How Mortgage Practices Have Added to the Real Estate Debacle

The real estate and mortgage meltdown that has occurred here in South Florida , as well as many other parts of the nation, is a direct result of greed, both on the part of investors, developers, and, more often than not, home owners. And, of course, mortgage companies, offering deals too sweet to be true (which they were) just upped the ante that much more.

One component of the problem were investors, many of whom had been soured by the lackluster returns their investments were getting in the stock market. The unrealistic rise in real estate prices in Florida, as well as elsewhere, looked like a golden opportunity to double or even triple their money by putting a minimum down payment on their investment homes. Interest rates were at an all time low, even though many of these mortgages had balloon payments a few years down the road. These investors planned on “flipping” these homes before that ever happened. We know people who timed this right and actually did make huge sums of money with very little down payment. Some actually sold their homes immediately after they were completed. They had been locked into pre-construction home prices, and these homes had increased in value by hundreds of thousands of dollars before they ever closed. These were the lucky investors who got in and out before the bubble burst. But everything is timing.. Investors who got on the bandwagon late, and whose homes were caught in a backlog of construction delays, were not as fortunate. As prices started declining, they couldn’t sell these homes as they were completed. I know of investors who are now paying high mortgages, property taxes and high homeowners premiums on three or four empty homes. They still have to pay to keep the electric on, for lawn and often even pool service, and water bills . Watching them decline in value only makes things worse.

The developers haven’t fared much better. As their homes are being completed, they now have to compete from the limited buyer pool, with all of those same investors who are now looking to get rid of their homes in these same communities. They have had to drop their prices as well to get rid of some of their inventory.

There is yet another part of the picture. Homeowners over the last few years started tapping into the equity of their homes, which had been increasing at an unrealistic rate due to this heating up of the housing market in 2002-2005. They treated their homes as banks, borrowing against them with abandon. And, of course, the banks and mortgage companies were complicit in encouraging this practice, offering homeowners many thousands of dollars to fix up their homes, pay off other bills, finance the college education of their kids, or even to borrow against their existing homes to get a down payment on an investment home to “flip”! The airwaves and newspapers were filled with advertisements encouraging people to borrow against the equity of their homes.

It was as if this cycle took a life of its own, and a perfect storm was brewing. Well, the storm hit. Just as the stock market bubble in 2000-2001 showed Americans that everything in our economy is cyclical, this time it hit just as hard. Many of the same people that had been hit by the stock market debacle in 2001, got hit again.

But the good news is that , like every cycle, this one will turn. Hopefully the real estate market is almost bottoming out and the tide will turn. It may take a bit of time for the inventory of unsold homes, and foreclosed homes to begin to move again, but they will . People still need a place to live, and our population only keeps growing, as the amount of land suitable for development is not endless.

Actually, for first time buyers, this is a wonderful time. There are some great deals to be had out there now, and hopefully, as people start taking advantage of these bargains, things will start to turn around

Share this article:

Leave a Comment