Foreclosure - The Foreclosure Mess Of Today

The Foreclosure Mess Of Today

March 31st, 2008

So far in the history of US there have been three foreclosure crises. The first one was during the Great Depression of 1933. During the eighties the savings and loan scandals led to another bout of foreclosures. The third one was during the nineties when the blame for foreclosures was put on flipping. The crisis of today is due to the sub-prime mortgages.

There is an all round hue and cry but what is hard to find is a rational explanation of why we have got into this foreclosure mess.
The FHA of Federal Housing Administration was set up to insure mortgages. This work it has been doing for nearly three quarters of a century having insured about 34 million mortgages. This in turn had led to a rise of house ownership from 40% during the thirties to a little below 70% today.

Till the turn of the century Baltimore was very much a FHA town – the latter being in control of 42% of the real estate compared to its control of 30% across the nation. The system was so well oiled that there was little chance of abuse. Each loan was sent personally by hand to the Department of Housing and Urban Development’ office to be scrutinized and checked by the loan officers of FHA.

Another reason behind Baltimore being the special favourite of FHA was that the community consisted mainly of East European immigrants who were very close to each other in their day to day lives. Soon they clubbed together to form building associations that resulted in the beginning of the house ownership operations in the country. The community came forward to help newly married couples to set up homes in houses of their own. But if any family was late even by a month their names were read out by the pastor. There was a covert social pressure to encourage people to keep to their promises. Standards were high and so was trust. The institutions still exist but they have been engulfed by big institutions that are impersonal and cold.

Why and how has this happened? It started with huge lay offs in the eighties in FHA that resulted in it cutting its programmes. The demand for housing remained. To meet this, new players in the game of mortgages were legally allowed entry. In the nineties the mortgage companies could choose their own appraisers. This opened the floodgates of mortgage abuse leading to foreclosures.