Real Estate Foreclosures and the Financial Crisis up till 2011 in the US - Essay Example

?Real E Foreclossures and The Financial Crisis up till in the U.S Table of Contents Table of Contents 2 Introduction 3 Real E Foreclosures and the Financial Crisis 3 Causes of Foreclosures 4 Impact of Foreclosures on Economy in the USA 5 Conclusion 8 Works Cited 9 Introduction Foreclosure occurs if a property owner is unable to pay back the amount of principal money or interest of his/her granted loan. Foreclosure can result in seizing of property from the owner. It is a legal practice and has numerous phases during which the owners are provided with the prospect to pay back the loan amount and escape the foreclosure. The subprime crunch of the USA had generated the mortgage problems and foreclosures of properties. Through foreclosure process, banks or creditors can reclaim the possessions of owner if he/she is unable to fulfill the contract of mortgage loan. As the financial crisis has occurred in the USA, the numbers of foreclosures have increased. Several banks such as Bank of America, JP Morgan Chase, and Ally among others had announced foreclosures against the homeowners who failed to repay the loan amount. Real Estate Foreclosures and the Financial Crisis The unreasonable strategies of financial institutions in the USA had allowed many people to purchase houses which they could not manage to pay for. It was unwise for people to think that house prices will only increase and as a result people started to take loans and purchase property from them in the prediction that the cost will increase in future, which will make it easy for them to repay the amount. When the bubble burst, the house price began to decrease considerably and several home owners were trapped unexpectedly to pay for the loan amount. As people understood that they will lose more money by selling their property compared to the loan amount, they foreclosed. The increasing rate of foreclosure had freaked several banks as well as hedge funds that had already converted the loan amounts to securities and comprehended large amount of losses (Edmonds, “What's The No. 1 Reason for Foreclosure?”). According to Mortgage Banker Association (MBA) above 900,000 households had foreclosed in the year 2008 which was 71% more compared to 2007. It was recoded as highest foreclosure rate over 36 years in the US economy. The main reason for foreclosure was the attitude of people of maintaining lifestyle beyond their affordability. The subprime loans frequently arrive with low preliminary interest rates and thus people with less affordability are the key receivers of it (Edmonds, “What's The No. 1 Reason for Foreclosure?”). Causes of Foreclosures The unconscious purchasers of loans are liable for foreclosure crisis in the USA. In order to benefit from the large loan values, people had chosen several dishonest paths such as fabricating their income, and increasing the values of pledged properties. The lenders had also avoided taking necessary actions against such conducts and made this happen. Generally, people are not very aware about financial details with respect to planning their own revenues. They were simply attracted by the smartly influencing media and thus often fall for overwhelming mortgage culture. The leaders and politicians were more engaged with spending more amounts compared to tax revenue. The high expenditure had resulted in deficit of budget. In order to deal with the deficit, government had produced more currency which brought inflation and the value of Dollar fell significantly. As a result, the prices of essential goods increased and ordinary people became incapable to cope up with the higher inflation rate. The expense for mortgage amount increased due to fluctuating interest rate and foreclosure was the end result of it. Several unethical decisions to deal with the deficit of budget such as borrowing money from overseas countries and spending excess money on war had degraded the economy of the USA (Vidmar, “Seven Ways Foreclosures Impact Communities”). Impact of Foreclosures on Economy in the USA Foreclosure causes undesirable effect on the public. People not only lose their property, but also suffer economically. Besides, government can experience adverse influence which can cause reduction in annual budget. The lesser cost of home due to foreclosure can result in reduced tax revenue. In the USA, foreclosure had caused depreciation of almost 44 million properties and 42 counties in the USA had experienced reduction of tax revenue by above 1 billion USD. Foreclosure also impacted on the employment market (Vidmar, “Seven Ways Foreclosures Impact Communities”). The economy of the USA was endangered due to high rate of foreclosures. According to Congressional Oversight Panel, almost 700 billion USD had been bailed out in the year 2010 from Federal Bank of the USA due to foreclosures. It can have much deeper impact on the mortgage market which affects the economic steadiness (EconomicCrisis, “Foreclosure Mess May Threaten U.S. Economy”). Besides, mounting foreclosure can decrease the employment progress as government exploits billions of Dollars on consumer expenditure. The foreclosures had affected the economy as a whole and worsened the impact of financial crisis. The origin of foreclosure falls within Federal Reserve’s decision to push money in the economy to fight the mortgage crisis. The mortgage loan strategy was unsuccessful because of the unwise activities of banks and risky flexible rate of loan. As the housing market had faced boom, the loan market also confronted with boom situation, and many banks had aggravated the situation of foreclosure problem. The reason that foreclosure has become so extensive is that banks have overdue, weakened and blocked efforts to discourse the problem of foreclosure (Grow & Et. Al., “How Banks Are Worsening the Foreclosure Crisis”). As the foreclosure rate increases and cost of property remains miserable, the health of the victims has been deteriorated. The loss due to low rate of property was calculated as 500 billion USD which had resulted in economic instability. The Center for Responsible Lending had anticipated that in the next 4 years, the foreclosure will impact on almost 91.5 million properties in the USA. As foreclosure continues to get worse, the contamination is spreading continuously. The Mortgage Bank Association had said that approximately 1.4% of total loans had entered in the foreclosure in early 2009 which was 20% more than that of late 2008. By evaluating the record from Mortgage Bank Association, the Credit Suisse had anticipated that above 9 million homes will probably enter into foreclosure by 2012 (Tedeschi, “Beware of Neighbor’s Home Foreclosure”). Though the rate of foreclosure had fallen by 35% in mid-2010 but it was simply simulated. The decline in foreclosure does not depend on the robust retrieval of housing market; only a steadying economy and developing employment market is crucial to recapture housing crisis. The attempt of federal government to maintain the housing market was unsuccessful. In the year 2009, the government had passed a plan for people who were unable to pay for the mortgage expenses but wanted to save their property. But the plan failed to accomplish the objectives and left the housing crisis in a distress (McIntyre, “Foreclosures Drop to 44-Month Low in July”). In the year 2011, the foreclosure has reached a new height. Job loss along with financial crisis has increased the rate of foreclosure in the USA. According to several reports, almost 230,678 housing mortgages had been foreclosed in October 2011, which is 7% more than the previous month. One in every 563 houses is either in a nonpayment warning of foreclosure or booked for auction (Isidore, “Foreclosures On The Rise Again”). Conclusion In order to deal with the foreclosure problem the banks and the government need to come up with a resolution to solve the problem. The previous attempts of the government had failed to mitigate the subprime and the mortgage crisis. Due to foreclosure, government is losing money and also it requires to preserve the foreclosed property. As long as there is delay in taking actions, more people will lose their homes. The faults of banks and lenders have generated the foreclosure crisis and bindings of faulty documents have exacerbated the situation. The financial market needs to be more regulated with respect to aspects such as mortgage loan and every details of person who applies for loan must be verified properly. Banks and people who do not make decision sensibly should learn lessons from the current economic situation. Even after facing the recent economic recession several banks such as JP Morgan and Goldman Sachs among others had not reformed their irresponsible conduct and still use their old actions and unsafe investment strategies. The banks at Wall Street have been creating money in the similar fashion which had pushed the financial system into disorder (Allmand, “As Foreclosure Crisis Worsens Banks Take Bigger Risks”). The laws need to be very strict with respect to banking actions which require close observation of the financial activities. It cannot be repudiated that in present days the USA is having a hard time in managing the financial turbulence. People have lost their jobs and homes and only with proper planning and strategy, the USA can diminish the problem of foreclosure crisis. Works Cited Allmand, Reed. “As Foreclosure Crisis Worsens Banks Take Bigger Risks”. December 05, 2011. AllmandLaw, 2009. EconomicCrisis. “Foreclosure Mess May Threaten U.S. Economy”. December 05, 2011. News, Analytics, Recommendations, 2010. Edmonds, Molly. “What's The No. 1 Reason for Foreclosure”? December 04, 2011. HowStuffWorks, 2011. Grow, Brian. & Et. Al. “How Banks Are Worsening the Foreclosure Crisis”. December 05, 2011. Spiegel Online International, 2009. Isidore, Chris. “Foreclosures On The Rise Again”. December 05, 2011. Cable News Network, 2011. McIntyre, Douglas. “Foreclosures Drop to 44-Month Low in July”. December 05, 2011. AOL Inc, 2011. Tedeschi, Bob. “Beware of Neighbor’s Home Foreclosure”. December 05, 2011. Real Estate, 2009. Vidmar, Christine. “Seven Ways Foreclosures Impact Communities”. December 05, 2011. Neighbor Works America, 2008. Read More