The original loans allowed people with lower incomes to buy larger homes worth more than they should have been able to afford. Loans in the past required smaller deposits, but with an adjustable rate. The people who financially stretched their finances to buy the more expensive homes are finding themselves in troubled waters. In one zip code there has been a strong correlation between high foreclosure rates and bankruptcy. These issues go hand in hand. Poor decisions made a few years ago when the market was appreciating are backfiring and causing real credit damage for many. Huge mortgages companies are finding that even they are having trouble paying back their debts on these high risk mortgage loans. The U.S. economy has faced "a surge in foreclosures [and] turmoil in the stock market."
Defaulting on a loan can mean losing the mortgage and in this case the home. Banks around the world are seeing the repercussions of lenient loan policies. In fact some in particular are admitting the pitfalls of their past decisions. Just this week alone there have been numerous articles regarding the foreclosure rate in America. Risk controls are exceedingly important now and in the future. However, it is the here and now that is at stake. This is not just affecting those whose homes have foreclosed, but also the U.S. economy. Those companies that specialized in giving loans to people with bad credit are now straining to right themselves as interest rates increase and the housing market flattens. Though many smaller mortgage companies are failing in this business climate, Merrill Lynch believes it can capitalize. At The Mortgage Porter Rhonda Porter helps explain the current turbulence in the mortgage business. Recently she answered a question from a local in Seattle about buying or renting his/her next home. Rhonda suggested purchasing a home, but this was based on a few assumptions some of which were broad. I asked her to elaborate as well as comment on the current and future market trends. The following is that comment and link to her site as well as a response to Tom's post on Real Estate Blogger:
The Mortgage Porter:
“As a believer in the current housing bubble and after looking at this issue of to rent or to own, I have some additional questions. As the old adage goes the three key factors to success in real estate are location, location, location. Though this situation is definitely one of infinite individual situations I am curious as to how this relates to the housing market as a whole. Is it safe to assume that all homes will appreciate more than 5% per year or is this solely an estimate for the Seattle area? The current issue of a housing bubble is something that may significantly affect the current and future lending rates should it finally pop. Is it not possible that the current number of housing foreclosures rising is a sign of a failing housing market? Lastly, if the above is true and the high risk lending begins to backfire as foreclosures increase, how might this affect the current market?”
Real Estate Bloggers:
“The housing market seems to be leveling off after an intense few years. Recently there has been much concern relating to the amount of foreclosures. How does this affect not just the housing market, but the mortgage business? The public's fear of the bursting housing bubble and the aforementioned defaulting loans will destroy their trust in the mortgage business. How are larger corporations like Merrill Lynch going to take this negative and turn it into a positive? How will this affect the U.S. economy as a whole?”