs disappearing or being moved overseas. When all of the real estate related businesses, like construction and finance, began to die after the collapse, then the economy just got worse.
Also many homeowners used their equity to “keep up with the joneses,” buy toys, and sometimes just to pay bills. This “house of cards” had to eventually collapse.
Predatory Lending and Low Interest Rates
Some lenders preyed on the perceived increase in equity that homeowners mistakenly believed was there by offering loans at low rates. Many refinanced thinking their homes were like an ATM machine. Some used Adjustable Rate Mortgages (ARMs). When interest rates went back up they found they could no longer keep up with payments and default and foreclosure was inevitable.
Greedy First-time Homeowners
Supported by short-sighted government programs and greedy lenders, many new homeowners got into the market using sub-prime loans, and unrealistic interest rates. Many bought homes that they never could have bought just years before with little or no money down, and when things collapsed, they had to face-the-music which usually meant default and foreclosure.
The Illusion of Increasing Home Values
When the bubble was growing it seemed like it would never end. Home prices kept increasing at amazing rates. This brought many people into the market planning on getting rich. It also led homeowners to borrow against the “illusion” of what their homes were worth. With more and more “qualified buyers” available, demand increased and prices continued to go up. This spiral continued until the bubble burst and prices stopped going up and even started going down as they always do.
But it was too late for many who were over-extended. They could no longer keep up with payments and defaulted so banks foreclosed. Some banks even went out of business themselves.
A growing sector of the banking industry at the time, speculated using securities that were backed by mortgages. These new Mortgage Backed Securities (MBS) were somewhat risky in that they were tied to housing rates and mortgage payments. Many global investors, including managers of 401K plans, invested in these new, risky securities. When the housing market collapsed so too did this part of the investment community and this affected the overall economy as even those who never got involved in the real estate market saw much of their wealth disappear.
The result… lenders couldn’t lend, investors couldn’t invest, and ultimately businesses couldn’t grow or hire. In fact many laid off workers. This meant workers couldn’t spend.
So like the proverbial “house of cards” all of these factors led to an economy that is suffering one of the largest downturns in history. And it has affected the whole world as well.
And I can’t help but wonder… doesn’t it all come down to one thing… greed… on everyone’s part?