Home
WOLFpackGirl192 asked:
I’m writing an essay, I’m trying to talk about how the value of the U.S. dollar and the foreclosures on properties are causing the economy to decrease.
I’m writing an essay, I’m trying to talk about how the value of the U.S. dollar and the foreclosures on properties are causing the economy to decrease.
I just want a basic way of talking about the downfall of the housing industry. I don’t know very much about it.
If you’d like to add more, that’s great.
Tags: Dollar, Economy, Foreclosures, Housing Industry
January 26th, 2008 |
Tags: Dollar, Economy, Foreclosures, Housing Industry
January 29th, 2008 at 11:42 am
Too many folks bought homes that were way out of their budgets with fancy adjustable rate mortgage products and they didn’t fully understand the terms of the loans. Now that, that they are seeing the higher end of the payments disclosed in their ARMs, they simply can’t make the payments. Unfortunately, if they had to use creative financing to get into the home in the first place, it is very likely they do not have the credit worthiness to refinance to a lower fixed rate mortgage with payments they can afford. Research the lending practices of banks, new mortgage products, and how the housing starts reflect the health of our economy.
January 30th, 2008 at 3:10 am
Lots of aspects to consider. The housing bubble had been set up in the regulatory agencies in the 1980’s and 1990’s, but capital hadn’t yet gone into these sectors. In the 1990’s, the dotcom bubble was all the rage, as well as “emerging markets,” like SE Asia and Russia/former USSR nations.
Also, after the collapse of the Savings & Loan industry, and the resulting wave of foreclosures from that, real estate was a steadily-appreciating, but not inflated, market. Investments were going elsewhere and returns were better than could be had on real estate or mortgages.
But then around 1997, the markets in SE Asia and other developing nations became super-inflated, with many of them pegging their currencies to the US dollar. Speculators could then inflate the markets, driving capital into them and inflating stock values, and then create a flight out of the currency, taking their profits. Many of these countries saw their currencies collapse relative to the dollar as capital fled.
The same happened most notably in Russia in 1998, where the government actually defaulted on its debt, which was somewhat unheard of. The most powerful nation in the USSR defaulting on its bond payments? A large hedge fund at the time, Long-Term Capital Management, had bet heavily against this, and was in danger of collapse. The Fed and other banks stepped in to make sure this didn’t happen, thereby setting the precedent of bailing out hedge funds.
In 2000-2001, the dotcom bubble burst, as investors realized internet companies could not make money without business plans. Many of them folded, and the market began to sink. As a result, Enron faced collapse as a result of its aggressive accounting fraud. But Enron had engaged in the somewhat novel idea of selling of its debt to other investors.
After the collapse of the dotcoms and the disclosure of Enron’s accounting shenanigans, two things happened to work together to create the housing bubble. Without both, the bubble wouldn’t have inflated so much, most likely.
First of all, the banks and mortgage companies realized what a great idea Enron had in selling off its debt. The banks could originate mortgages and package them up and sell off the rights to collect the payments. The profits they got from selling mortgages would help them originate new mortgages, and the scam would continue forever!
Second, because the Federal Reserve lowered interest rates to below 1%, huge amounts of capital flowed into the US market and anyone who could use a pen could sign for a mortgage. Interest rates were so low that lending guidelines could be nonexistent. If the homeowners defaulted, it didn’t matter, since the bank could just re-sell the house on the open market and make a profit.
This was the environment until early 2007 or so, when investors started to realize that maybe giving loans to deadbeats wasn’t such a great idea, because if the market declined, there would be a lot of foreclosures. Banks started tightening up lending guidelines and the Fed was busy raising interest rates to cool off the artificially heated up housing market.
Then, the inevitable happened: with money becoming more expensive, the real estate boom collapsed, taking a few Bear Stearns hedge funds with it. But it was OK for them, since they were bailed out. Homeowners, though, were still dealing with higher interest rates and were unable to sell their homes for as much as they paid for. They either went into foreclosure or the banks had to help them take a loss on the houses.
Either way, when the loans went into foreclosure or were paid off for less, the money lost just disappeared. No one wanted to own these bad mortgages anymore, but no bank was quite sure who owned them at all, because they had been sliced up, packaged, and sold off to dozens of different investors.
So banks didn’t want to do business with each other, so credit dried up. The Fed started providing loans to banks and dropped interest rates. When that didn’t work, the Fed decided to trade bad mortgage debt for US Treasury Securities, which means that the US dollar is now backed by foreclosed loans.
Since the rest of the world uses the dollar as its reserve currency, it wasn’t too happy to see that their money was paying less interest and was backed by defaulting loans. Currencies not backed by foreclosures were assumed to be safer, and nations moved to invest in Euros or Yen.
Nations still accepted dollars, but wanted more of them for what they were selling. Stuff like gas (oil), food (fertilizer made from natural gas), precious metals, and consumer goods (made in China) went up in price as the value of the dollar went down.
And here we are today.
Hope that helps.
ForeclosureFish