What’s the Reason For The Housing Bubble Bursting In the US
In the period between 2004 and 2006, the new US household mortgage debt stands at staggeringly high $8 trillion. The reasons for this appallingly high mortgage debt are far too many and that includes negligible and improper documentation of borrower’s income status coupled with almost no down money for mortgages. This resulted in great amount of increase in the borrower’s monthly payments within few years of taking the loan.
From my understanding of the situation of, I believe there are many other factors as well that cooked this high US household mortgage debt.
First, the loans granted to borrowers required very low to almost no down payment at all.
Second, the non existence of recourse mortgages. As a result, lenders were able to simply forget the loan should they encounter any serious financial problems. It was not a favourable situation for the borrowers.
Third, existence of mortgage interest deductibility paved the way for borrowers buy homes that were unaffordable for them in the first place.
Lastly, lenders took too much risk with the presumption that they are just too big to fail, creating a scenario where “I win” and “You lose”.
For future prevention of this kind of financial crisis it becomes pertinent to do away with scenarios of this nature and put rules and regulations in place to combat it.
Most importantly mortgage interest deductibility should be completely eliminated and there should also no long be any no recourse mortgage.
Requiring borrowers to put some money down, needs to be introduced. This can be in the region of 10%-15 % of the total cost of the home.
Additionally, there should be some legal methods and procedures for liquidation of large financial institutions (except commercial banks), such as Bear Stearns and AIG, in an orderly fashion without declaring bankruptcy similar to situation where FDIC takes over failing banks.
Stringent legislation and commitment from legislators is the need of the hour, to prevent such crisis from happening again in the future. The question is, are they committed enough to do what is necessary.
I think I have a solution everyone will agree upon for what we should put together for Ronnie’s pre-wedding weekend. Who would be up for a surprise trip and putting up a bit of money on a downpayment for renting chalets val d isere?