Giant Pool of Money – Part 2

Okay, so from around 2003 to 2005, houses were increasing in value. Income, however, was staying about the same, or rising at a much lower rate. In the past, individuals or families were buying houses that cost around 2 or 3 times their annual income. During this time, however, people were buying houses around 4 times their annual income. To put it into perspective, families with an $80,000 income that were buying $160,000 houses were now buying $320,000 houses – and paying a mortgage payment twice as high. Income being the same, where did they get the money to make their mortgage payment, you ask? Well… due to the increase in the value of these houses, people were able to take the equity in their houses and borrow against it, in the form of an equity loan or equity line of credit. They could then take this money and use it to make their mortgage payment. Crazy vicious cycle, huh?

Obviously, this wasn’t going to last forever, and housing values started decreasing around October of 2006 – the bubble had burst. People were no longer able to borrow against their houses to make their payments, and they started defaulting on their loans. As more people defaulted, more houses came on the market. With no buyers for these houses, prices were forced down even further, and people began to see themselves upside down – owing more money than their house was worth.

The investors, who before couldn’t get enough of the mortgage backed securities (see Part 1 of my blog), no matter how risky, quickly tightened their restrictions. Now they wanted safe investments. The problem was that the small mortgage companies had already made quite a few high-risk loans that they now could not sell – and they made them with money borrowed from large banks. Since they could not sell these mortgages, they had no choice but to default on their own loan, causing the company to go out of business, and people to lose jobs. So now… everyone was losing. The large banks were losing the money that the mortgage company had borrowed, the investment companies were losing their returns, the mortgage company lost, well, everything, and the families lost their houses. Even the government was losing money – they had to lend it to the large banks in order to keep the economy afloat.

If you, like many others, are facing a Michigan foreclosure due to the bubble bursting, or because of a hardship, give us a call. We will never ask you for any money, we will keep everything confidential, we will never ask you to make any repairs on your house, and we will absolutely never put you in a worse position than a foreclosure.

Holly

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