What Led to the Economy Crash?

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RYAN D. FERRELLI
        By RYAN D. FERRELLI |        Broker in        San Diego, CA

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What Led to the Economy Crash?

    Posted under: Home Buying in California, Home Selling in California, Credit Score in California  |     April 4, 2013 9:49 AM  |     7 views  |     No comments
Looking back at the last few years, many could not foresee the damage that subprime mortgages would do to the economy in terms of the housing market and the resulting recession. Early into the new millennium, the number of subprime mortgages originated began to rise rapidly. Individuals that normally would not qualify for a mortgage were able to purchase homes for the first time. As the demand for subprime mortgages grew, mortgage brokers and lenders began to ease their credit requirements allowing for a huge influx of pre-approved buyers to enter into the marketplace.The increased demand for property caused real estate prices to skyrocket. Nationwide the prices of real estate were increasing at a rate much higher than the average increase in salary. To add fuel to the fire, many mortgage lenders began providing “stated” mortgages loans, in which applicants did not have to verify their income but merely needed to “state” how much income they made. These “stated” mortgage loans, quickly became know as liar loans as many people purposely lied about their income in order to qualify for larger mortgages.

The increased demand caused by subprime mortgages was simply unsustainable, ultimately causing the real estate market to crash. People simply were purchasing homes for higher prices that what they were intrinsically worth because of the lenient credit practices. Another problem plaguing the sub prime mortgage crisis was that many of the loans were originated with an adjustable rate as opposed to a fixed rate. This was initially done in order for borrowers to have lower mortgage payments on larger loan amounts. However, once these mortgages began to reset and the interest rates began to increase, many homeowners simply could not afford to make their monthly mortgage payments and foreclosures began to skyrocket.

As the market was flooded with an abundance of foreclosed properties, the prices of homes nationwide began to plummet. This caused a ripple effect, as homeowners who wanted to refinance their homes to a fixed rate mortgage were unable to do so because their home was worth less than the price they originally paid for the house. These same homeowners were now stuck in a home with an adjustable mortgage and higher mortgage payments for a house that was worth considerably less than what they paid for it. As the financial burden of the increasing mortgage payments continued to rise, many homeowners simply stop paying their mortgages leading to more foreclosures and a continued downward spiral in the real estate market.

There are many issues that lead to the housing crisis, but the main cause of the crisis was greed. Mortgage lenders and brokers were enticed by the thought of making a quick profit by originating sub prime mortgages and selling them as a collateralized security. Home owners were enticed by the thought of owning their dream home of little to no money down and easy low payments. Many parties are to blame, but greed was the primary motivator in the crisis.

Overall, the real estate market is beginning to rebound in many local markets. However, there are many home owners who are still underwater and struggling financially. A full recovery is still many years away, but in due time the market will stabilized.