subject: Housing boom and meltdown - Is tax credit helping the meltdown? [print this page] During the housing boom, I was living in California and working in a software firm. I used to wonder how people that have similar income like me could afford half a million dollar house but I never investigated. I had a brief consulting work with countrywide in developing and testing mortgage software where I learned about subprime loan and how new homeowner applicant could get massive mortgage without a down payment. I have also heard Bush saying Everyone in America should be able to afford a home. As I research more on the housing boom, every article depicts that the federal government began a regulatory push to create affordable housing program. Republican and democratic as well as president pressured lending institution to lower new home owner applicant credit rating standards and accept minimal or no down payment requirement and introduce ARM (adjustable rate mortgage) and ARM with balloon payment. The unsustainable housing bubble created by major semi government firm Fannie Mae and Freddie Mac by their irresponsibility and uncontrollable spending on flawed mortgages. Fannie Mae and Freddie Mac spend trillions of dollars in housing mortgage which is more than any countries in this world except 4 countries and the return from the 50 -75% of the mortgage was close to null. Housing experts and leaders view the government decision on affordable housing was a big mistake that caused big roiling in the US economy. The negligence on borrowers affordability on housing loans that was classified as affordable loan by Freddie Mac and Fannie Mae has cost US taxpayer huge amount and to compensate this, generations of tax payers will have to pay to recover what was lost. Bank started issuing mortgage loans to those applicants with poor credit ratings. Mortgage brokers enticed by big commission accepted poor credit applicants with little or no down payment and this was the root cause of mortgage meltdown. Approximately 80% of US mortgage issued in recent years to subprime borrowers were ARM loans. The housing market peaked in mid 2006 and then began bursting due to subprime loans. The subprime loan with balloon payment in few years made homeowner financially not able to handle balloon payments hence triggering foreclosures and there begins the ripple effect of mortgage meltdown all across the coast. Homeowners are unable to pay the huge monthly mortgage hence default the loan on home where the home value is less than the loan amount they owed. The fall out of subprime loans due to default have tremendous effect in housing market, financial market and the entire US economy. To save the US economy, government has provided tax rebate to improve American economy by mailing checks to pay bills and to buy something new. It was just a temporary patch and not a permanent fix. Also, to promote foreclosed and new home sales, government provided tax credit to the new homeowners but if the homebuyers are unemployed then tax rebate is useless. It seemed like every problem stricken at once to United States such as housing crisis, stock market, and unemployment but it is definitely ripple effect of bad loans except GM and Ford bankruptcies. Is the government tax rebate on new home buyers working? The tax credit was initially originated in 2008 and this initiative gave a hope to the nation that housing crisis will end or minimize with this but the housing tax rebate is again extended to 2010. Housing crisis triggered recession and even though government claims that US recession is over but I think we have a long way to go (4 to 5) years to bring everything back to normal. All the empty houses are to be filled with homebuyers and need to reduce 10% unemployment rate to 2 to 0 percent. This definitely takes time, although stock market has recovered a little but it is still in vulnerable state. Any bad or good news is shaking stock prices and shaken stock price means stock holders low confidence on US economy. Currently, 2 to 3 million families are expected to lose their homes to foreclosure as they cannot afford the balloon payment. Most of the loan was originated with 5 to 10 year ARM balloon payment and in my opinion, to get to the end of housing crisis; we need government to create jobs so that homeowners can pay the big mortgage payments that is coming to their way.
Housing boom and meltdown - Is tax credit helping the meltdown?
