Foreclosure and the Economy
Experts have said that though the number of foreclosures are said to be on the rise, only a handful of people who own homes are in real trouble. They predict that by the end of next year things will be looking up for home owners. 95 percent mortgages are fine as opposed to the 5 percent delinquent ones and real trouble is caused by only 15 percent or so of the entire amount of mortgages.
Experts also agree that the current rate of foreclosures is affecting every body. The root of the problem lies in the Federal Reserve Board’s pumping money in to the economy after the September 11 attacks, which triggered a series of events leading to the current problems. Basically, mortgage rates fell because of this action and risky adjustable rate mortgages were much more popular than fixed rate mortgages. Since so much cash was flowing, the housing sector experienced an economic boom and so did the mortgage market. A lot of opportunists took advantage of this and jumped into the market without any real experience or knowledge of it. As a result loans were given to people who obviously could not repay them, and would eventually default and face foreclosure. Borrowers with awful credit histories and no documented fixed income got loans they should never have obtained, and eventually this led to an increased rate of foreclosures.
If lenders are to be blamed for this debacle, builders are not far behind. The teaser rates were so tantalizing that many people fell for them, not being too farsighted, they didn’t predict the repricing of loans that occurred in a few years time. Some of these loans added interest which wasn’t charged to the principle so that the actual mortgage amount was also increasing. Many of these loans were so complicated that debtors were unable to understand them, and all this led to the big foreclosure mess we are in today.
If only people had seen that home values would not continue to rise. On the contrary, they dropped, and with it dropped the home equity of these debtors. Then these home owners were unable to refinance and eventually defaulted on their mortgage repayments, thus facing foreclosure. The rising mortgage rates and the risks associated with adjustable rate mortgages all led to this problem. The initial low rates evaporated and suddenly home owners found themselves owing much more than they were capable of paying. Also, the equity they had expected was not there, so there was no other route rather than defaulting.
The long term economic impact of foreclosures is significant. Available housing is an area that is particularly affected. The property values of the surrounding neighborhood areas drops because of the houses facing forced sale in the region. Brand new areas with builder buy down debts are another issue. The neighborhood, and not the house itself, gives the value to a house, and this is how the larger impact of foreclosure is felt. The intrinsic value of the home is little compared to the larger effects of foreclosure homes surrounding it, even if the home itself is not a foreclosure home.
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