Digging For The Root Causes Of Foreclosure
Foreclosures are the mere symptoms. The call of the hour is to dig for the root causes of foreclosures. Once that is found then the symptom can be uprooted – but not before. No solution will be effective if the remedial arrow is blindly thrown in the dark.
The usual run of thinking points to the sub-prime mortgages with floating interest. But despite the media rage about it, this is not the root cause. Some opine it is the change in real estate prices.
A Boston Globe article commenting on the increased number of foreclosures in Massachusetts said that this was due more to dropping house prices rather than the rising mortgage interest rates. The survey is based on the findings of the Federal Reserve Bank of Boston. Unaffordable loans do not directly cause foreclosures. During the economic slump of 2001 falling behind in mortgage payments was quite common but foreclosures were rare because the real estate continued to go up. Thus by selling the houses the people were able to escape foreclosure. Debts were repaid and there was enough left over to start life afresh without stains. The increase in house price acted also as an incentive for borrowers to try hard to become current in their mortgage payments. It was worth the while to keep the house. The house was a valuable asset and became even more so with each passing day. In the falling market the converse is true. Today the value of the house has gone down. So what is the point of struggling to keep it? Little wonder then that foreclosures are exploding. The report concluded that the rise and fall of housing prices play “a dominant role in generating foreclosures.”
The report points to the fact that the recent attempts by local and federal government to help the borrowers might prove to be ineffective.
Henry Paulson, the Treasury Secretary is attempting to freeze the monthly payments on mortgages by putting on hold the rise in interest. It does not show much in depth thinking because the primary cause of foreclosures is not addressed. It is declining equity that drives foreclosures and not the other way round. To take the bull by the horns it is time to find out what is causing this fall in real estate prices. It will need a lot of digging that will bring out many skeletons in the cupboards.
