Mortgage Foreclosure Crises: Causes, Effects & Justifications Unanswered

Over the last two years there were many questions asked about what caused the mortgage meltdown and subsequent foreclosure crises. There was plenty of speculation to go around as well as a lot of blame and finger pointing towards certain groups of home buyers who supposedly bought homes they couldn't afford; towards the FHA which supposedly encouraged unqualified people to buy homes; and towards mortgage brokers and some mortgage lenders who supposedly originated bad loans.

There was probably some truth in all of this speculation, but we all now know that groups of home buyers (whether they were qualified or not) could not have created the circumstances which led to the mortgage meltdown because, even if they had the knowledge and expertise to write their own mortgage loan applications and get them approved and closed, it is safe to assume that they would not have possessed the skill to package and sell their loans as securities on the stock exchange. There's no home buyer group(s) I'm aware of with such a license that would permit it/them to do so.

The FHA had been insuring mortgage loans for almost seventy five (75) years when the first signs of problems in the mortgage industry were detected in late 2007 into early 2008 and had not packaged loans and sold them as securities (Ginnie Mae dealt with FHA-insured loans on the secondary market), but rather protected mortgage lenders against default through the insurance paid by mortgagors (borrowers) known as mortgage insurance premium (MIP) and continues to do so today.

A number of mortgage brokers and some mortgage lenders did originate what was known as subprime mortgages (unconventional, non-traditional, non-FHA, non-VA, non-PMI mortgage loans) which carried very high risks for the home borrower, based on low initial interest rates (and mortgage payments based on those rates) for short terms, at the end of which an adjustment in the monthly payment - and the interest rate on which is was based - caused severe payment shock and many homeowners defaulted. Initial terms ranged from six (6) months (LIBOR) and one (1) year (1 year ARM) to two (2) years (2/28 ARM), three (3) years (3/27 ARM) and were among the more popular subprime loan programs, but there were also five (5) year terms (5/1 Year ARMs), seven (7) year terms (7/1 ARMs) and up to 10 year (balloon) term loans which adjusted at expiration of the respective terms for the ARMs and due in full for the balloon.

Did mortgage brokers and some lenders originated bad (subprime) loans? The answer to that question is a qualified yes; And many of those lenders are now out of business. A visit to the mortgage lenders implode meter will reveal that since 2006, 387 major U.S. lending operations have "imploded". These failures consisted primarily of subprime lenders or subprime lending departments of major conventional lenders.

Of course, none of this article's content thus far completely addresses the root cause(s), effect(s) and/or justification(s) relating to the foreclosure crises, because this writer is just not in a position to provide answers satisfactory enough to address all the still unanswered questions surrounding this issue; But the information provided is certainly accurate enough to raise additional questions by all those affected, including displaced home owners who have lost their homes to foreclosure as well as the many whose mortgages are now "underwater" (mortgage balance higher than the property value).

In fact, major players involved with the mortgage meltdown and foreclosure crises are some of the same that received a bailout from the federal government and continue to be such powerful entities in the industry - with the ability to buy a great deal of influence (lobbyists with access to lawmakers) - that it was necessary to appoint a special inspector general to investigate one aspect of the overall crises, and bailout by the federal government. So I thought it necessary to include an excerpt from one of the special inspector's articles to provide some perspective as to why there is still a dearth of answers relating to the subprime mess and mortgage foreclosure crises, which after all, was at the heart of the bailout.

One thing I can say with some certainty: The problem was not caused by any particular groups of home buyers and it certainly wasn't caused by the FHA, which has grown in market share since the crises began.

This excerpt is from a NY Times article written by NEIL M. BAROFSKY (OP-ED CONTRIBUTOR). It was published on 3-29-11 with the title, Where the Bailout Went Wrong. Mr. Barofsky is former special inspector general of the bailout program.

Here's the excerpt:

From the perspective of the largest financial institutions, the glowing assessment is warranted: billions of dollars in taxpayer money allowed institutions that were on the brink of collapse not only to survive but even to flourish. These banks now enjoy record profits and the seemingly permanent competitive advantage that accompanies being deemed "too big to fail."

That program has been a colossal failure, with far fewer permanent modifications (540,000) than modifications that have failed and been canceled (over 800,000). This is the well-chronicled result of the rush to get the program started, major program design flaws like the failure to remedy mortgage servicers’ favoring of foreclosure over permanent modifications, and a refusal to hold those abysmally performing mortgage servicers accountable for their disregard of program guidelines. As the program flounders, foreclosures continue to mount, with 8 million to 13 million filings forecast over the program’s lifetime. The entire article can be viewed at the NY Times Op-ed article.