A Guide For Young Buyers To Understand The 2008 Mortgage Crisis
The average age of today’s first-time home buyer is 32 years old.
This means that ten years ago when the U.S economy entered into what would become the worst economic crisis since the Great Depression of 1929–today’s first-time home buyer would have been in their late teens to their early twenties.
While no American can deny having seen the effects of the recession in the late 2000’s, those Americans that are now buying their first home likely don’t know or understand what caused the mortgage crisis and intern the crash of the economy.
While we want to avoid sounding like your economics professor here, we do feel it’s important that all of you young buyers out there (especially those who will applying for a mortgage) know what (or rather who) was responsible for the mortgage crisis.
“Why,” you ask?
Because like it or not, as a home buyer today, you are still paying for the mistakes that were made over a decade ago. Plus, our economy and the housing market can’t take another hit like in 2008–we’ve got to be smarter.
Know that this is a basic and very general explanation of the “mess” that actually occurred–if you’re interested in going more in depth, contact us–perhaps we can discuss the mortgage crisis over coffee?
In the early 2000’s, after events like the burst of the dotcom bubble and September 11th terrorist attacks, the U.S economy was at high risk.
In an attempt to revitalize the U.S economy, central banks around the world reduced interest rates to create capital liquidity. In turn, investors found the higher returns they were looking for through riskier investments.
Lenders decided to hop on board the risk train too. They began approving subprime mortgage loans to borrowers with poor credit.
Around the same time, consumer demand was fueling the housing bubble which reached an all-time high in the summer of 2005.
Ultimately, that growing bubble popped the following summer resulting in foreclosures, large lenders and hedge funds going bankrupt, and further economic turmoil.
The lenders were by far the biggest culprits when it came to the mortgage crisis. They’re the mortgage originators, the source of the bigger problem. The lenders were the ones responsible for lending funds to people with poor credit and at high risk of default.
Home buyers aren’t completely free of blame. Many knew they were taking a huge risk buying a home they couldn’t afford.
Non-traditional mortgages that offered low introductory rates and “no down payment” were what made their dream home possible. Homeowners hung onto the hope that the value of their new home would appreciate, allowing them to refinance for a lower rate and take the equity out of the home for use in other spending. That hope was crushed with the collapse of the housing bubble–house prices dropped quickly.
Instead of refinancing for a lower rate like they had hoped, homeowners were forced into higher rates–rates they couldn’t afford. As a result, many homeowners defaulted on their mortgages and their homes were foreclosed on.
Instead of holding onto the (bad) mortgages they were originating, lenders would sell them in the secondary mortgage market and collect originating fees which provided them with the capital they needed to continue lending. As you probably guessed, this kept the snowball rolling.
Investment banks would purchase the (bad) mortgages from lenders and securitize, or package them up into bonds, and then sell them to investors–worsening the situation for the entire economy.
You may be asking, where were the rating agencies? Don’t worry, they’ve since received a lot of criticism as well. Some argue that they should have foreseen the high default rates and shouldn’t have given the securities such high ratings. If the ratings had been more accurate, fewer investors would have bought into them and the losses wouldn’t have been so bad.
Overall, it was a mix of factors and individuals that contributed to the crash of the U.S economy–people are still pointing fingers!
When it comes to helping you understand real estate lingo, terms, and processes–we’ve got you covered. We created a guide called The Redbud Group Decoding Real Estate Guide and you can download a free copy for yourself!