What Led To The American Foreclosure Crisis

By Author: Wade Knoxville
Total Articles: 43
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The reason why so many homes went into foreclosure lately has to do with risk. After the tech crash of the early 2000 the Federal Reserve lowered interest rates which made buying home affordable. In addition to low interest rates, new financing solutions were created to make it easier for people to get a mortgage on a home. A lot of these new financing programs would offset the first few years of mortgage payments to a low dollar amount. After a couple of years from the loan origination date, the loan would switch to a higher dollar amount to recoup the initial monthly discount. This transition to a higher monthly mortgage payment became too difficult for most home owners to afford and subsequently led to the massive amount of foreclosures found into today's real estate market.

The Risk Factor

One of the key ingredients that led to this financial meltdown has to do with who held the risk on these mortgages. The small boiler room shops that would process the home owner's loan information would get a commission for any loan they could approve. Once the loan fit a certain pre-approval criteria the loan was passed ...
... on to a bank and the bank would hold the risk for the mortgage. The broker who originated and created the paper work for approval did not hold any of the risk if the loan went into default. What this causes is a completely risk free environment for the broker to try to process as many loans as possible in order to create more commissions for themselves. If a loan goes into default, the originating broker does not suffer monetarily or legally.

The Young Broker

In order to approve people for home loans at a high volume rate, brokerages have to increase the chance for a loan to be approved. When a mortgage broker does not hold the risk of the loan, they can be persuaded to use alternative methods to approve a home loan. Sometimes this would lead brokers to falsify documents in order to make the loan pass the pre-approval process.

To find people who are willing to falsify documents in order to gain an increased wealth potential, it usually means brokerages would seek out young males in their early 20s. Young people who do not have a wide experience of laws, owning homes and fraud are easily susceptible to be attracted to this line of work (Especially when a college degree is not necessary). In some case young mortgage brokers as old at 19 years old were making upwards of $30,000 a month processing home loans. This led to a widespread attraction to this line of work, thus increasing the number of new home and refinancing loans originated in the early 2000s.

The Loan Calls of 2007

Many economists saw 2007 as beginning of the end. Most of the original loans made that increased the borrowers monthly payment came into effect during 2007. Many anticipated that most borrowers would not be able to afford the increased mortgage and therefore default on their home loans. By 2008 the United States had been swept with a wave of foreclosures across the country. During November of 2008 the United State stock market began to drop significantly. This was primarily due to an economy built on an expanded housing market that crashed. In addition, when families can't afford housing, money is quickly removed from the economy. These combined effects severely punished the U.S. Economy, which may take several years for a correction to take place.
Wade Knoxville
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