While many where taken by surprise when the housing market began to tumble. Others had predicted the current collapse. What events led up to the crash that investors saw when other didn't?
Copyright (c) 2008 Troy Foote
Certainly, one of the leading events that eventually resulted in the crash of the real estate market was the crumble of the subprime market. As a result an unfathomable amount of companies were suddenly facing foreclosure. Even those companies that were not forced to declare foreclosure found they had suddenly lost billions of dollars.
While the subprime market crash has been in the news of late and has affected most property owners to a degree, most remain uncertain exactly how this came about.
When the real estate market was at its peak, homebuyers with bad to no credit were able to purchase homes with subprime mortgages. Because the underwriting guidelines for subprime mortgages where easier to obtain, people with bad credit where able to qualify for mortgages. The downside to this however was that mortgage lenders where able to charge a higher rate of interest. Lenders where under the assumption that if the buyer could not make his mortgage payments they would foreclose on the property and resell it for a profit.
Just where did the money come from which funded these loans?
That is the interesting part. When interest rates from banks where so low, mortgage lenders where actually able to borrow money and then loan out those funds to home buyers. And for a profit.
When the housing market was experiencing an all time high homebuyers were taking on a massive amount of debt This debt was fueled by the belief that the real estate market would continue to rise. Which proved to be unrealistic.
Before the market crash of 2007, lenders did not hesitate to lend money to borrowers despite their credit history. As explained above this created a huge money making opportunity for mortgage lenders. However problems started to occur when interest rates started rising. Historically, rising interest rates have always had a negative affect on the housing market buy causing prices to fall.
. Until mid-2006 homebuilders could not build new homes fast enough to meet the growing demand. During mid-year; however, the demand began to slow. It was also about this time that the rate of defaults on loans began to increase.
When mortgage lenders found it difficult obtaining money from their previous sources of funding would be buyers now discovered that they could not obtain loans because the money was no longer easily available.
Additionally, investors suddenly became wary of taking on risk and underwriting guidelines grew stricter. Homeowners who had taken out loans with adjustable rates began to find it difficult to meet their mortgage payments as interest rates continued to rise.
More stringent underwriting guidelines meant they were unable to refinance to fixed rate mortgages in some cases. As a result, defaults continued to rise; fueling the massive rash of foreclosures.
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