Secondary Mortgage Market Responsible For Foreclosure Typhoon

Posted in Foreclosure, October 15th, 2007 |

In the see saw of falling housing prices and rising interest rates the foreclosure genii has come out of the bottle. Its smoke and stench is covering the entire neighbourhoods. and not just the directly affected units. In 15 years the likes of it has not been witnessed.

Providence and other cities are being flattened by the foreclosure steamroller because of several factors. There have been sea changes in the real estate field pushing each and every American to realize the dream of owning a house of one’s own. To meet this ownership culture and craze exotic mortgages were launched by unethical lenders while regulators looked the other way. Investors ruled while consumers and entire communities remained vulnerable and unprotected in the new order of things.

To trace the origins of this foreclosure typhoon one has to go back to the immediate post World War II period. Conventional mortgages were in vogue then, which had a fixed rate for a period of 30 years. Local banks granted these loans only to those who had good credit ratings. The banks held the mortgages and collected the instalments. The system although stable had its drawback because money from the real estate did not flow freely and investors felt left out. In the late 70’s Wall Street came up with a scheme by which lenders could make one package of many mortgages and sell these packages to investors who held the documents and collected the payments. The investors then traded the securities within themselves. Thus was born a bubbling secondary mortgage market. The lenders used the money they got for selling packages of loans was used to make even more mortgages. For a time banks, investors and house owners all shared the cake. The American economy was bursting with health. But a new set of lenders wanted to package more and more loans without thinking of risks – which were not their headache in any case. Coupled with this interest fell to an all time low. The middle and low income were fed with talk about free flowing money. They borrowed and moved into houses their income could ill afford. After 2006 as per economic laws the housing bubble began to burst. The result is the foreclosure ogre we see today. It will take many more tomorrows to put the genii back into the bottle and restore balance.