 | Last login: 9 months agoHanh123 is a 41 year old woman from Michigan, USA. |
- Jul 19, 2008 10:05am
- Does Your Head Spin As You Try To Figure Out What Is Going on With The Economy?
Subprime. Collateralized Debt Obligations. Liquidity. These are not uncommon words now a days. Every so often you hear them out of the mouths of people you wouldn't expect.
 Everyone knows we're in a recession, the stock market plummets every time the price of a barrel of oil goes up. We are feeling the sticker shock, every time we go to the market, the gas station. For months people in Washington have been struggling to find ways to help the economy bounce back from these difficult times.
As if they had their heads in the clouds, or something, they couldn't see this coming? What happened to the booming economy? The housing boom? The bubble has burst and the average American is left to sweep the pieces under the carpet?
Many can blame the financial burden of fighting an ancient religious war or sticking our nose where it needn't be-let them figure it out right? But we've had a score to settle since 9/11 and this score has taken the focus from areas of the economy we should have been watching like a hawk.
The housing market, the boom of the late 1990s into this new millennium has caused people to become too comfortable. Even the banks grew more flexible, bent the rules for some that would be considered very high-risk. Interest rates were the lowest since post-World War II; FHA loans opened the doors to homeownership and other banks created a specialty niche for sub-prime customers.
Many homebuyers needed "no down payment" or less than the traditional 20 percent. This created a buyer's paradise, no longer were people hindered by less than perfect credit. Still what were banks and large mortgage companies thinking, that this boom would never end? Maybe they were too busy making profits hand over fist to care about the future and if such practices would have negative repercussions.
By the summer of 2003 the Federal Reserve had lowered the interest rate to 1 percent, which is practically unheard of and while the interest rates on various credit lines were higher, this move changed everything as far as momentum in the marketplace. Mortgage rates were a bargain compared to years before. This resulted in a refinance boom. Homeowners could not call their mortgage company fast enough. This caused banks to rethink further how loans are underwritten and funded.
It is like a double edged sword because on one hand there is a segment of the market that has been historically underserved and considered high-risk; on the other hand there are people who have maintained a prime credit rating and scrimped, saved to put a sizeable down payment on a home. What did not help matters was President Bush's Homeownership Initiative, which encouraged mortgage companies like Countrywide to write loans to risky customers. Still this action touched upon a segment of communities that were ethnic, diverse and always considered renters. Mortgage companies worked the notion of the American Dream with these people.
Another thing that was happening at the time was a somewhat illegal action called "Flipping." With the home values rising at an astronomical rate, everyone believed they could get rich quick by playing real life Monopoly. Not only did you see people buying homes for the sake of building wealth but also buying investment properties. Many people would buy homes in need of renovation in up and coming areas, in hopes of profiting from buying in the first place. What ended up happening in many cases was that people did not think about other intrinsic fees associated with buying home. They thought all they would have to do is pay the mortgage, not taking into account rising taxes, water bills and other maintenance.
This was the era of anyone being able to get a loan. This spawned hybrid loan products when before there was typically only the fixed rate mortgage, now there was the adjusted rate mortgage, or ARM, which many homebuyers did not understand, they just wanted the loan. The idea was give an at risk borrower an ARM and this would allow them to build healthy credit with hopes of refinancing into a fixed rate later before their existing rate adjusted to a much higher interest category.
To compound the logical thinking of this, it made sense because the home was only destined to appreciate in value, so banks were willing to lend up to 110 percent because the home or collateral would be worth more than that in a few years. This also worked to close doors for some homebuyers in areas where the living wage did not catch up to the housing value. This is why you see so many people leaving California bec
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