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
People lost their homes because they defaulted on their mortgages and the lending banks foreclosed on them, taking back the house for not making payments.
If home owners could afford their mortgage, they weren’t having homes taken back from them. But for a time, banks were making home loans with higher risk than typical, due to demand for mortgage-backed securities (bundles of loans which act like a bond, paying regular interest). Instead of the usual 10-20% down on homes no more than 3-4x income, there were all sorts of minimal down payment loans, loans without debt ratio guidelines followed. Even loans where buyers didn’t need to prove their income of assets!
But people was under the impression that real estate prices could never fall, so they hoped they could just hold on long enough to sell for more money in a few months. There were instances of people making $20k/yr taking on $700k mortgages, hoping they could make the mortgage by having a bunch of friends move in and pay rent, then sell for $800k next year and pocket the profits. Or new construction high rises with investor-friendly terms like 1% down, guaranteed rent for 2 years, no condo assessments for 2 year. Well you’d get some dentist who imagines himself a real estate mogul buy 10 or 20 of those units for les down than a modest new car, with idea he could just sell some units for profit when those incentives expire in 2 years, and keep rest as investments.
When prices leveled off or fell, many were screwed. They couldn’t make payments or sell for enough to break even. Banks were overwhelmed with foreclosures and banking system couldn’t lend on new loans due to loses. Home prices fell as there were no new buyers for this sudden glut of houses. Issue snowballed. Investors turned in keys, walked away from underwater investments. And so on.
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