Great Crash 2007 Mortgage Fed Meltdown

Tamsen Butler
Mortgage Meltdown

It is highly likely that you have heard about the Great Crash 2007 Mortgage Fed Meltdown, even if you have never owned a home. A housing crisis affects the entire economy, not just the people who find their homes quickly approaching foreclosure.

What Caused the Crash?

A few years ago mortgage interest rates fell to almost irresistible levels. It was possible to acquire a mortgage loan for close to 1%, so many people scrambled to purchase homes with these incredibly low interest rates while other people refinanced their existing loans to capitalize on the lower interest rates.

The vital information that many people failed to realize in this mad dash to get the lowest interest rate possible was that a mortgage loan hovering around 1% is an adjustable rate mortgage (ARM), and the loan won't stay around 1% for long. Homeowners attracted to low interest ARMs undoubtedly knew - at least on an intellectual level - that interest rates had nowhere to go but up once adjustments began. Many homeowners witnessed their interest rates increasing mere months after initially purchasing or refinancing their homes. For some homeowners this increase resulted in shock, either because they didn't fully understand the terms of the loan or because they somehow thought the incredibly low interest rates would last.

Buy, Refinance, and Spend

Before interest rates began climbing back up there was a huge influx of financial activity. People were buying and selling homes with the greatest of ease. New homeowners were filling their homes with furniture, appliances, and other purchases while people who refinanced their homes were adding to the consumer boom with the funds they received from cash-out mortgage refinances.

Something else interesting happened when interest rates were still low. Potential homeowners took advantage of the incredibly low interest rates offered with ARMs to purchase homes that may not have been within their budget with a fixed rate loan. Eventually, however, two things happened:

  1. Interest rates started to climb and people realized they couldn't comfortably afford their mortgages.
  2. As people slowed down with purchasing homes - and some people defaulted on loans - market values declined.

The result is that some people are now living in homes that are worth less than the amount of money owed. For some people this is because they took out equity loans to the maximum amount when the market values were high, and for other people it's simply a matter of the market value decreasing.

Market Value

The market value of a home is an estimation of how much money the home would sell for at any given time. The sale of comparable homes within the same area affects the market value. For example, if a home down the street from yours sells at a highly reduced rate it can affect the market value of your home, especially if the sold home is similar to yours in square footage and other features. This is one of the main reasons why the Great Crash 2007 Mortgage Fed Meltdown should be a concern of yours even if you are comfortably making your mortgage payments every month.

The Blame Game

There are plenty of theories regarding who is to blame for the mortgage meltdown. Some homeowners blame lenders, accusing them of using predatory lending techniques to sway people to take on loans they couldn't truly afford. Some lenders blame homeowners for not keeping up with their mortgage loan payments and for agreeing to loans which they may not have fully understood.

Many economists and financial professionals sent out warnings back when interest rates were so low that this pace could not be sustained and everything would lead up to the real estate bubble bursting. In many markets the bubble has burst, and some markets await the inevitable bubble burst of their own while foreclosures rise and market values fall.

The best thing homeowners can do right now is to avoid taking out equity loans if possible while also keeping a close eye on the market value of your home. Keep in mind that the amount of equity in your home is always subject to change, and this may not be the economic climate when you want to take out more loans on your home.

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Great Crash 2007 Mortgage Fed Meltdown