Speculation By Investors Largely Cause Of Foreclosure Crisis

November 14th, 2008

Foreclosure Crisis

Speculation by investors is largely the cause of the foreclosure crisis. Today over 30% of the repossessed houses units are not occupied by the owner. This indicates that the person is an investor. The Government programmes that are being launched are specifically instructed not to help such investors. The reality however is that it is going to be difficult to weed out the culprits.

Apart from speculation another reason for the foreclosure crisis is the complex investments that were made by the banks. In the conservative mortgage system the lenders weighed the capability of the borrowers and held on to the mortgage during its life span. In the 80’s the mood of the financial market changed and Wall Street began to package, slice and sell of the mortgages as investments to global buyers. These attracted customers because the terms appeared better than staid government bonds. In the beginning of the 21st century the Federal Reserve cut interest to all time low rates and money poured into the mortgage market. This led to the debut of the sub-prime mortgages. In 2001 there were $160 billion new loans. In 2005 this figure shot up to $600 billion. Lenders ignored the credit worthiness of borrowers and offered risky mortgages. Anybody with a pulse could get a loan. Brokers were driven by commission because they had nothing to lose even if the loan turned sour.

Today the problem of helping borrowers is that one loan has been sold to many investors at home and abroad. Many of these investors are refusing to cut down on the loan amount and accept losses. Evan Wagner spokesperson of IndyMac said, “We and others have gone to these investors, and they’re just not having it. They don’t want to take more losses than they have to.” But without modification foreclosure is inevitable.

The situation has been further mired by rising unemployment. Without jobs who can pay mortgages even if these are reduced? Unemployment figures have been rising. This together with personal problems like death or divorce has made matters more difficult for the borrowers. Two year previously 36% of the defaults were because of unemployment. But that has now risen to 45% in 2008 with the unemployment figure at a five-year record of 6.1%.

Now that the excitement of the elections are over it is time for the new administration to give this problem top priority..