In the mortgage world today, we are hearing a lot about fraud and foreclosures that are taking place in the real estate arena. What is this going on and how did it happen?
In the past few years, there were a lot of mortgage products introduced that opened up primary, secondary and investment types of home ownership. These products created a boom in the real estate market while at the same time made every lender susceptible to closing on a fraudulent loan. Yet they went ahead and created the products. On the other hand, some of these products were hard to understand and made the home owner susceptible to fraud.
A lot of today's mortgage problems stem from stated income stated assets, no income no assets and no doc loans. These were special products. The interest rate was higher but the borrower did not have to justify anything that was on the loan application. They could state income and assets and not prove it. They could opt for not stating anything or for no paperwork at all. This was used by a lot of speculators who were not true investors. Regular people who wanted to get on the investment wagon and buy a second home knowing that they couldn't afford it. They expected to sell it fast at a profit. In other words, flip it. Although some people did indeed make money, there were many that got in at the end of the boom and became stuck with the home. They could no longer afford to pay the mortgage and so the house goes into foreclosure.
Another problem arising today, is the adjusting of the adjustable rate mortgage. Many people opted for this type of mortgage which has a low interest to start with but runs the risk of the unknown in the future. When the rates started to adjust, these people could not longer afford the payment. Many borrowers were fully aware of how the adjustable rate mortgage worked but many were not. Many were led to believe that the rates would stay low and so their payment would stay low. Refinancing is not always the answer since most of these people were only able to qualify with the lower adjustable rate. So trying to qualify them now with a fixed rate is impossible.
Although the products created by lenders carried risk at the time, no one knew the direction that the economy was going to take. At the time, oil prices and gas prices were not so high. No one was looking at them slowly creeping up to potentially become a problem in their own pocketbook. As a result, everything that we touch has gone up in price while most salaries have stayed the same. At the same time, so many people have lost their jobs because of this. If oil, gas and everyday prices were the same as when those mortgages were taken, there probably would not be this problem. Unfortunately, that is not the case and has created a multitude of problems for not just banks, but for everyone out there.