With the current foreclosure crisis in America still ongoing, it is becoming a common practice for people, qualified or not, to offer their explanations for what has caused such a meltdown in the mortgage industry and steep declines in property values. Many of the reasonings offered are well thought out and serve to highlight various aspects of the economy and how it is being affected by record foreclosure rates. No single discussion of the issue, though, can provide a comprehensive analysis of what has caused the problems faced by homeowners, and ours presented here is no different. However, the more that homeowners are exposed to different explanations of the foreclosure crisis, the better able they will be to prevent facing foreclosure again in the future.
The most commonly cited cause among armchair analysts is simply greed and corruption on the part of nearly everyone in the mortgage and real estate industries. And, of course, there were massive levels of greed among the lower level workers and participants in the market. Appraisers over-valued homes, Realtors listed them for these unwarranted prices, and loan officers provided loans at higher values in order to reap higher commissions. Homeowners were also not innocent, as many of them lied on mortgage applications to increase their incomes and qualify for homes they knew they could not afford for the long term. Banks provided incomprehensible mortgages with low teaser interest rates, basing the qualifications on the applicant's ability to pay the artificially low rate, not the reset payment even based on current market conditions. These circumstances all combined to create a highly over-valued real estate market and vast numbers of homes sold families who simply could not afford them.
Geopolitical concerns relating to oil and gas prices also began to contribute to homeowners' financial problems. Finite (and falling) energy supplies and growing populations in foreign countries pushed up demand for various forms of energy, causing an increase in costs. Prices have risen for food (grown on farms using oil-powered machines and oil-based pesticides and processed in industrial plants), gasoline (rising demand, falling quality of oil from imports), and home energy (natural gas-fired power plants), to name a few concerns. These rising prices are naturally passed along to the end user of the products, and consumers often spend more time complaining about high prices instead of reducing their dependence on such items or going without. Of course, every budget has its own break point, and many homeowners facing foreclosure who had negative savings rates for months or years before missing a payment inevitably reached theirs.
A third cause is the falling value of the dollar, decreasing the purchasing power of ordinary Americans. Devaluation of the dollar causes imported goods to increase in price, contributing to higher energy prices, food prices, and expenses for nearly every good sold by the largest retailers. Homeowners are also robbed of their money in the form of inflation caused by the federal government borrowing money and printing money to wage war and provide social programs, thereby devaluing the dollar further. Once Congress passes a budget and realizes it will not bring in enough money to pay for every program, they rely on borrowing money. When this does not make up the shortfall, they simply print the money and have the first use of it. This inflation takes away the wealth of citizens, as their once precious dollars become as common as confetti and worth about as much.
The complicated world of collateralized debt obligations, hedge funds, and packaged mortgage investments have also contributed greatly to instability in the market. Convoluted investment instruments have been used to package subprime loans and sell them on the market to hedge fund investors and pension funds. Now, with so many foreclosures, it is doubtful who even owns these loans in default, as they have been bought and sold so often by institutional investors. In some cases, the courts have been unable to verify who actually owns the debt and is legally allowed to collect the payments or foreclose on the homes that have defaulted.
A final cause discussed here is the prevalence of credit as a means of financing one's life. With credit applications available in nearly every college classroom, during commercials on every television show, and sponsoring sports and community events, an incredible percentage of people have faced financial issues at one time or another due to their use of credit. This overuse of credit through cashing out equity, using home equity lines of credit, or frequent credit card use, often combined with an unexpected financial hardship, such as a loss of job or medical expense to push homeowners into foreclosure. If credit is relied on to prop up the family's budget, and then a payment is missed, one of those shaky supports falls away, interest rates increase, and it gets more difficult to keep on top of that bill and others. Miss a few payments, multiply the same experience by numerous homeowners, and it is easy to see how that can affect markets.
Again, no discussion of the causes leading up to the declines in the real estate market can conclusively explain the effects. But, homeowners, whether they are in danger of losing their homes or not, would do well by researching some of the reasons their family and neighbors may be facing foreclosure. Only by learning from the mistakes of others, and the traps designed to facilitate the loss of their homes, can any homeowner realistically expect to keep his or her property out of the foreclosure process.