The Causes Of The Foreclosure Crisis

September 10th, 2008

Analyzing the causes of the foreclosure crisis the accusing finger points first at the sub-prime mortgages. But are they the sole cause for this catastrophe?

Since the last two years foreclosures have been swamping the nation causing alarm and panic. It has led to blame being tossed around from one point to another. This is the biggest financial collapse since the time of the Great Depression. Considering its magnitude it will be unwise to place the blame on any one cause.

A year of two before the crisis triggered off the sub-prime mortgages had debuted. These were held to be the main cause. It was reported in the New York Times in December 2006 “about 1.1 million homeowners who took out sub prime loans in the last two years will lose their houses in the next few years.” It was estimated that the foreclosure would amount to $74.6 billion mainly from equity. The sub-prime mortgages were given to those with questionable credit. By doing so the lenders gained from high interest rates.

Another cause of trouble is the ARM or Alternative A loans. These stand somewhere between the prime and sub-prime category of loans and were sanctioned to those with respectable credit history. But here again the borrowers are being unable to be current.

The failure of borrowers has always been there but what is striking in the recent foreclosure crisis is that borrowers are being unable to sell off the mortgaged house and clear the debt. This is because of the fall in the real estate market that has caused the value of the house to become less than the loan amount.

To add to insult the word ‘recession’ is on everybody’s lips. The people do not have the money in their pockets for essentials like gas and food. Little wonder then that mortgage dues go unpaid. Moreover the house is no longer worth fighting for – the value has fallen to such gloomy depths. Nobody is quite sure about when this chapter of foreclosure crisis will come to an end.

The question that pops up is that why were there no regulations and why was the sub-prime fiasco allowed to take place at all? Was Washington and Wall Street sleeping? Or did it look the other way allowing lenders to have a ball with gullible borrowers? A carefully planned injection of loan culture in the society together with greed and naivety resulted in the foreclosure crisis of today.