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  • 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. So far, 95 percent mortgages are fine as opposed to the 5 percent delinquent ones. The real trouble is caused by only 15 percent or so of the entire amount of mortgages. Furthermore, experts have predicted that by the end of next year, a lot of people will have been looking up for home.

    Experts also agree that the current rate of foreclosures is affecting everybody. 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.It was always presumed that 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 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 reprising of loans that may occur in a few years time. Some of these loans added interest which weren’t charged to the principal. As a result, the actual mortgage amount has increased. Many of these loans were so complicated that debtors were unable to understand them ; thus, resulting to the big foreclosure mess we are in today.

    So far, peopleexpected home values to rise. On the contrary, they dropped, and along with it is the home equity of these debtors. When it was difficult for them to refinance, They defaulted in their mortgage and eventually, face foreclosure. The rising mortgage rates and the risks associated with adjustable rate mortgages all led to this problem. The initial low rates evaporated. Suddenly, home owners found themselves owing much more than they were capable of paying. And so, when the equity they had expected was not there, there was no other easy way out than defaulting.

    The long term economic impact of foreclosures is significant. One area that is greatly affected is the housing. It’s property surrounding areas and neighborhood are forced to sell houses while brand new areas with builder-buy-down-debts are also facing 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.

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