There were many causes of the housing crisis that hi the US in 2007 and set off the depression that began in 2008. Many of the problems remain but the biggest question is what do we do now?
When the housing market began to decline many problems were created. Banks that held hundreds of billions in Mortgage backed securities found that what they had thought were low risk securities discovered they were taking huge losses. Home owners could not afford their mortgages anymore and the down real estate market put them “underwater”, that is, they owed more than their homes were worth. Many individuals chose to walk away from their debt to start anew while many others were foreclosed on by the banks. Banks hate foreclosures because they must recognize the loss, begin what can be expensive procedures to remove the occupant, and are stuck with property they don’t have the means to maintain and run a high risk they will be either occupied by squatters or gutted by criminals seeking a quick buck. Clearly, kicking homeowners out is undesirable for both parties. Banks then must sell the home in a declining real estate market bringing down the comps for the remaining neighbors, creating a “death spiral” that put the remaining neighbors under water.
Up to this point, banks have chosen to let many foreclosed homeowners stay in their homes paying nothing. This is known ad foreclosure stuffing. As stated above, this allows banks to put off the recognition of the loss and allows them to put off selling the home in a declining market. Whether banks foreclose or not they face a decline in revenues and accounting losses. A home owner who moves out loses their home and their families lives are put in upheaval. But for a new healthy real estate market to emerge, prices must correct and be allowed to fall to their real value. Only then will new buyers step in at the lower prices because one, homes are more affordable to young people who begin household formations and two, because people still view a home as their biggest investment and want to think the odds are in their favor their investment will increase in value rather than become a “money pit”.
Up to this point the Federal government has tried to help by easing requirements for homeowners to refinance. But this does little for people who are underwater by over one hundred thousand or more. Accounting standards were also suspended to allow banks to “mark to model” rather than “mark to market” making a joke of our accounting system which is a cornerstone of a free market since analysts rely on reasonable accounting to value companies. Meanwhile, the Federal Reserve has in both QE1 and the current QE3 bought mortgage securities to provide liquidity to banks. Certainly this is helpful to banks who get the bad debt off their balance sheet but is does little for the homeowners and worse it socializes the losses from the banks to the US taxpayer who see the value of their dollar reduced by the money printed by the Fed to buy the bank’s mortgage securities. So neither of these programs helps reset the market, rather they both stretch out the time it will take for the real estate market to find its new, lower equilibrium. Neither of these solves the documentation problem where documents on mortgages were incomplete, fraudulently signed or where documents are completely missing. This has clogged our courts with cases of homeowners suing their bank or fighting eviction and no clear indication as to who the real owners is legally.
The solution is REITS