5 million mortgages, with
another round in 2009. The spring 2009 cumulative total of over 4 million
foreclosures is a reasonable expectation. "At roughly $200,000 per
defaulting household, the total of mortgages going under could be $800
billion" (Dumas, p. 24).
Many people are asking the same question of 'how did this all
happen?' The finger pointing is just beginning and it is being pointed at
Wall Street for creating the investment vehicles, the bankers for being
willing to make the loans, the underwriters for rating the investments so
highly, and even the individuals who purchased the properties and then
defaulted on the loans. According to one investment guru, "it all started
with low interest rates, which made homes affordable for more people"
(Altfest, 2008, p. 24).
Altfest states that lenders were much more willing to make loans in
the subprime market because they had an outlet to rid themselves of those
loans once they had been made. That outlet was Wall Street who had created
the REMIC's, CDO's and CMO's and were more than willing to purchase the
loans for placement in those investment vehicles.
The problem came about when "thousands of buyers who normally wouldn't
have been able to get a mortgage on their own were able to realize the
American Dream" (Altfest, p. 24) but these borrowers with questionable
credit eventually began to default on the loans and "many mortgage
companies found themselves in serious financial trouble, stuck with loans
they couldn't sell to private investors or other lenders" (Altfest, p. 24).
With property prices falling and no one to sell them to, the glut in the
housing market affected the builders who were no longer able to build
houses that would sell. The oversupply of houses on the market hit a 16-
year high in July 2007 and there continues to be a huge number of unsold
houses on the market today.
As if to add insult to injury, many insurance companies are raising
their rates on the very same consumers who are in danger of losing their
homes, or are already in foreclosure. Insurance companies often run credit
checks on individuals requesting insurance but base the premiums being
charged on how good (or bad) the individual's credit is. This is causing
some angst in Washington and the practice may 'reignite insurance scoring
battles in state legislatures and in Congress" (Gusman, 2008, p. 12).
According to Gusman, some consumer groups expect lawmakers to
aggressively look again at the rating factors used by insurance companies
to determine premiums. "With millions seeing their credit standing
threatened and many at risk of foreclosure, penalizing them further with
higher insurance rates would be unfair, these groups contend" (Gusman, p.
13).
Some experts are saying that, as with every financial crisis, this too
will work itself out. However, one expert says "this is different from,
say, the Internet bubble because the financial industry needs our help
(taxpayers' help, that is)" (Regnier, p. 138). The bursting of the
internet bubble was different in other ways as well. The internet bubble
was brought about in a similar manner to many of the other financial crisis
suffered by Wall Street. That is that many investors bought into the hype
of a particular industry and bought up the common stock of the companies in
that industry. The various stocks were not created by Wall Street and
touted as safe, fixed-income investments as CDO's and similar investments
were. As Regnier put it; "over-exposed Wall Streeters are having a crisis
of confidence" (p. 138) and when investors lose confidence in their brokers
the immediate response is often to pull their money from any and all
investments. That type of response is what leads to volatility in the
marketplace, and a general downturn in value. This downturn does not
affect only stocks and bonds, but all types of investments, including the
underlying securities or security used to back loans, etc.
As one investment guru recently stated; "as a value-oriented investor,
I'm salivating over the prospect of eventually purchasing distressed real
estate for both current income (through rents) and potential long-term
gains (through sales)" (Altfest, p. 24). Of course, Altfest is not buying
yet, he would prefer to wait until the dust has settled. He said, "over
the next few years, I'll also look to buy more shares of homebuilders, like
Toll Brothers, Pulte Homes, and Lennar, but only after their prices fall to
half or less of their book value per share" (Altfest, p. 24).
Other firms and industries are feeling the pain as well. Since
builders are not building as many homes, suppliers are not selling as much
product as was previously being sold. Workers are being let go which only
exacerbates the problem, especially if the worker is one of the borrowers
who has purchased a home with relatively little creditworthiness. A recent
article stated...
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