The year is 2008, a presidential election is coming up (I guess), the economy is headed for a recession (or worse), and the housing market is in a depression (or worse). How did all this happen? Just a year ago, in 2007, the real estate market, by all appearances and according to many of the so-called “experts”, was going to continue to boom.
But then the market took a nosedive as investors realized that people couldn’t afford their homes and property values began to drop sharply in some areas. Hedge funds at Bear Stearns were bailed out by the Federal Reserve printing press, Abu Dhabi investors bailed out Citigroup to the tune of billions of dollars, Bank of America entered the bailout of Countrywide Financial Corporation after that your high – risk portfolio went into meltdown mode . Who is responsible for all this mess?
To get an idea of why so many Americans are facing foreclosure at the same time, one need simply drive to the nearest mall in the neighborhood. Take a look at all the pointless, expensive junk that people keep buying, because they can just pull out a credit card and never have to think about paying for their items. And they have no reason not to keep shopping, because getting approved for a new credit card is as easy as ordering from McDonald’s.
And when interest rates were lowered to near 0% to combat bubble bursts in 2000 and 2001, banks started issuing mortgages like credit cards. Homeowners, trained from birth to be greedy impulse buyers, began buying houses and refinancing their homes like ATMs. Banks would approve a family for a maximum loan amount, and appraisers would value the home at that amount, to increase fees and commissions for the mortgage broker and real estate agent. The theme of the day was greed and everyone had a place at the table.
Homeowners, to get the most money possible, simply lie on their loan applications, inflating their income by 50% or more. After all, decades of public schools encouraged cheating, and now the teacher-lender wasn’t even trying to grade the worksheets. Banks, eager to dole out money, approved the loans with no questions asked.
It didn’t take long for early homeowners who could never afford their houses to begin with, discover that they couldn’t afford their houses. This had little to do with increases in interest rates, since people who make just $2,000 a month and have $1,000 a month in credit card bills, can’t afford a $3,000 principal payment, regardless of how much interest they pay each month. But multiple foreclosures in one area will start to drive down home values. And homeowners with good credit who financed 110% of the purchase price would not be able to sell quickly if faced with job loss or a medical issue. The fallout from the greed of subprime buyers and lenders began to affect the rest of the market, which should have been completely predictable knowing how many bad loans were being made by banks, securitized and sold to hedge fund investors.
Property values have declined, making it even more difficult for homeowners to sell to avoid foreclosure. And more foreclosures could not be avoided, further driving down property values. A market crash turned into a panic that, despite the Fed’s best inflation efforts, turned into a recession that, despite the Fed’s best interest rate manipulations, turned into the depression now being experienced by homeowners who are now effectively trapped. in their homes, with loan amounts well above the current value of the property. For years, they will pay for their past years’ greed, instead of building equity in their homes.
So the real estate market experienced a series of big banks handing over money and homeowners lying to get money. That imbalance paved the way for the housing market to enter a depression at the first sign of default and falling property values. The problem was created in the first place by inflation and the manipulation of interest rates by the Federal Reserve, in a misguided attempt to combat a bubble. However, manipulated bubbles cannot be effectively addressed by transferring the problem from one market segment to another. And by shifting a massive bubble onto homeowners and consumers, the Fed paved the way for the bigger economic crisis that foreclosure victims are now riding.