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Current housing crisis
Current housing crisis
Mortgage crisis of 2007
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In today’s economy, foreclosure seems to be a common phenomenon. In its simplest form, foreclosure results because people, for whatever reason, cannot pay back a mortgage that they have taken and the mortgagor decides to seize the property that has been mortgaged. This inability to pay can either be due to foreseeable causes such as having a higher mortgage rate that one’s ability to comfortably pay for it, or unforeseen circumstances. But unfortunately, with the current recession and economic crisis, more and more of today’s foreclosures are due to unforeseen circumstances such as a sudden medical illnesses, loss of a job or forced pay cuts to enable further continued employment. With unemployment levels rising and average pay levels decreasing, more and more families are finding themselves unable to pay their mortgages and hence losing their houses to the mortgaging banks. Because most of these foreclosed properties have become foreclosed not because of bad decisions on the part of the consumer, but rather due to national economic trends, we need to find a way to reduce the number of properties getting ready to be foreclosed.
Because foreclosure of properties is such a deep current economic problem, it will be difficult and near impossible to find a quick and easy solution. Yet there are steps that the government and banks can take to make the current situation a little better and avoid a crisis of this nature in the future. Since not all foreclosures result due to the owners’ negligence or reaching beyond their means for buying a property, those creditees that were responsible and in a position to pay some form of payment to the mortgagers should be given the chance to retain their houses by paying what they could. This not o...
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...ter and more fiscally feasible and responsible payment system can be set up. As such, creating variable mortgage rates based on the stock market or other such economic predictor will enable the banks to receive their mortgages on a timely basis and will also enable the consumers and homeowners to be able to retain their properties even as they face tough economic conditions, boosting community morale and preventing chaos in tough times.
Economics is a very integrated and multi-disciplinary field that is hard to understand even at the best of times, and foreclosure is one of those tricky concepts where solutions seem impossible to reach. But we have to try to prevent the current foreclosure crisis and reduce the number of families facing foreclosure now, and also seek to gain long-term solutions that ensure another crisis like this doesn’t come up in the future.
The new millennium brought with it a housing boom which had reached an unsustainable level (Pollock, 2011). Housing prices grew rapidly, and Baker (2010) noted a rise in house prices of over 70% from 1995 to 2006. For example, he noted average home prices in Los Angeles rose more than $400,000 over the period of 1995 to 2006 and approximately $519,000 in San Francisco. Prices around the country increased substantially as well (Baker, 2010). To encourage homeownership, banks promoted creative financing options (i.e. adjustable rate, interest only,...
Mortgage crisis can evidently be associated with excessive borrowing from the financial institutions without proper considerations of the terms and conditions of the deal. The prospects that surround business in real estate are always promising and this presumption got into the mind of all stakeholders involved in the subprime mortgage lending business. This is because in 2000, the mortgage rates were low and everybody would afford a mortgage. Unfortunately, the financial models were flawed as the rate was adjustable. After many people were nested in the mortgage bracket, greed propelled the rates to levels subprime cannot afford thus leading to foreclosures. It can be concluded that greed, lack of sufficient knowledge and flawed financial models led to the emergency of subprime mortgage crisis.
In order to accurately solve the problem of the foreclosure crisis the nation is currently in, one must look at the cause of the issue. To determine the cause, the history of foreclosures has to be looked at. The questions, “How long have foreclosures been around? In the past what was the cause of foreclosures? How was the problem fixed before? What are the similarities between now and then?” all need to be answered.
The last quarter twelve percent (12%) of American homes are in default of their loan, or in foreclosure. Add that to the previous four quarters and that is eight point seven (8.7) million homes in crisis. (Further on known as HIC's) The United States “Bail Out” helped major mortgage corporations, and their chief executive officers (CEO's), but not the families that are in, or were in these HIC's across America.
This will have a bad effect on homeowners with a mortgage and small business owners due to the increase in interest rates and decreased money supply in the market. The interest rate is determined by the interaction of the demand and supply of loanable funds market. “Increases in demand will increase both the interest rate and the total amount of borrowing and lending. Decreases in demand will decrease both the interest rate and the total amount of borrowing and lending. Increases in supply will decrease the interest rate and increase the total amount of borrowing and lending. Decreases in supply will increase the interest rate and decrease the total amount of borrowing and lending”(Macroeconomics Bus 302 Lab concept 4). Therefore, when the federal reserve tightens the monetary policy, the housing mortgage supply will decrease and as a result interest rates go
To solve the foreclosure crisis we must take a multi-pronged approach that tackles the issues making the situation worse and that caused the problems in the first place. Our goal is to do this in an efficient and time conscious manner. Any solution is going to have its positive and negative aspects but we must try to maximize the former and minimize the latter.
The frequency of foreclosure in our nation today is dangerously high. The strain from the recent economic downturn has put many families and individuals in a financial chokehold preventing them from being able to make their monthly mortgage payments. Consequently, many of these people feel they’ve punched a one-way ticket to foreclosure. With all these homes being foreclosed on, we face a very real crisis.
The 2008 financial crisis led to a sharp increase in mortgage foreclosures primarily subprime leading to a collapse in several mortgage lenders. Recurrent foreclosures and the harms of subprime mortgages were caused by loose lending practices, housing bubble, low interest rates and extreme risk taking (Zandi, 2008). Additionally, expert analysis on the 2008 financial crisis assert that the cause was also due to erroneous monetary policy moves and poor housing policies. The federal government encouraged the expansion of risky mortgages to under-qualified borrowers. Congress pushed for the support of affordable housing through extended procurement of non-prime loans for applicants with low income (Zandi, 2008). The cutting down of interest rates to low levels to supplement for technology bubble of early twentieth century and the effects of Sept 11, a housing bubble was created. This move facilitated individuals with poor credit to obtain mortgages in high percentage when lenders created non-conventional mortgages by offering mortgages with extensive amortization periods, loans with interest and payment alternatives such as ARMs (Angelides et al, 2011). Ultimately, interest rates rose again and many subprime borrowers stopped paying for their mortgages when their interest rate were reset to higher monthly payments. This paper will discuss the impact of the financial crisis as a result of subprime mortgages.
As such, people are less optimistic about the future and have chosen to scrimp and save to last through the recession. Therefore, this has resulted in a decline, in demand for houses, (Tapper & Travers, 2009). This has also resulted in a decline in prices. However, the prices can change in the future when the economy picks up, and people become more confident about the economy. To conclude, the point, which affects one’s decision to buy a new home, is never constant, one's financial situation, level of income, and even number of family members changes all the time. For this reason, people will take into consideration different factors when making the crucial decision for or against the purchase of a new house.
As of December 29, 2009, the website Foreclosure.com reported that over 2.2 million homes in the continental USA are in some form of foreclosure, 486,323 are in pre-foreclosure and 465,490 have already been foreclosed. Over seven hundred thousand have tax liens against them and 87, 389 have been sold in Sheriff sales. Along with the homeowners, mortgage companies and banks have suffered tremendous financial loss. However, the homeowners lost so much more; they not only lost the roof over their heads, but memories, their self-esteem and their piece of the American dream.
...our weeks ago it was down to 5%. It is now currently 5.24%, which is a big jump for only four weeks. Mortgages are through banks, so that is money they are losing since it is so low right now. Credit card interest rates need to drop so mortgages can get back to where they were. It is more expensive for the people, but it would compensate for credit cards.
Following the sudden increase of the dot-com bubble and the possibility of decline threatening the US management started dropping the interest rates to improve the economy. The interest-rate turned as low as 1.5% in June 2003 which was at its least possible point since 1958 (Gerding, 2009). This low interest-rate found its users in the shape of homebuyers and borrowers with the housing market at last expressing some development after period of declining movement. Indeed the rate of a thirty year unchanging mortgage in the year 2003 was the lowest in 40 years and thus the dream of owning a residence in US was becoming an incredibly simple reality for Americans (Ely, 2009). With increasing housing charges borrowers assumed th...
Foreclosure is an extremely serious topic for so many people. For some, it simply means that there are cheap houses on the marker, for others, it is the end of their lives as they know it. Ultimately, there really isn’t a solution to foreclosure, but there I have formulated a plan to help slow down the process.
Every mortgage has an interest rate and different repayment options, which is prearranged with a bank manager at the start of the loan. A fixed rate mortgage allows the borrower to pay the same rate of interest for the life of the loan, with monthly repayments never increasing. The other option is an adjustable mortgage rate, most commo...
Floating-rate mortgages begin with lower interest rate for first few yrs and then change according to the market conditions after the initial period is over. Caps are placed on how much interest rate can change at any one time, as well as on how much the rate can increase over the life of the loan. This means the principal and interest amount of monthly payments change repeatedly throughout the loan.