Sub Prime Mortgages Did Not Cause The Real Estate Recession

By
Real Estate Agent

 

The Sub-prime loan market was not the cause for our current market woes.  We've heard the blame put on those who bought more home than they could afford as a simplistic reason.  

  • Many vilify those individuals who through mortgage and real estate professionals were encouraged to finance using many creative mortgage products. 


The mortgage industry kept rolling out attractive loans and offers to snag anyone who wanted to own a home.  The end result was that people purchased homes with adjustable rate mortgages, thinking appreciation would put them in a position to refinance in 3-5 years.  The refinance would avoid the reset of the adjustable rate.

  • Other attractive mortgages like the 80/20 combo or the 90/10 combo were frequently used.  Those loans were coupled with seller assist, which resulted in little or no money out of pocket from the buyer.  The standards for acquiring a loan allowed "no doc" or "stated income" were extremely low. 
  • A dangerous recipe, but not enough to sway our market coast to coast.


In actuality, this was a very small portion of the mortgage market. The Sub-Prime mortgage market only represented 1.2 Trillion which was not enough to cause the total collapse we have experienced.

In a recent article the National Bureau of Economic Research identified that the cause for the housing recession was just plain old bank panic.  The real culprit was the little known Renew Sale and Repurchase (REPO) process.

  • Its a difficult concept since we assume bank assets or deposits are insured.  This facet of the banking industry is not.


To understand how this portion of the banking industry collapsed please read the full article Subprime Mortgages and the real estate recession.

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Comments (2)

Sara Homan
Coldwell Banker Ellison Realty 352-209-4044 - Ocala, FL
Realtor, Homes, Farms & 55+

Bonnie,

There are without a doubt many facets to this market.  I feel that the biggest mistake is the attempts of the White House to try and stop the inevitable foreclosures.  If it would just run its course we'd probably be much better off, instead we are having health care jammed down our throat and stupid spending sprees when we are facing tremendous debt now...How can the country possibly  recovery with such idiotic actions?

Mar 02, 2010 05:08 AM
Melissa Anderson
Mortgage of Texas & Financial - San Antonio, TX

I'm still convinced the COMMUNITY REINVESTMENT ACT was the first nail in the coffin and everything went down hill from there.

It took a few years, but it happened.  It started a trend.  EVERYBODY DESERVED TO BUY A HOME, so everybody did.

Great blog Bonnie!

Mar 02, 2010 10:29 AM

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