Reasons for Short Sales, Foreclosures and Defaults
To continue my story on why there are so many foreclosures, short sales and people defaulting on their mortgages ... the banking and lending institutions were no longer policing themselves and the Federal Reserve, which one of their duties included overseeing banking and lending institutions, no longer deemed it necessary. Under Alan Greenspan's supervision, it was decided that it was not necessary to regulate the transaction industry and they would take care of it themselves. Surprisingly in 2008, he expressed his disbelief in how the lending institutions only acted in their self interest and not in the welfare of the shareholders that they were thought to have served.
In 2005, Greenspan praised all the new products such as niche credit programs for immigrants and subprime loans. He also encouraged the ARM's (adjustable rate mortgages) in 2004, giving them the stamp of approval. These applicants would have been denied credit at any other time in history, and he felt that lenders were able to judge the risk by applicants and price the risk accordingly. As we all can tell, there were reasons that they were turned down for loans before. Bonuses were paid on the volume of loans written and not on the quality of the loans.
It used to be that the focus of mortgages was to guard against defaults for the life of the loans. If the home owner defaulted twenty-five years later, it was the original lender that held the mortgages and not the investors.
Now, they no longer needed to write loans for buyers that were good risks for 30 years; they needed a good risk until they prepared the loans into marketable securities representing an ownership interest in an asset ... in this case, a bundle of loans that are traded on Wall Street. The people who provided the loans guaranteed that it wouldn't default for 90 days. Can you imagine that was the only guarantee that they got and it was considered acceptable? These packages were created and sold on the market before the teaser rates vanished and the homeowners were no longer able to pay. They were sold as residential mortgage-backed securities (RMBS).
Fraud existed in real estate, mortgages and among home builders. Appraisers were given extra bonuses to provide the prices that were needed to get the mortgage. Ten percent of all appraised petitioned the federal government to do something to prevent these abuses of the system, but nothing was done and they continued to over inflate the prices of the homes being sold.
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