Daily Archives: May 9, 2011

Long live the housing crash?

Housing and jobs are the two biggest problems in the US economy. Both have their origins in the financial crisis caused by the banks with speculating on ever rising housing prices and greed. As we all know, that kind of business practice derailed the US economy and many others worldwide. Not only that, but millions of people and families found themselves in heart-breaking crisis.

Today, nearly 5 years after the crash of the housing market, the organizations causing the crisis, are on the way to write profits again, while Main Street America is still suffering. Families and individuals are in a fight for their home for years and as it looks like, will continue to suffer from the fallout for years to come.

Years ago, when the mortgage bubble was pumped up, a mortgage was available for almost everyone. Banks, motivated by certain Wall Street firms, wrote loans to everyone with the desire to own a home, financially sound or not did not matter. Today, things have changed. Banks, while regrouping from incredible losses  with government help hesitate to lend. The entire housing market is actually only accessible to a small percentage of the American population. This is one of the reasons why the housing market will not reach levels of 2000 to 2006. Currently the market and its prices, with some exceptions, is stuck on levels of the 80’s and early 90’s. Another reason why housing is not taking off sometimes soon is the job market. As housing, the job market was hit by the financial crisis with millions of people losing their job and their life line and others working jobs that bring only in a fraction of the income from before the crisis.

With the “newly acquired knowledge” by the banks, that homeownership requires very sound financial circumstances, the banks cut out more than the half of the population from buying a home or keep the home that they already possess. While many, due to job loss, were not able to keep up with payments and found themselves in foreclosure procedures, those that could avoid losing the home right away, are now unable to refinance their homes. With 30% of mortgages under water, this is a fact that will increase the numbers of foreclosures in the future. This will bring prices further down and will create further problems for the market.

As it stands, for the housing market to improve, years will go by. In order to reach levels of before the crisis, people need jobs and banks need to get back to lending. Not only to those that are able to put down 20% of the buying price, but also to those that don’t have the funds for a significant down payment. This can only be accomplished with government help. If the government will not step up and deliver programs for those that don’t have a certain level of wealth, the housing market will have to take the hit and accept the fact that only few can buy and that housing will become a market of buying for the rich and renting for the poor. While this can bring some sort of stabilization for the market, it will not significantly improve the market, at least not for years to come.

What should be done? A program for those that have their mortgage “under water” would clearly relief the market from pressure. This would require the banks to modify or refinance those loans that can be served by the homeowners. While this is not the case for all of the 30% of mortgages under water, it is possible for a big part of it. In the past, so called “Arms” were extended by the banks with very low credit and down payment requirements. While in the mean time the value of the attached homes went down, the accounts are not past due. The owner can’t sell, doesn’t have a down payment and sufficient credit for a refinance and the property is going into foreclosure. There is no reason why such loans shouldn’t be refinanced.

Looking at the misery in housing it should also be considered, as a moral responsibility of the banks, that banks cashed in on tax payers money to save themselves. It is now time to give back and at least save those that have been good and only need refinance, and that is a quite a number of loans. Maybe just a drop, but nevertheless support for the limping housing market. Moving on with none or limited flexibility by the banks will only cause more damage and will create a “walk away” attitude with many borrowers. One thing is for sure at this point, not everything that can be done to soften this crisis has actually been considered. One is wondering about the sense of the bailout. Was the bailout a substitute for lost profits, or was the taxpayers money given to solve a problem?