A Credit to America
We are in one of the most serious economic recessions of our country‘s history. The current status of the real estate market, paired with the plummet of the stock market and the weakening American dollar against foreign currencies, has left myriad Americans with a serious dilemma: continue paying off their mortgage despite the monetary deficit their property is suffering, or abandon their property and default on their mortgage, thereby triggering a foreclosure on their property. Today, the decision of foreclosure is too often the path chosen in this situation. In February 2009, foreclosure filings increased almost 6% from January of 2009, and foreclosure filings in February were reported on over 290,600 properties across the country. This was a 30% increase from the number of property foreclosures recorded in February 2008. This translates to approximately one in every 440 United States homes receiving a foreclosure filing in February of this year. It is obvious that this crisis must be dealt with as soon as possible.
The foreclosure crisis really began by a relaxation of underwriting standards on the part of the lenders. When the real estate market was strong, lenders made the decision to finance individuals with poor credit backgrounds, in order to supply the beckoning real estate demand. These individuals posed some concern for lenders, and brought with them, additional risk (compared to more creditworthy individuals). Nevertheless, lenders often dismissed this concern considering the current status of the market, but attempted to lessen their risk by exercising loans, which had higher interest rates, in order to offset the possible danger of financing these individuals.
The problem with lax underwriting standards was that many of these individuals lacked the capital to afford their initial investment, planning to refinance or sell their property for a profit in the powerful real estate market. Lenders did not want to lose these individuals, however, and utilized several types of loan programs, including “teaser” rates and “balloon” type payments. The “teaser” rates provided the individual with a very low temporary introductory rate on their mortgage, allowing them easier beginning payments, while the “balloon” type payment method took a slightly different approach by scheduling the large lump-sum payment on the mortgage at a future time, after a number of significantly smaller payments, allowing the individual time to refinance their house, assuming they earned a profit on their property, and possibly parlay the extra capital into a new house.
Needless to say, the strength of the real estate market did not continue, and many of the mortgagors were wiped out when the market crashed. With their property values underwater, many Americans saw the only answer being to abandon their properties, allowing them to be foreclosed upon. Without consequences, such as debtor’s prison, these individuals had no reason...