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To prevent a serious recession - the market was down even before the attack - the Federal Reserve kept lowering interest rates, which made mortgage more affordable. When you purchase a house, what matters is really your monthly payment.
The combination of these two - low performance stock market and low interest rates created a run on housing.
As demand increased, so did housing prices, especially in places like CA and FL. Many started "flipping" houses, bought and sold within a few months and making money doing this. Many purchased houses as investment, not as main residence. And with anything like that, people started thinking that they'd better jump on the trend before it was going to be too late.
As prices were going up, houses were getting less affordable. But a hot area will open new ideas. After all, this is what capitalism all about.
So first, loans were made to people who otherwise would not qualify for any of them. Now called NINJA loans (no income, no job, no assets). People were approved for loans without proof of ability to pay them.
Next, since some of these loans were risky, they were considered good investment since the payoff would be higher. So as soon as loans were made, they were sold to investment groups. Thus, in the old days, if you had problem paying the mortgage - losing a job or something - you could go to the bank and try to work something. But here, the banks no longer held the loans so there was nothing they could do.
Then came the "interest only" loans that, even on DU, some would say that they are worth tool for some. This means, that instead of making a payment consisting of principal and interest, it was interest only. At the same time, the amount you owed - the principal, would increase. At least, you'd had an option of selecting interest only or a full payment. Some claimed that if you were going to flip the house in a couple of years, it made sense. I disagree but, hey.
Then you have the teaser rates. You would pay a very low rate, say, 2% for two years and then the rate would adjust to the market rate. And this is what happened. Interest rates started going up in the past two years and many of these loans fell into this trap where people were faced with $500 or $1,000 increase in their monthly payment.
When they made those risky loans, they were "assured" that if they could not pay the new loans, they could always sell the house. But now you have the opposite effect. As rates went hight, prices went down. So if you are going to sell, you really have to lower your price, even below the amount that you owe on your mortgage.
So now you have a spiraling effect. Interest are high, buyers are sitting on the fence, waiting for prices to drop, more houses on the market, people faced foreclosure and no one is buying.
The worst thing - many of these loans have a pre payment penalty, often of thousands of dollars. So even if they could refinance, if it is with a different lenders - they will have to pay these penalties which makes it impossible for them to do so. This was one thing that Clinton suggested to prohibit - several months ago.
Last, many jobs were created for people in the real estate and mortgage areas. Now these people have lost their jobs, cannot pay for their own mortgages, adding to the vicious cycle.
And, as will always happen - a lot of fraud.
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