Posts Tagged ‘Economic’

Real Effects of Real Estate Mortgage Default

Saturday, November 28th, 2009

The real estate mortgage default that started to reach alarming proportions in 2006 has been singled out as the trigger of this economic downward spiral that we are experiencing right now. If we are to believe the results of the numerous economic and financial models that were formulated to understand the root cause of the problem, we would be tempted to believe that the reach of this sector is so extensive that real estate mortgage default caused all the economic woes that the world economy is experiencing right now. Yet, nagging questions about the real effects of real estate mortgage default remained unanswered. Adding to the confusion are the differing views we get in the attempt to explain the entire mess that we are in right now.

Most people look at the problem as caused by the rising real estate mortgage payment defaults. This is like saying that the real cause of the thousands of deaths in September 11, 2001 is poor building design. We tend to put too much credit on the issue of mortgage payment delinquencies by saying that it can bring the world economy to its knees. At this point, we can say that mortgage payments are the trigger of the economic mess that we are in right now. However, it is not the single cause of the problem. It is just one of a series of issues that transpired to bring us to this serious economic slowdown. It is the proverbial straw that broke the economic camel’s back.

Financial analysts estimate the amount of mortgage losses to reach $650B. This amount is insignificant if paired to the vast financial resources of the government and makes no sense that it can cause an $8 trillion drop in financial wealth over 2008. This unmitigated rise in real estate mortgage default triggered this economic crisis which is seen as the worst since the 1930s. This is event that eventually burst the real estate bubble is an after effect of the forces in the market that moved for self correction.

Real estate properties were extremely over valued to the point that the market moved to make the adjustment. However, because of other lingering problems, it created more than a ripple in the market. The market correction and resulting mortgage defaults created a tsunami of epic proportions. These economic woes affecting all economies can be traced to the failure to rein in financial institutions; particularly on the issue of debt to equity ration. These financial institutions with serious financial problems are now subject for bailout because they did not have a comfortable debt to assets ratio. We now have an abnormal situation where the value of real estate properties is way below the amount of mortgage that homeowners are paying. This situation can trigger more real estate mortgage default unless all sectors join hands and come up with the appropriate solutions to the problem.