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Understanding the Housing Crisis

Credit Wise (featured column)
by Jennifer Wallis

Unless you don’t watch TV, read newspapers or magazines, you’ve probably heard scads of stories about the housing crisis. But unless you work in the housing or financial industry, you may not really understand how we ended up where we are or how it may affect you-even if you pay your mortgage on-time every month or don’t own a home at all. I believe that in order to know where we are headed, we really have to understand where we came from. I’m going to attempt to shed some light on a convoluted topic while offering my humble opinion in the process.

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If you look back several years, it seemed that everyone was buying a home, getting a home equity loan or a second mortgage. Interest rates were low and the housing market was booming. In my home state of Oklahoma , it seemed that I’d drive by an empty field one week and the next week, it was being turned into another new neighborhood.  Houses in my neighborhood were selling before they could put up the For Sale sign. Friends and relatives that work in the housing industry were raking in money faster than they could count it. People with credit issues (that previously could not qualify for a house) were being approved for mortgage even if they had little or no money down. Now, years later, banks have tightened the rules regarding loan qualifying and financing. Subprime lenders are dropping like flies, stocks are volatile, and houses are sitting on the market for months and years, in some cases.

It was as if our society had built a fragile house of cards with no thoughts regarding how it would end. So, what happened? One big piece was the subprime market implosion. Subprime simply means that the loan is worse than prime. Prime loans are given to people with very good credit. For those with credit issues such as late payments, past due bills, etc, they turned to subprime lenders. Subprime lenders are willing to take a higher risk by lending to someone with credit issues. In exchange for taking that higher risk, they often charge higher fees, interest rates and provide less favorable terms. Additionally, many subprime loans were not fixed rate loans like many prime mortgages. They were instead ARM (adjustable rate mortgages), which means that the rate stays fixed for a period of time and then will adjust according to market conditions.

Unfortunately, just because someone can qualify for a loan does not mean that they should. In some cases, these higher risk borrowers did not pay their mortgages on-time so they ended up in foreclosure. In other cases, borrowers fell into the typical "buy now, worry later" mentality. They may not have fully understood that their interest rate and therefore, their payment, would adjust in a few short years. If they did understand the terms, they simply didn’t plan ahead or ran out of options. They were trapped with a rising mortgage with no way to refinance. Then, because so many borrowers began to default, the pool of money began to dry up that mortgage companies could not invest in new borrowers. Many subprime mortgage companies have simply gone out of business.

The effects of this housing crash are far reaching and will be felt for a while. Many large banks that have mortgage companies also have credit card divisions. Will they jack up their credit card fees in order to make up for the losses in their mortgage division? If the market is flooded with houses and you were planning to sell yours soon, it might be time to rethink that decision. Even perfectly lovely homes in wonderful neighborhoods are sitting on the market longer than I have seen in years. Anyone that makes their living from the housing market (builders, realtors, appraisers, brokers, loan officers, etc) are noticing a decline in business. If they were just getting started in the business, it will be difficult to make it. Even in my state (where the housing market is in better shape than other parts of the country) we have seen an increase in the number of clients coming in for housing issues. Additionally, we have seen an increase in the numbers of mortgage industry professionals seeking credit counseling to deal with their decreased income.

I don’t believe that any of us can point our finger at any one group to lay the blame. Home buyers should be responsible for only borrowing the amount they can comfortably afford. They should also be sure that they completely understand the terms of their loan, the costs and the interest rate. If the interest rate and payment will go up, they need to develop a plan for how they will afford it when the time comes. They also need to make sure that if they enter into a contract, they are willing and able to keep their end of the deal and pay their loan on-time.

On the flip side, lenders should make sure that the borrowers they lend money to can repay their loans based on a demonstrated savings discipline and positive credit record. They should be responsible to make sure that they are not qualifying borrowers for an amount larger than they can repay. They should also not allow borrowers to sign contracts that they clearly do not understand. To be blunt, they need to make sure that the borrowers they lend money to are a good investment and a good risk. Unfortunately, some lenders made their money up-front, sold the loans to someone else, and were left counting their money while the house of cards fell, stocks crashed and investors around the world lost money.

The U.S. Government is well aware of the huge increase of houses in foreclosure and the crisis at hand. The Fed has been cutting rates and banks are being bailed out. Recently, Congress approved $130 million for foreclosure prevention through NeighborWorks America ’s National Foreclosure Prevention Counseling Program. The credit counseling agency that I work for was awarded a portion of these funds to help homeowners avoid foreclosure through housing counseling. Studies have shown that homeowners may not know where to turn for help or may be too scared to reach out to their mortgage company so they simply sit in silence while they lose their homes. It is hoped that community based credit counseling agencies will be able to reach these homeowners and help them save their homes.

If you are behind on your mortgage, know someone who is, or know someone in danger of losing their home (perhaps their interest rate and payment are due to rise soon) there are now a lot of options to reverse that situation. Most community based credit counseling agencies will help homeowners for FREE. It is important to beware of other companies just looking to make money from an already unfortunate situation. My agency received a call just this week from a lady whose sheriff’s sale (the last step in the foreclosure process) was scheduled for the next day. She had lived in her home for 20 years and was still trying to save it the day before it was sold. Sadly, she had been paying another company thousands of dollars to save her home. They did nothing but take her money and basically kick her while she was down. By the time she called us, there was nothing we could do with less than 24 hours before the home was sold.

A legitimate housing counseling agency will help at a very low cost or for FREE. It is best to call at the first sign of trouble. Start with your mortgage company.

I can’t pretend to know how this housing crisis will end or what else will crash in the process. I just hope that our society learns from this valuable lesson. The important thing is to err on the side of caution and try to plan for the future. With the uncertainty of the economy, that’s tough for all of us.

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Copyright © 2008 by Jennifer Wallis. All rights reserved.

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