06 Aug Another Real Estate Nightmare: Builder as Lender
Businessweek.com has a story today about another factor contributing to higher foreclosure rates: the large builder as mortgage lender. As homebuilders have become large publicly-traded companies, they have access to larger pools of cash, and have used that cash to provide financing to induce people to buy their homes. Since Wall Street can then buy and re-sell the mortgages, no one seems to have cared very much that those home-buyers couldn’t pay the mortgages. Or, as Businessweek.com says:
A diverse cast of characters combined to launch the once-in-a-lifetime housing boom of the past five years. Traditional mortgage companies and banks unleashed a barrage of loans, many to borrowers with iffy credit histories who didn’t bother to read the fine print about upwardly mobile interest rates. Wall Street egged on the often-reckless underwriting by buying vast quantities of home loans for repackaging as securities. Now that the boom has fizzled and foreclosure rates are rising, the important role of large homebuilders as lenders is also coming into sharper focus. In addition to spitting out subdivisions, many of which now stand half-empty, builders jumped into the mortgage business to a degree they never had. Wall Street provided the same encouragement it offered other lenders. Even as the housing supply began to exceed demand last year, builders kept sales brisk by pushing adjustable-rate, interest-only, and other risky loans.
Several such builders are being investigated, and at least one class action suit has been filed, not by those home buyers, but by other property owners who allege that such practices have adversely affected property values of existing homeowners. None of that provides much-needed relief for those who have been persuaded to make ruinous loans and can’t make their mortgage payments. Help for those folks must come in the form of a much-needed amendment to the Bankruptcy Code, allowing modification of such mortgage debt.
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