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Foreclosure Crisis Worsens

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Message Mike Colpitts

The foreclosure crisis is worsening as millions of home owners lose their homes from coast to coast, and has begun to impact the national economy. It has materialized into the worst financial disaster since the Great Depression, and little is being done to solve the massive problem.

At the height of the Great Depression President Franklin D. Roosevelt created the Home Owners Corporation sponsoring loans for those having trouble making their mortgage. A similar program is needed now to fix the crisis before it strangles the U.S. economy.

In early 2007 Housing Predictor forecast that two million foreclosures would occur through 2009, updating its forecast to 3 million just a few months later. The crisis started in subprime mortgages and has spread into exotic conventional loans. A Housing Predictor survey found one in six home owners fear losing their homes to foreclosure.

U.S. regulators are reviewing the role that credit-rating agencies played in the mortgage market melt down. Congress members have introduced proposals to assist home owners. Critics of the three largest Wall Street rating agencies, which are Standard & Poor’s, Moody’s Investor Service and Fitch Ratings say the companies failed to provide investors adequate warnings of the risk involved in mortgage securities, where investors purchased securities that funded the mortgages.

The housing downturn in 1925-33 saw the worst national loss in housing values suffered in the U.S. and the current crisis clearly provides a new set of dynamics to send the nation on a similar road, producing record losses in home values. As prices have climbed the losses could be multiplied to new levels, greatly surpassing the 1930's.

The Federal Reserve was formed in its present form and equipped with new laws to limit the likelihood of a similar disaster from occurring. The changes assisted the economy’s recovery from the Great Depression. But the World has changed from the 1930's. Technology and speed are now paramount. American business has gone global, providing goods and services to hundreds of developing nations. The situation is much more different today.

Massive global business growth presents massive issues for Congress and others to resolve before the housing crisis impacts the national economy in much larger ways.

The growth of an epidemic of fraud and greed and all its underlying elements has given life to a mortgage system that has failed the nation. The epidemic is beginning to already have an impact in other areas of the nation’s economy. Credit card delinquencies are up. Auto payments are late in increasing numbers.

Mortgages were made to many subprime borrowers that adjusted upward to unrealistically high payments within a couple of years and thousands of mortgage agents and mortgage brokers working on commission cooked the applications to make more conventional "Junk Mortgages" that should have never been made in the first place.

Home prices in the majority of U.S. housing markets are falling. Some markets prices are falling at the fastest clip people can remember. Foreclosures are already at a record high. Some housing markets are crashing in California and Florida, where prices have dropped as much as 50% in some cases from the peak.

The equity many home owners enjoyed is evaporating in the majority of the country. Americans borrowed $800-billion from their homes a year from 2004 through 2006, and many are now nearly imprisoned in their homes to pay the mortgage or face dire consequences.

More than 50% of all home mortgages made in 2006 were with 5% or with zero down as a down payment. The figure is particularly significant since mortgages like this were nearly impossible to obtain except by those with excellent credit histories and strong incomes until two years ago. Many loans like these, which were originally designed to be made to owner occupants have been mishandled and made to investors as a means of qualifying for mortgages.

The U.S. Savings and Loan Fraud scandal in the late 1980's was the worst financial failure in the nation’s history since the Great Depression. An independent economic research group has estimated that the crisis will cost the banks and mortgage companies more than $300-billion. Other estimates range up to $2-trillion.

The sweeping scope of the crisis has sent Wall Street and other business markets into volatile swings since summer.

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Mike Colpitts is the Editor of Housing, an independent web site, which forecasts more than 250 local housing markets in all 50 U.S. states and real estate news. Housing Predictor has a staff of researchers, economists and computer (more...)
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