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Foreclosures Challenge Our Economy and Our Way of Thinking
| | Tuesday, August 12, 2008 @ 11:21 AM EDT
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Contributed by: Jeff Adams
Jeff Adams Properties
Read more archived articles about Foreclosures
Foreclosure expert, Jeff Adams, analyzes the way foreclosures affect our economy and our economic model.
In a perfect world everyone who ever buys a house gets to own it, never defaults on their mortgage payment and lives happily ever after. The world is far from perfect and when it comes to owning a house and making the Great American Dream real we all face the stark reality of balancing payments, other commitments, priorities and the possibility that our precariously balanced house of cards may come tumbling down upon us.
Within this context it is easy to see that foreclosures are punitive measures. They are there to punish those who have fallen behind in their payments and, for whatever reason, can no longer afford to keep their home. This is a simplistic view which looks at foreclosures as a carrot-and-stick approach and regards our free market economy as a blunt instrument driven by single-minded directives.
Neither of these are true. A free market economy is a highly complex, almost organic, organization which requires feedback loops and controlling mechanisms which check its growth, stop it from growing too wildly and becoming a runaway train that leaves behind the very same people it is supposed to help.
Foreclosures are exactly that kind of feedback loop for the country’s (and now, it seems the global) real estate industry. The moment it looks like real estate is a good bet everyone jumps on the bandwagon. The mortgage companies, sensing an opportunity to make a fast buck in a high-demand market, begin to lower some of their lending criteria and increasing their market share, spreading the risk and driving up their profits. Investment companies then jump in, provide capital for the mortgage companies, further dilute the risk and do their bit to drive up the demand for mortgages by making the availability of credit a lot easier and more widespread.
This is exactly what happened with the sub-prime mortgage market which put homes within the reach of hundreds of thousands and maybe millions Americans but, by the same token, exposed to risk people and companies which maybe were not that particularly well-equipped to deal with it.
The moment the market looked to be over-heating the compensatory mechanism of foreclosures kicked in and started adjusting supply and demand and slowing down explosive growth which was bad for the economy. What did happen of course, which was also bad, was the fact that new, unregulated and largely untried financial products were developed to help cash-in on this mortgage boom and a certain amount of predatory lending took place.
These two combined created an explosive situation which is now beginning to cause us pains as we try to extricate our economy from this mess. The moment that is done, foreclosures will stop getting the terrible publicity we sea at the moment and will be regarded, again, as one of the feedback mechanisms we have in place to make sure our free economy system works.
Jeff Adams
Note: This article was written by Jeff Adams, a national author, speaker and trainer who has done over 350 deals over the past 12 years. http://www.FreeForeclosureCourse.com
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