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Solving The Foreclosure Crisis Essay

1576 words - 6 pages

It used to be that the formula to homeownership was well scripted. One works hard, saves money for years, gets in touch with a broker to obtain a thirty years fixed rate loan towards the purchase of a home. While this process may sound simple, it is precisely how millions of Americans used to buy their homes, their most important investment and asset. According to the Peter J. Elmer, and his study sponsored by the Federal Deposit Insurance Corporation (FDIC) Division of Research and Statistics, during the 1950’s foreclosures rates on single family homes ranged from a low of 0.04 percent in 1953 to a high of 0.12 percent in 1959. Those foreclosure rates would remain low in the next few decades to peak at 1.04 in 1997 (Elmer). By then, something had happened in the market place where conventional wisdom about home ownership had given way to more riskier mortgages, opening the door to the worst financial crisis the Nation has ever experienced since the great depression.

Opinions differ as to the exact year when the US housing market boom started, but it is clear that from 2000 to 2005 there was an explosion of demand in the housing market. One could characterize the obsession of home ownership as pure euphoria. As prices increased, American homeowners watched as their paper net worth, in terms of home equity grew at unexpected rates. This enticed many people to trade up to more expensive houses as well as purchase second homes. Mortgages could be easily obtained, even without proper income documentation. This led to the highest homeownership rates ever experienced. Supported by easily attained credit lines, unsound lending practices on the part of banks, and poor financial planning on the part of homebuyers, this cycle continued unabated. Politicians of both major political parties took credit for the high rate of homeownership and job creation in construction and other housing-related industries. However, in the mist of the housing boom there were concerns from many that the industry was going through a housing bubble and that any collapse of the industry would have a direct effect on not only home valuations but on the economy as a whole. By mid-2006 those concerns materialized, sparking the greatest economics crisis this country has ever known since the Great Depression.

During the boom years, people used their homes as an account to finance lifestyles that were beyond their means. Some people did this irresponsibility, while others did it, because they were encouraged to do so by the financial industry. Banks routinely sent invitations to homeowners in the mail to cash out home equity and buy a boat or take a vacation. The subprime mortgage market that helped fuel deceptive lending practices is not without fault. These financial issues have culminated in decreased consumer spending, a crumbled housing market, and increased rates of foreclosure. The stock market has reached new lows in 2009 whose impact has been felt...

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