Throughout the last three decades, the United States experienced a substantial economic expansion. With more spending power than ever before, people began to seek larger purchases. Most of these significant purchases require the use of credit, and real estate is perhaps the most notable market which uses credit. Banks saw the great potential for profit, and sought to grant as many home loans as possible during this period of great wealth. Gradually, banks began granting loans to less qualified customers. After all, this inflationary period would continue forever, right? This is where the foreclosure problem began. The expansion ended, and a recession began. Suddenly, thousands of lower-income loan clients found it impossible to make payments on loans they should never have been granted to begin with. This problem must be resolved, and the nation must restructure itself so as to ensure that a similar event never occurs again.
To begin, one must examine the roots of the foreclosure problem. Like most issues, it is two-sided, and both sides must share the blame. Lenders know very well when to grant loans and when not to. This was certainly the case throughout the 1990s, when most of these problem loans were given. However, for some reason, the basic guidelines for lending were ignored, often on a massive scale. Why? Most people would point to the blind desire for profit. This is at least partially true, but it was certainly not blind. Banks were noticing that during this time of success, lower-income people were becoming more able to make larger purchases. Everyone was getting wealthier. So why not grant loans to these people? For the answer, one must look ahead. Surely, a recession would come eventually. A Capitalist economy fluctuates without fail. Thus, although these new customers might be able to make payments in the here and now, there would inevitably come a time when circumstances would change and payments would stop. Loans were granted anyway. At the same time, people were forgetting to use reason. If you are barely making payments during a time of great prosperity, what happens in the next recession? This simple lack of insight led thousands of people to make poor financial decisions that would eventually turn on them. The stage was set.
Then, as any economist might have foreseen, the recession came. The housing market collapsed. Nobody could afford to buy a new home, so selling at a good price became nearly impossible. All of these customers, who could hardly make mortgage payments five years ago, could never dream of making them now. Foreclosure became reality for thousands of Americans, across all ages and income levels. Banks continually repossess the homes of failed loan recipients. This is an ongoing process, and it shows little hope of significant improvement. As a result, one of the biggest questions facing the nation today is: How do we fix the foreclosure crisis?
The truth is, it is impossible to wave a finger and "fix"...