How the Foreclosure Crisis Started: Investors, Speculators, Mortgage Fraud & Lax Lending Standards All to Blame


Have you ever wondered how the whole foreclosure mess started? An excellent, detailed series by Keith Jarrow at the Real Estate Channel gives you a birds-eye view of where it all went wrong. Expecially interesting is how it got so off track, so fast.

The Collapse of the Housing Market: The Major Players & How They Contributed

Investors: They played a great part in collapse of the real estate market. In the article, Investors Played a Key Role in Creating Housing Bubble, Mr. Jarrow points out:

An important, well-researched article posted online in November 2009 by the St. Petersburg Times found that 44% of the 11,967 residential properties foreclosed in 2007-2009 in Hillsborough County, Florida were owned by investors who did not occupy these homes.

Speculators: Some might call them the first cousin of investors, but they propably did more harm as their activity drove up the prices of homes very quickly. In the article, How Speculative Madness Changed the Housing Market, Mr. Jarrow uses the city of Phoenix as an example of how speculators decreased housing inventories and drove up prices, writing:

Phoenix had become a hotbed of speculative buying.  By March 2005, monthly home sales had climbed to nearly 10,000, up 13% from March 2004 and 73% higher than March 2001 sales.  Speculative interest was so great that the inventory of homes for sale had plunged from 23,000 in March 2004 to a mere 3,000 a year later.

The less homes that are available for sale, the more the price goes up . . . a simple case of supply and demand.

How to Invest in Cheap Foreclosures to Earn Passive Monthly Income
(& Retire Early)

The final piece of the puzzle that led to the collapse of the housing market came from the lending side. By now, even if you don’t know what a subprime mortgage is, you’ve heard the term ad nauseam. Lending standards got to be so lax that there was practically no regulation at all.

Mortgage Fraud: And, this doesn’t include out and out fraud – which played a major part in the collapse of the housing market. In the final article in the series, How Widespread Mortgage Fraud Toppled the U.S. Housing Market, Mr. Jarrow explains that there were some whow warned what was to come, ie, the FBI: 

In September 2004, the FBI reported that there was a “growing epidemic” of mortgage fraud in the country that could eventually cause the collapse of the housing market.  No one paid much attention . . .

Why did no one heed the warning? In short, the war on terror was the focus of the administration att the time. And really, who could’ve imagine that such brazen fraud on such a rampant scale would take place. A few million here or there in fraud, yes; easy to foresee that happening.

But billions . . .and that’s what the foreclosure crisis wound up costing the American taxpayer — billions. It still boggles the mind — even with an explanation staring you right in the face.

Lax Lending Standards: Zero Down Home Loans — Have They Gone the Way of the Dinosaur?

As a side point, I was a loan officer during this time (2005-2006). Credit standards were so lax that all you needed to qualify for a 100% home loan (zero down home loan) was a 580 credit score. Yes, a 580. That’s no typo. How dramatically have things changed?

Not only are zero down home loans practically gone the way of the dinosaur these days (ie, become extinct), you have to have a near perfect credit score (720 to 780)  to qualify for a home loan — and you have to have a significant down payment 10 to 20% in most cases.

Even federal mortgage underwriters like Fannie and Freddie have changed their lending standards, as we wrote about in the post, Lost Your Home to “Almost” Foreclosure? Fannie Mae Wants to Help You Buy Another One, ie:

While Fannie is not making homeowners who’ve had trouble with home ownership in the past wait as long, they have tighted qualifying guidelines. For example, instead of a 3 or 5% down payment like in the past. Now the down payment has to be significantly more — 20 percent.

Looks like the ship is going to right itself, but the American tax payer is the one paying the price for the foreclosure crisis — literally and figuratively.

P.S.: Start a Business Cleaning Foreclosed Properties. While the foreclosure crisis has been a nightmare for many, it has presented a perfect small business opportunity for others. Learn how to start a foreclosure clean up business. Read how one foreclosure cleaning business owner rakes in $40,000/wk (not a typo).


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Copyright © 2010 Yuwanda Black for Foreclosure Business News. Article may not be reprinted or reproduced in any manner without the express, written consent of the author.

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