How could record foreclosures and Mortgage Lender bankruptcies occur in the "booming" economy?

Question

Is it because this inflated economy is funded my deficit spending and the bubble is due to burst?

Answer 1

Both lenders and borrowers are to blame.

Interest rates fell to lows not seen for 45 years. This had the effect of putting more money in homebuyers hands because the same monthly payment could buy a lot more house.

Demand for mortgages grew quickly (for new builds, purchases of existing homes, refinances and refinances with cash out). This lead to house prices going higher, in some parts of the country much higher.

As demand for mortgages began to drop off (when mortgages bottomed out and started to increase) mortgage companies that had staffed up to handle the demand began to get "creative", doing such things as offering interest-only adjustable rate mortgages and loaning people more money than their house was appraised at.

As mortgage rates increased home prices began to level off and in some areas decline.

So suppose someone could reasonably afford $800 per month but they stretched and got a mortgage for $900 per month. They borrowed more than their house was appraised at, got an interest only loan with a variable rate. And their house is now depreciating in value. So then the rates go up and their payment is now $1,100. They can't make the payment. And they have little incentive to. They have no equity in the home (in fact they have negative equity). And they can't sell their house because they can't get enough for it to pay off the mortgage. And their payment is likely to go higher and higher while their house's price continues to go down.

Answer 2

There were too many liars loans. Liar loan are loans where the buyers sometimes in cahoots with the lender, and the appraiser, gives false or down right lies to obtain the loan. They lie about how much they earn, with doctored documents. The loan officer gets their up front money and the home owner sells the home for more than it's worth, because the appraiser gets a cut to up the value, the buyer gets the house usually as a rental property. Then when the house is foreclosed on, the whole process starts again.

Answer 3

yes it is because of the booming economy.
low unemployment, low interest rates and more first time home buyers then ever in history made lenders bold and confident. this drove prices higher than value and tempted both lenders and buyers into risks.
so yes, the housing market was a bubble due to burst and yes, it was a result (at least in part) to our booming economy whose fundamental indicators range from good to record breaking.
the deficit went down over the last three years as the housing market soared to record heights. there is probably no correlation, but if there is any it is the opposite of what you infer.

Answer 4

It's because too many lenders have taken too many customers with no credit or even no social security numbers in order to make a quick buck. As soon as the loan is made, the paper is sold in a basket of likewise loans to investors who don't know most of the loans are fraudulent. Then it all implodes sooner or later.

It isn't a political thing or even an economy thing. It is due to fraud and greed in the mortgage industry. I've been a loan officer, trust me it is a filthy, disgusting business which is wrought with fraud which is why I couldn't do it for long.

Answer 5

known risky lending. the lenders knew what they were doing, they were setting people up for a fall who didn't know any better, so these poor people could have a taste of the American dream. if people would use their heads instead of their hearts, they may not tend to fall for these types of things. the lenders deserve the blame, and hopefully they have their fair share of problems. I can only hope that those who were suckered into these ridiculous mortgages make their way through them or at the very least learn a big lesson. it won't be the end of the world.

Answer 6

Many want to blame financial institutions for all of this. While many do practice predatory lending, we must all also remember that those that ultimately sign on the dotted line are presumed to be somewhat intelligent adults.
What has happened is people wanting way more than they can afford over the long haul and they end up in default.
This isn't just for housing either. A buddy of mine works for a company that repossesses cars, and business is booming like never before for him.

What should be done, especially for first time home buyers, is make it a requirement to attend a home mortgage class that educates people about home loans, the interest involved as well as taxes and insurance.
That way when they buy a house they are told will cost them $1000 a month, they won't get slapped silly with confusion and regret when their mortgage payments are actually $1300 or $1400 a month.
That interest only scam? That is all it is, a scam. Anybody that falls for that one and doesn't do their homework on it is just a flat out big dummy.

Answer 7

Predatory lending practices, ARM's, interest only loans, people borrowing more than they can afford and not doing their homework on loan options (personal responsibility).
The economy is strong, unemployment is low and existing home sales are at a three year high.
The inflated economy your are talking about was the last administration when the fake economy and the dot.com / tech boom burst, all while social security was being robbed blind.

Answer 8

Possibly. But it is mostly because of greed and gambling.

1. 'Lenders' don't make money on the money they lend, they make money by making loans and collecting all of the fees and closing costs that go along with that. The more loans they make, the richer they are. If the loans are defaulted,, well that is other people's money.

2. It looked like a good bet to make riskier loans when property values were rising fast. Loan someone $200K that they likely can't pay back is not a problem when by the time that happens the house is worth $300k. That worked in 2003 and 2004. It stopped working in 2005, but no one knew that until 2006.

Answer 9

The boom slowed down in the US.

But, the world economy is soaring!!!

Lots of foolish people paid prices that were way too high. It would have been as if people had borrowed a ton of money to invest in Excite or AOL before they lost 90% of their value.

Answer 10

Suthrn is more or less right, but here's the kicker - unregulated predatory lending in the name of open markets has now created a situation where NONE of us can get mortgages (certainly not quickly), so that markets that should be liquid are now sticky like molasses and are ANYTHING but efficient.

And yet you'll be hardpressed to find many who can leap the "blame the ignorant homebuyers" chasm and see that what goes around comes around.

Government exists for a reason. Regulation has a purpose. Laws are in place to ensure smooth transactions.

Or they're supposed to be.