Quick Profits and Quicker Losses
The real estate market, like any other, is a cyclical market. Over a long period, there are many upswings and an equal number of downturns. The volatility of financial markets is fascinating. Many things can factor into a turn in the market. Sometimes they are small, other times they are quite large. In 2000, I began working in the mortgage industry and soon became a licensed California Real Estate Agent. The license allowed me to work as a salesperson at the mortgage company. From this vantage point, I was able to clearly see the cause and effect of a giant upswing and accompanying down turn in the real estate market. It is clear that both the recent upswing and downturn in the real estate market were a direct result of the lending institutions changing their lending guidelines in a greedy attempt to create more profits.
Lending institutions lend money to borrowers with the intent to create profits. There are many ways for a lender to profit from making a loan including collecting interest, loan setup charges, and annual fees. Collecting interest is the most common and profitable form of revenue for the lender. The interest can be charged upfront, in payments, or at the end of a loan. Typically, lenders adjusted the interest rate based on the probability that the borrower would default on the loan. A higher probability of default usually resulted in a higher rate of interest.
When a loan goes into default, the lender is at risk of losing the money that was lent out and all potential profits. When a borrower stops making payments the loan moves into default. During times of default, lenders are not collecting interest, and therefore not making a profit on the loan. If all efforts to collect the money owed form the borrower have failed, then the loan will move into foreclosure. During a foreclosure a lender repossess the piece of property that was used as collateral for the loan. The lender will then sell the property at...