A tsunami seems to have struck the US. As homes increasingly fall prey to foreclosure notices; it really appears that there is a huge tidal wave that threatens the real estate market.
People are increasingly giving up homes – these homes have run up a negative equity, meaning that owners owe more on these homes than they are worth. As values plunge, people feel its better to leave the homes rather than pay mortgage on them.
There are many borrowers who are simply letting the banks take over the homes. They know that banks would have no other option but to sell them at a loss. There are people who are so disgusted that the banks did not let them adjust the loans that they are simply letting go of their properties.
Good. But are banks losing anything in the process? Certainly not! It is the tax payers and the investors who are proving to be the biggest losers in the deal. It may be pointed out that a majority of the foreclosures are now on loans that banks have issued. However, these loans are backed by Freddie Mac and Fannie Mae – the two government-owned mortgage companies.
The Federal Home Mortgage Corporation and the Federal National Mortgage Association were created in order to give a boost to homeownership. These two associations now own 50% of the loans. The system was built in order to encourage banks to produce more mortgages. There is an in-built security in the system. When people stopped making mortgage payments, the banks did not take the loss.
The tax payers ultimately bear the loss. This was revealed by Anthony Sanders, an ex-professor of finance and real estate at Arizona State University. The losses of both the mortgage companies will be pegged at $400 billion at the time the crisis ends. There are many mortgages that were more risky. The financial industry had packaged those loans and resold them to investors. Investors lose a lot of money when these loans fail.
These losses will hit taxpayers. The pension funds of the government are some of the big investors. Sanders said, "If the federal government begins bailing out pension funds, then the taxpayer pays for that, too." A federal inquiry revealed that even after the real estate bust, the mortgages were bundled and even sold, even though home prices had plummeted. Experts agree that the foreclosure crisis would continue for some more time.
Tags: plunge, banks, prey, borrowers, mortgage payments, foreclosures, tidal wave, mortgage companies, negative equity, fannie mae, arizona state university, tax payers, freddie mac