Posted by Nicholas Vanikiotis
The recent housing collapse cannot be attributed to one specific event. There were a multitude of reasons that created the housing and real estate crisis the economy is facing. Since then, we have been able to point out some things that went wrong to cause the crisis.
1. People were being asked to put little money down for down payment and for collateral.
2. Adjustable rate mortgages were giving attractive teaser rates for a few years then interest rates spiked to where the borrower could not afford payment anymore (sub prime mortgages).
3. Automated underwriting process was too lenient and little regulation among lenders.
4. Mortgage backed securities were not being pooled correctly, thus bad mortgages were slipping into AAA rated pools.
These are not all of the problems, but they are definitely some of the ones that caused the current economic state. In addition, people were not saving enough. They were spending every dime they had, not investing into liquid accounts in case of emergency. As you can see in the image above the borrowing power of lower income families was tremendous and there was a huge spike, which shouldn't have one unnoticed in 06-07.