Many things are contributing the the current mortgage crisis.
However, one of the major reasons things are in such turmoil stems from the mortgage industry and the government itself.
One of the contributing factors was the fact the government wanted to enable lower income families to be able to buy their first home. The income requirements were lowered below the level they should have been.
The rule of thumb had always been that the amount of the monthly payment should not be more than one week’s gross income. That added to the fact that twenty percent of the value of the property had to be put down ensured that the borrower had sufficient income to pay off the loan.
Hence the rules were changed, there were loans that could be had with no income verification, one hundred percent loans were given, all a borrower had to do was fog a mirror to qualify for a loan.
One of the unintended consequences was that , besides making homes available to people who really couldn’t afford them, it increased the demand for property, whenever demand goes up, so does the price, this rapid increase in property values led to many people buying property on the speculation that it would rise in value in a short period of time, thus allowing the purchaser to “flip” the house, thus making a profit in a short period of time. As this practice continued,it began to feed upon itself until the values kept rising and rising.
Sooner or later the bubble had to burst, people were over extended, either because of speculation, or because they had purchased more house than they could afford. A sudden downturn in the economy, people started getting laid off, they began falling behind on payments, gas prices kept rising and soon there were a whole lot of houses that were overvalued, and no one to buy them.
The speculators were stuck with their houses, people quit buying, and the time came when you couldn’t sell a harpoon to an Eskimo.
Now we have the government bailing out the very people that they encouraged to make the bad loans in the first place, and who pays for all of this government interference in a free market? Three guess, the first two don’t count.
And the people the government were trying to help are now losing their homes, and ruining their credit in the process.
What is the lesson learned here?