The Foreclosure Crisis And How The Private Market Fell For The Bubble

By Author: Nick Adama
Total Articles: 197
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The housing market has suffered a dramatic collapse, the stock market has destroyed trillions of dollars of wealth, and the economy has entered into the worst recession since the 1930s. As a result, many Americans have lost faith in the companies and professionals they were supposed to be able to trust.

A number of real estate and financial experts played a role in the pump and dump scam that was perpetrated on the American housing market over the past decade. Homeowners should be aware of the role of these private market professionals in taking advantage of the artificial bubble in real estate prices to impoverish borrowers.

Local real estate agents who arranged sales between buyers and sellers were usually the first contacts that families had with the housing market. Depending on the contacts the real estate broker may have recommended to home buyers, it could be very easy to inflate the value of a property or refer a mortgage broker able to get bad loans through the underwriting process.

Mortgage brokers or loan originators working for lending institutions were also able to take advantage of a willing ...
... applicant. Brokers would often encourage home buyers to take out a loan for as much money as they were approved for, rather than a reasonable amount they could pay back. With the nonexistent lending guidelines during the bubble, getting approved for a large loan was easy.

Appraisers played a role in the housing bubble by estimating values of properties on the high side and finding any reasoning to justify market increases of 20% per year or higher. But even if they wanted to be honest, appraisers would often find themselves with very little business from local Realtors or mortgage brokers if they did not pump up values.

The mortgage lending institutions that provided funding for these loans also helped inflate the housing bubble by looking for mortgages anywhere they could be found. Underwriting guidelines disappeared in the quest for more mortgages to fund. Once the loans were made, they were packaged up and sold to the investment banking firms that mortgage lenders borrowed the money from to fund the mortgages in the first place.

The Wall Street investment banks played an enormous role in the housing boom by providing the credit lines to subprime and other lenders to make mortgages. Once the housing loans were closed, Wall Street would buy the loans, package them, slice them up, and sell the new asset backed securities to buyers around the world.

The investors played a role by buying these securities that everyone knew would go into default quickly. Public, private, and international pension funds bought these securities believing they were safe. Hedge funds took on most of the greatest risk, using credit lines provided by the investment firms to purchase more mortgage securities on margin.

The media also helped to support the illusion that housing prices never fell and that the bubble was a great opportunity to get into the real estate market. Of course, none of this was true, but the news media promoted it anyway and too few homeowners examined the wild claims made by pundits or market analysts.

The credit rating agencies, which get most of their funding from the financial firms whose products they are supposed to be rating, simply assumed that mortgage securities were high quality and gave them the highest ratings possible. This made it much easier for Wall Street to sell the toxic assets around the world; after all, they were AAA rated.

This does not even take into account the government politicians and regulators who encouraged poor lending practices. As well, the Federal Reserve set the entire market up for malinvestment through artificially low interest rates during the years after the 2000 dot-com bust and the 2001 mini-recession.

The bubble in the housing market turned all participants into amateur speculators and allowed homeowners to believe in a fairy tale of always rising real estate prices. Now that it has collapsed, the result has been rampant delinquencies, the erosion of trust in government and the banking sector, and the worst recession the nation and world have seen in decades.
Nick publishes articles on the ForeclosureFish website to provide foreclosure help and information to property owners in need of assistance. The site examines various methods to save a home, including deed in lieu of foreclosure, filing bankruptcy, short sales, fighting foreclosure in court, and others. Visit the site for an e-book explaining the basics of foreclosure and how to stop the process: http://www.foreclosurefish.com/