Solve Real Estate

This is a very complex problem, I will attempt to do my best to answer it.

Firstly, one must realize that banks are private organizations. Thus, under American law, they are allowed to do anything with their money that they want, so long as it is legal. And the American way of doing business is for the Gov to keep their noses out of it as much as possible. Thus, very few things are illegal compared to how many ARE.

Now, since banking and loaning are all private, the government is hardly justified in stepping in to FORCE the banks to stop foreclosing on property. It is still their property after all.

Another problem is that many people that are being foreclosed on probably should be. Again, the error most likely falls to the banks for lending money to households that had little probability of being able to pay it back, but the fact remains that many homeowners either should not own homes, or own homes that are well beyond their means to support. In those situations, it would be UNJUST for the government to force banks to stop foreclosures.

It is still a fact that much of the financial problem in America stems from a collapsing mortgage market and ever-mounting foreclosures. However, mounting debts is a more fitting description, since one of the reasons that Americans can't pay their mortgages is that they are entirely waylaid by other mounting debts that offset their ability to pay (credit cards). So the problem is bigger than foreclosures anyway, and forcing them to stop wont' likely fix anything.

In fact, it might make things worse by encouraging homeowners not to pay their mortgages, because of a forced security.

What banks need to do, in all probability, is loan out MORE money. However, better measures need to be in place to ensure that those loans are likely to be returned. If the government needs to do anything, it likely needs to be forcing banks to be more careful where they put their money.

Anyway, this is a very partial explanation to an immeasurably complex problem.
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If you think about it from a different position, foreclosures could be seen as curing rather than causing a whole multitude of problems. Yes, people lose their homes…but in many cases they end up no worse off than they were before they bought a home the had no business buying in the first place.

All the recent foreclosures hopefully represent the end of a viscious cycle that started many years ago. I have to disagree with the person that said our government stays out of private enterprise…in this case at least, the government has direct control over interest rates and the money supply and has repeatedly used that power to influence the banking industry. In addition, the government directly involves itself in the housing market via HUD, FHA, VA, and more entities that offer programs to make it easier for people to afford a home. The combination of these two influences alone contributed far more to the problem that poor decision making by banks.

The cycle works something like this. Home ownership is one of the biggest dreams for many Americans…and many of those that already own a home want something bigger and/or better. Our elected officials know that they can win a LOT of votes by helping people attain an obvious dream. So they increase the money supply (by changing the reserve requirement for banks) while simultaneously reducing interest rates. This encourages consumers to spend more money (to make the economy look healthy) and allows many people to afford a new home.

Now the viscious part of the cycle starts. All this new demand for housing creates a "seller's market" and the price of housing rises (quite rapidly in some places…I made $70K on a $130K house in four years a few years ago!). Now people that already own a home (perhaps even one purchased only a few years earlier) decide to take advantage of the lower interest rates and refinance…and many decide to borrow against the recent equity (created by the increase in housing prices) to consolodate debt and/or make improvements to their home "to increase its value"…some just take cash for a new car or fancy vacation.

Things are looking rosy, but they aren't. To maintain the growth rate, lenders (actively encouraged and influenced by the government) begin to extend loans to more and more "risky" customers…and these customers are buying in a market with inflated home values!

Then the slightest blow to the economy from another sector causes the whole thing to start collapsing. Now think about everything that's happened in this country for the last ten years…9/11, gas prices tripliing, two of the worst hurricane seasons on record, Katrina, Rita, and an incredibly expensive war just to name a few.

People lose their jobs and can no longer afford their payments, other people aren't able to make their payments because of added expenses for gasoline, electricity, food, etc… They put their house on the market and are unable to sell it in the face of economic concerns. Eventually, banks are forced to foreclose (many times on government-sponsored loan programs like FHA). At the same time, the market is becoming a "buyers' market" and the prices of housing are starting to drop. People find themselves living in a house that's worth a lot less than they owe on it, and they have no hope of selling it…and the worst hit are usually the last ones that were able to qualify to buy (most risky) and consequently bought the most overpriced houses! Forclosure represents an easy escape from the burden for some.

If nothing else, all the recent foreclosures have caused consumers to be a lot more careful about the way they spend their money…they're thinking twice before buying a home they can't afford…and people that shouldn't be thinking about buying a home at the moment aren't finding the "easy money" any more. Everyone is wising up, buyers have regained a measure of control in the housing market, occupancy rates for rental properties are improving.

I wish I could believe we'd learn from this particular round of "messin' with the economy" and that we'd stop trying to encourage people to spend (or save) money using interest rates, money supply manipulation or any other government intervention. Alas, I don't think we will. People will continue to demand that the government and businesses make it possible for them to buy things that they can't afford, productivity and output will continue to suffer as a result of circumstances beyond our control (e.g., terrorism, natural disasters) prompting more demands on the government to intervene, and our government will continue to try to maintain the illusion that they can control the economy. …and the economy will go on it's merry way, exercising its own control in the form of natural laws, like supply and demand.
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