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The Mortgage Crisis -- Looking Backwards and Forwards

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looking back on the mortgage crisis

As you read this, 30% of U.S. homeowners are "underwater" -- meaning they owe more on their mortgage than their home is actually worth.  Even though it's been five years since the housing bubble burst, the rippling effects of the mortgage crisis are still causing problems today.
Before you jump into the housing market, you may be wondering if we could ever have another mortgage crisis.  While something like that is nearly impossible to predict, making an informed choice means looking backwards.  Until you understand exactly what cause America's mortgage crisis, you won't be able to decide if investing in a home right now is right for you.
So, let's rewind to the mid-2000's…  
Back then, people had no trouble qualifying for mortgages.  In fact, lenders were so willing to hand out home loans that they didn't even require down payments!
All of that easy lending led to a spike in home sales.  After all, with so many buyers out there, sellers could practically charge whatever they wanted.  The sky was the limit!
The only problem was that lenders were giving out money to people they shouldn't have.  The lending process was actually TOO easy!
How does something like that happen?
To understand that, you have to understand Freddie Mac and Fannie Mae.  Starting in the 1990's, they were required to meet government quotas so that low-income people could also buy homes.  At first, 30% of Freddie Mac and Fannie Mae's loans had to be given to people at or below their community's median income.  By 2007 (the same year that the bubble burst), that government quota was up to 55% -- meaning that more than half of the loans they guaranteed were considered "low-quality".
By 2008, there were 27 million low-quality mortgages around the country -- 70% of which were held by Freddie Mac and Fannie Mae (the rest belonged to private lenders).  When people couldn't pay their loans back, everything collapsed.  And, as a result, property values plummeted.
So, is it possible for something like this to happen again?
For their part, lenders (including Freddie Mac and Fannie Mae) have really tightened up the purse strings.  Today, it is much harder to qualify for a loan than it was a few years ago, and lenders are requiring higher down payments.  In fact, if you can't afford to put 20% down, most lenders will make you pay private mortgage insurance every month.
What about the people who are still suffering from the last crisis?
The federal government has created a forgiveness program with the major mortgage servicers, in which lenders have to "forgive" home loans so that their owners don't default.
The potential problem with that?
When the Mortgage Forgiveness Debt Relief Act expires on December 31st, lenders will be required to report canceled debts to the IRS.  As a result, homeowners will have to count their debt as "income" and pay taxes on it.
If, for example, your lender "forgave" $150,000 of your home loan, you would have to pay taxes as if you made $150,000 this year -- in addition to all of your other taxes!  That's something that most Americans can't afford -- especially the ones who are already having financial problems.
Plus, once the Act expires, homeowners will also have to pay tax on the balance forgiven by their lender in a short sale.  So, if your lender agreed to take $75,000 off the price so that you could get rid of your home faster, you'll have to pay taxes on that $75,000.  Considering that the number of short sales went up 25% in the beginning of 2012, that's a lot of homeowners at tax risk!
So, what's the bottom line?
If you're thinking of going out and buying a home, you can rest easy knowing that those tighter loan standards are designed to benefit you.  Now that the days of easy lending are gone, it's simply a matter of digging out of the hole.  As long as you give careful thought to how big of a loan you can honestly afford, you shouldn't have any problems.
 


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