I’m so tired of what is going on in this country that I have to get on my soap box…. Here is a brief history lesson on how we got to where we are. I know that there are other factors that I’m not mentioning but I’m not trying to write a book. These are the parts that I feel are the most important. I’ll get into the other parts and my idea for a solution in other posts but for now, let’s just look at the meat of the problem. There always has been, and always will be foreclosures.

Things happen in life that people can’t control and it forces them to fall behind. People take on a mortgage knowing it will be tough but think they will make it and plan on steady salary increases to help smooth things out. Historically, foreclosures have always been a very minor blip on the screen. Until now. It started years ago. Private companies saw a need for credit poor people to buy homes so they created a sub-prime market. It came with a high interest rate but the borrowers accepted that in order to live the American dream. They were sold on the idea of refinancing after 12 months to get into a better mortgage. It worked well enough that the government decided to get in on the action.

Ok so they didn’t decide to get in on it. Andrew Cuomo, The HUD Director at the time forced them into it. He wanted to look good and to make his boss look good. So he announced that HUD was going to increase home ownership for the “poor” by drastic numbers. The only way to do it was to get into the risky loan business. Fannie Mae and Freddie Mac started supporting and encouraging the sub-prime market. Being the capitalist society we are (for now) the private sector took this as a sign of encouragement and started creating fancy loans, offering teaser rates and giving anyone with a pulse a mortgage. It took over 10 years to build to the point of explosion.

And boy did it explode. 2004 and 2005 saw the most dramatic increases of home prices and fancy mortgages than any other time in history. In the Spring of 2006 things started to slip a little. These fancy loans were starting to show the cracks in what everybody thought was a great and robust housing industry. By the end of the summer of that same year, the cracks had become deep wells in the Western part of the country. Interest rates started going up and people who bought into the fable of getting quick rich in real estate found themselves stretched too thin. They bought first and thought second.

Regular, everyday folks bought second, third and fourth homes as an investment. They planned on renting them out for a year or two in order to cover the expenses and then selling them at 20% plus gains. If you bought in 2003 and sold in 2005 it worked flawlessly. But after that it had become so easy to get a mortgage, people that would typically rent were buying. These investors started to fall behind in the payments and the foreclosures started picking up speed. Most of these investors didn’t lose any real money. They financed the homes at 100% with interest only loans. Walking away from the homes was an easy thing to do. Sure it hurt their credit but they kept up with the mortgage on the home they lived in so they didn’t care. Mortgage companies started receiving “jingle mail” on a regular basis. “jingle mail” is when you put the keys to a house in an envelope with a copy of your mortgage bill and no check.

At first, the mortgage companies didn’t really care. It was the cost of doing business and they could sell the property and still have a profit. Then the second wave started to come. You remember those people who typically rented homes but suddenly became homeowners? Well, they financed 100% of the home as well. They still had the mind set of a renter because they didn’t have any skin in the game. Some of them got tired of eating Ramen Noodles just to make the mortgage payment and others got hit with adjustable rate increases that they didn’t expect and couldn’t afford. The foreclosures picked up speed again.

This time the mortgage companies started to pay attention. Home prices had gone up so rapidly, homes had become unaffordable. Home sales started to stall and sputter in some parts of the country. In other areas, home sales all but stopped. Those cracks in the wall that had become deep wells were now filling with water. While the mortgage companies were paying attention, they did little to try and fix the problem. They responded by laying off people to keep the bottom line in check for the stockholders. Guess what happened? Foreclosures picked up again!

You can only go so far with downsizing before you are forced to accept the reality of a failing business. The mortgage companies asked big brother for help and they put some “voluntary” programs in place. These programs weren’t really designed to help the homeowner, they were designed to prop up the stock price and give the mortgage companies a crutch to lean on. It didn’t work and a lot of these mortgage companies shut the doors and sold out to other companies.

By this time, the mortgage industry was falling freestyle and didn’t have a parachute. The executives had individual golden parachutes and a lot of them used them. They saw the mess they made and got out before they got in trouble. But the mess they made, started to bleed out into the open. The bad mortgages had been bought and sold by investors so many times, that the current holder was shocked that the mortgage notes they bought were bad. After all, a large amount of them were backed and supported by Fannie Mae and Freddie Mac.

So these investors went to big brother and asked for help. Big brother threw some money at a few of them hoping it would go away but it didn’t. And now, big brother is trying to put another band aid over the problem without holding anyone accountable. This is a very big band aid that you and I have to pay for. It might slow the bleeding a little bit but it won’t fix the problem and eventually the band aid will not be able to cover the problem anymore.

Let me know what you think.