10/18/2017

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Why Are So Many Homes In Foreclosure?
by John M. Roberts

Many people are wondering how the real estate and mortgage markets changed from good times to become so depressed. What happened starting from around 2006 and on through 2009 and beyond, and how did so many people end up in default and/or foreclosure?

The reason there are such a large number of mortgage defaults and foreclosures during those years is because both lenders and many borrowers and investors got caught up in the greed of the time. Lenders were making huge amounts of money selling loans in the secondary mortgage market and there were either limited or absolutely no oversights by the federal government to control dishonesty and greed. So everybody from Wall Street to Main Street were encouraged to make questionable, deceptive, and in many cases, illegal loans to keep the big money flowing.

There were certain catch phrases during those years such as "securities" and "blocks of mortgages" that were bought and sold on Wall Street and other financial districts. You often heard the phrases "subprime loans," "stated income loans," "no money down loans," "100% loans," "120% loans" and other phrases that made no sense to anyone but those who were promoting them, and many lenders actually encouraged borrowers to take on such risky mortgages.

With stated income loans, all borrowers had to do was "say" that they made enough money to qualify. Lenders approved them without verifying employment or, in some cases, checking credit histories.

People were given adjustable rate mortgages, just low enough for them to make the payments the first year or so on the premise that they would get raises or better employment opportunities in the future. Naturally, this didn't happen and they were stuck with ever increasing interest rates, rising mortgage payments, and declining property values.

On Main Street, many lenders, loan officers, realtors, appraisers, escrow companies, and title companies realized that they could make huge amounts of money underwriting and selling those types of risky loan products, and they went for it with total disregard to ethics and, in many cases, the law.

Are those borrowers who took on such loans just as responsible? Sure they are. When people are given an unchallenged opportunity to make money, they will blindly follow the crowd, regardless to where they are led.

During those years of uncontrolled lending practices, many people saw the opportunity for making unearned money in rising real estate prices. You started hearing words such as "flipping" and "equity buildup." Many people who couldn't really afford large mortgages jumped head first into the fray thinking that there was no end in sight for the booming housing market.

They didn't consider the fact that the economy goes in cycles. One day the inflated real estate market would peak, the ballon would surely burst, and home prices would suddenly fall. It happened, and when things got tight, they couldn't make the payments. So many simply walked away from their mortgage obligations, not because they wanted to, but because they were never in a position to survive if the unthinkable happened. And it did! The housing market simply crashed leaving them with little or no options.

In all honesty, on an up note, many people made a lot of money during this same period. They knew about economic cycles, saw the warning signs and took heed, and then quit buying in the nick of time. Others only bought what they could afford.

But many others did get trapped in the mortgage mess. That is why there has been so many foreclosures, and so many other people and businesses who have had to file for bankruptcy.

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