Foreclosures are the Most Important Negative Forces Pulling Back the Economy
Questionable mortgage operations and loose lending standards were the causes leading up to the housing bubble that ultimately burst and pushed economy into the jaws of the severest recession (2007-2009) since the 30’s. Many citizens contracted mortgage loans on their houses without understanding and walked into houses they could ill afford. Consequently foreclosures touched record numbers. It is one of the most important negative forces pulling back the economy and preventing it from getting back on its rails.
The crisis relating to foreclosures began with the risky sub-prime mortgages with floating interest rates that the borrowers could not keep pace with. Many mortgages had been taken without submitting proper proof of income. But currently the foreclosure menace is spreading to those having good credit and took out safe mortgages whose rates were fixed.
It does not seem that the charges against defective documentation will cease – rather it will increase well into 2011 according to Mortgage Bankers Association. Many of the mega lenders had kept on hold foreclosures for the time being so as to review cases numbering thousands, regarding wrong handling of the same. Attorneys generals of all the states have kicked off an investigation jointly with other federal agencies.
This will postpone the inevitable foreclosures but not put a stop to it. Lenders are waiting to repossess over 1 million houses this year according to RealtyTrac. This will push down value of property because of the cheap rates offered for foreclosed units. This in turn will put brakes on the housing recovery; in the long run the economy will suffer.
In 2011 the legislators are planning to review the lending system of the mortgage industry and mull on replacing government sponsored Fannie Mae and Freddie Mac. The overhauling of the financial system inked by Obama last July did not tackle this problem although Republicans had protested that without such a programme the plan was without teeth and incomplete.
Two years previously Washington had bailed out Freddie Mac based in Virginia and Fannie Mae based in Washington to make up for the losses these two had endured on their toxic sub-prime loans. It has been calculated that the bailouts would dip into the taxpayer’s kitty drawing out $259 billion. It is about double the amount of $133 that the two were scheduled to get. This has made theirs the most expensive bailout during this financial crisis.
