One certain factor leading to the crash of the housing market was the deterioration of the sub-prime market. As a result, there were countless amounts of companies and individuals suddenly facing foreclosure. Even the larger companies who were not in a position to foreclosure on their properties, found that they had suddenly lost millions of dollars in their investments.
The news and financial markets began to come out with numerous reports regarding the sub-prime market crash. However, while most property owners were affected to some degree by rising interest rates, there were many who remained uncertain on how exactly this came to be.
Just a few years ago in the mid 2000’s, getting sub-prime mortgages were a great advantage to a lot of property buyers. The buyers and investors who were interested in taking advantage of the ‘hot’ real estate market, but did not have a good credit history, were all able to take advantage of sub-prime mortgages, in order for them to obtain loans. This was because the underwriting guidelines for sub-prime loans were generally more easier than traditional mortgages. This allowed buyers who had poor credit to obtain a mortgage loan. In exchange for making a sub-prime loan to a buyer with poor credit, the mortgage lenders were able to charge higher rates of interest. Also, so the theory and belief went, the mortgage lenders relied on the thought that they would be able to foreclose on the property, and easily flip it for a profit, in the event the borrower defaulted on payments.
The money which funded these sub-prime loans came from a large variety of sources. Low interest rates back then made it possible for these mortgage lenders to borrow money, and then loan out the same funds as a mortgage to home buyers for a higher rate. Also, it is not uncommon for federal and state governments to borrow money from the central banks.
The housing market, a few years ago was stable and was even experiencing a ‘high’ that had not been seen for quite a while. There were also a lot of home buyers who were taking on massive amounts of debt, thus creating another problem. The overall health of the real estate market seemed good at the time, so there were great expectations regarding future growth for this sector, but in hindsight, it appears to have been completely unrealistic.
The last two years of this current real estate boom was in 2005 and 2006. During this time period, mortgage lenders didn’t hesitate to lend money to all and any borrowers, regardless of their credit. These loans, because of the strong market, represented a tremendous money making opportunity for the lenders.
The problems began when the interest rates began to rise from their previous lows. If you were not aware, historically, interest rates that rise have always had a negative effect on the real estate market. When the rates are low, they help produce demand, however, when the rates are high, they ultimately cause the housing prices to fall. Up until mid 2006, home builders could not build new houses fast enough to meet the growing demand. During the fall of 2006 however, the demand suddenly began to slow down. It was also around this time that the number of defaults on mortgage loans began to increase.
Suddenly, mortgage lenders found it difficult to obtain money from their previous sources of funding. As a result, the would be house buyers quickly discovered that loans were no longer easy to obtain, as the money sources began to dry up. Also, investors did not take on additional risk as the underwriting guidelines began to grow stricter. Homeowners who had taken out mortgage loans with adjustable interest rates, began to find it hard to meet their mortgage payments as the rates began to rise. The stringent underwriting guidelines also meant that they were unable to refinance their fixed rate mortgages in some cases. Then mortgage payment defaults continued to rise, thus fueling the current massive rash of foreclosures.