People often say that as a result of the crash millions of people lost their homes before they could pay their mortgage off. However, it also seems that the housing crash was directly a result of millions of people defaulting on their mortgage payments. Are both true? Is it just a roundabout way of saying that irresponsible bankers offered mortgages to clients when they should have known they would default? Does this claim have anything to do with changing interest rates, unemployment or the depreciation of housing prices?
In: Economics
Both are true. Mortgage brokers were selling subprime mortgages to unqualified buyers, subprime means the payments started out lower for a few years, normally this is done when money is expensive expecting that in 5 years the economy will be better and you can refi at a better rate.
But they started sneaking in a lot of unqualified people, sure just tell them you make 200k a year, borrow some money to put into a savings account, see you have money, then give it back.
They didn’t think it mattered because prices kept going up and up, so even if you defaulted in a year, the bank got the house back and could resell it for more….eventually it got so crazy that some farm laborer making minimum wage was sold a half million dollar suburban house.
The bad thing for ‘normal’ folks, those who could afford it, even folks who just wanted a 2nd mortgage to fix up the house, get a new roof etc, they were sold on these underfunded mortgages even if they didn’t need them…
Now, the banks wake up from this drug like cocaine binge, realize their in deep with a dozen hookers and back out as fast as they could.
Since everything was so toxic, banks weren’t touching anything. The subprime balloons, the huge amount that built up while they weren’t paying the full amount from the start, were becoming due, and nobody was willing to refi. So your half price mortgage goes up to more than normal price…. but….
The prices of houses dropped so much, half because the prices were inflated before as so many people were buying houses, not only for themselves but for investments, buy one, roll it over into a 2nd, then a 3rd house….prices crashed….
so regular working people not only couldn’t get their homes refianced, but were paying a mortgage on a house that was only worth half as much (underwater)
I had several friends who walked away from their houses because they couldn’t afford to pay the mortgage anymore and couldn’t refi…
Banks didn’t help either, there’s no bonuses for keeping people in their homes, it didn’t matter that they were going to loose more money evicting someone that if they cut them a deal and kept a paying customer in place.
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