Thursday, March 06, 2008

Mortgage Crisis Going From Bad To Worse

The bottom seems to be nowhere in sight as record high mortgage foreclosures continue. Along with that bad news, there was a report today that said home equity has fallen below 50% for the first time since 1945. In a nut shell this report says that over 50% of homeowners in the US owe more on their mortgage than their home is worth. For weeks I have been writing about the problems at major financial institutions like 'Citibank'. I believe those problems will continue to get worse as more and more homeowners fall into default and eventually into foreclosure.

This current mortgage crisis was started when greedy banks and mortgage brokers threw caution and common sense to the wind and start making adjustable rate mortgages (ARM) available to almost anyone that applied. In a perfect world, the rates on these mortgages would have never increased and many moderate to poor families would have eventually owned a home of their own. However, we do not live in a perfect world and when interest rates started to rise, so did the interest on adjustable rate mortgages. Since many people were not qualified to get those mortgages in the first place, when rates began to rise it became impossible for them to make the higher payments.

Now with over 50% of American homeowners living in homes with negative equity there is a good chance that the US mortgage crisis will go from bad to worse in short order. Since Americans rank at the bottom of the list when it comes to personal savings, the equity in their home is usually used to help them weather a rainy day. However, with no equity left in most homes today - where will Americans find the money necessary to get past a family emergency like a major illness or worse the death of financial provider? In reality, with no equity left in at least 50% of US homes, the tendency to just let that home fall into foreclosure will be greater than if that homeowner had equity to lose if they stopped making mortgage payments.

Eventually, all of the excesses of the past five or six years in the mortgage and housing market will work their way through the system and a strong housing marketing will emerge on the other end. However, there will be tons of pain to go around as this process plays itself out and some large companies along with millions of homeowners will not survive this mortgage crisis without the help of the US bankruptcy court. At this point in time the only real, long term, solution to this mortgage crisis is to just let the system take care of the excesses and wait for better days down the road.

Read more about the Economy:

Citibank In Bad Financial Condition
Oil Price $105 Per Barrel As Economy Slows
Rich Get Richer While Most People Suffer
Bernanke Says Signs Of Inflation On Horizon
Housing Market Pain Continues, Foreclosures Up

March 06, 2008 Archives

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