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Author: Subject: The Mortgage Crisis
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[*] Post 322371 posted on 23-2-2008 at 20:39 Reply With Quote
The Mortgage Crisis

A huge amount of bad sub-prime mortgage loans have hurt the US economy. The sub-prime loans are the ones where the borrower was considered a credit risk, and the mortgage lender would increase the interest to everyone in that category to cover the expectation that some of them would default--but, since the value of the home stood behind the loan, it was thought to be good business.

Some people, seeing that home prices were continually going up, judged they were better off to but a home on credit now, instead of waiting until the price was higher, later. This would also lead people to buy bigger homes--it's no good to wait until you have more children to move into a house with another bedroom or two, if escalating home prices will make it out of reach, later.

This led to many people buying homes they could not afford. If they had an adjustable rate mortgage, and the payment went up, it meant they could not keep up the payments. It also meant that if a person lost his job, or was injured and could not work, he was in trouble.

As people tried to sell their homes to get out from their mortgage obligation with some money from what they had already put in, they sometimes found that other people were doing the same thing. Sometimes banks had homes for sale, on which they had already foreclosed, and they wanted to get rid of them as quickly as possible. This led to cutting prices, which meant people who had borrowed for a high-value home suddenly could only sell it for a lot less than the money they had borrowed.

But, there seemed to be hardly anyone willing to buy the homes, for two reasons:
1--People who would need to get a mortgage, to be able to buy a home, found the banks were unwilling to lend to people without excellent credit. Whole sub-prime loan departments were shut down in some lending institutions. The banks had gotten stricter--they couldn't afford more defaults.
2--Since people urgently needing to sell kept dropping prices, there was always the thought, "Since prices are falling every month, why should I buy now? If I wait even a few more months, I might get as good a house for thousands of dollars less."

Meanwhile, with fewer people buying homes, the building industry is hurt. Which means all those who sell construction supplies to builders are hurt. Which means the sources--lumberjacks, dry wall manufacturers, makers of hardware--are hurt. And all the stores and restaurants and entertainment and travel industries who sell to those people are hurt.

Many of the people who couldn't yet afford to own a home are going to have to rent, as they would have done if no one had loaned them the money. It will take some time for the adjustment, to get back to more renters and less owners-who-can't-afford-the-mortgage people.

As far as the problem of the prices dropping, which discourages people from buying a house that might cost a lot less in a few months, the market has to bottom out. And therein is a possible problem. One of the Democrat candidates said she would enact a three-month moratorium on home foreclosures. That would hurt the banks, it would not enable the people who cannot afford their payments to be able to pay (it would just delay them making arrangements they could handle as renters, or in a smaller house), and it would keep potential buyers from buying (also delaying the "bottoming out").

I hope British and Australian bankers do better than ours have done!:(
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[*] Post 322393 posted on 23-2-2008 at 22:31 Reply With Quote

Sadly the bunch of bankers who have let this happen also include British banks. Northern Rock has been badly affected by the US sub-prime market.
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[*] Post 322395 posted on 23-2-2008 at 22:32 Reply With Quote

Ruddy merchant bankers! lips_sealed
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