Lets take a couple and call them Mr and Mrs Brown. Like many thousands of others who had very little saved up, they could not fail to notice two things: money was simple to borrow, and houses went up in value by leaps and bounds. No way were they going to get left out of such an opportunity!
Before long, they found their house, easily obtained credit, and instantly saw their purchase gaining sizable value. They never felt so rich and their ego gained altitude. A new car was a must and a cocktail of new adventures was on the horizon, especially since the price of houses was rising more and more and there was no trouble in raising extra cash against the equity of their new property.
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Thousands of couples like the Smiths were becoming the proud new property investors, thus driving the market up and up.
It was obvious that a dangerously high proportion of borrowers were given loans well beyond their means to repay. As a result, numerous mortgage lenders collapsed when the inevitable crash came. Such huge numbers of these subprime mortgages were set up, that it caused havoc and many banks were placed into difficulties when this class of borrower failed to make payments. Furthermore, lots of mortgages were sold on to various investors and hedge funds, making their life miserable to say the least.
Money gets hard to borrow when the banks have empty coffers. Desperate sellers start lowering their prices, but mostly this will not work because the real problem is not the price, but the inability of getting a loan which stops a sale. Naturally this type of situation can only make things worse. Negative equity sets in, bringing further complications.
It is sad to lose a house, but repossessions are on the increase. While it may help the letting market since people cannot live with mum and dad forever, it is not a permanent answer.
When banks have a shortage of money it is not only home buyers who suffer, but all types of businesses from large companies to small traders are hit. Automatically, this in turn sets problems for thousands of private individuals, who cannot keep up their mortgage payments as well as other obligations.
It seems that the old way of making sure a borrower is worthy of a loan, must be strictly observed. It may not please some, but in the long run it will restore sanity to both the borrower and the lender. Unless the two have a happy deal, there will always be a problem.
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