Foreclosure Problems the US Real Estate Market has had and how Australians Can Avoid the Same Pitfalls

by Greg on February 19, 2014

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It’s no secret that the last few years have been tough on the world economy. The US and the rest of the world are slowly rising out of the latest recession, but many families are still feeling the effects of the global financial crisis. The rate of foreclosures in the U.S. has been declining since the height of the crisis, but it is still higher than it was before the financial meltdown.

Much has been written about the causes of the foreclosure crisis, and the prevalence of subprime mortgage lending in the first half of the 2000s is one of the key culprits. The US was riding a wave of unprecedented real estate growth. Many so-called experts thought that the “bubble” of US real estate would never burst. This meant that it would only continue to grow and gain value. Housing speculation became big business, with stories in the news of people buying distressed properties with no money down and flipping the properties for profit. Additionally, developers wanted in on the action, so many building projects were started to capitalize on the growth. Lastly, individuals who were previously unable to obtain home loans were suddenly able to sign up for adjustable-rate mortgages, or even interest-only mortgages.

For this system to work, the properties could never, ever lose value. As we all know, this situation was unsustainable. The building boom flooded the market with supply, which caused prices to drop. Also, individuals with adjustable-rate mortgages that were barely making their payments started missing those payments when the rate went up. Suddenly, people were unable to pay their mortgage and they could not sell their homes at a profit. The bubble had burst, touching off a wave of foreclosures and bankruptcies, which in turned caused a number of banks, insurance agencies, and other financial institutions to go under themselves.

So how can Australia avoid the same foreclosure problems that have affected the U.S.? We can actually look to the U.S. for a few ideas. For families that are already in trouble, the U.S. allows them to apply for certain programs that can expedite short sales and loan modifications. Additionally, certain predatory lending tactics have been outlawed or more tightly regulated. This adds further safeguards to the lending process, with the goal being to only lend money to those who can pay it back.

It’s hard, bordering on impossible, to predict and control the free market. However, signs of building bubbles are usually pretty clear, so pay attention to those. If home prices start rising faster than income, or if new supply starts outweighing demand, these are red flags. Citizens need to be educated about the real costs associated with home ownership in addition to the benefits. Some lenders in the US even require borrowers to attend classes where they learn about building equity, interest rates, and the advantages of maintaining good credit.

With good banking regulation, watchful economists, and an informed citizenry, Australia should be able to avoid any U.S.-style foreclosure crises.

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Stephen Hachey

This post was written for Homeiown.com by Stephen Hachey. Stephen is real estate attorney specializing in loan modifications, foreclosure defense, short sales and much more. He is also the owner of his own practice, The Law Offices of Stephen K Hachey. This article is for general purposes only and does not establish an attorney-client relationship. Please contact a licensed attorney in your area. You can follow Stephen on Google, Facebook, Twitter & Linkedin.

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