Everyone is aware now of the slow housing market and the fact that many individuals are losing their houses. There is, however, another segment of the housing market that is seldom spoken of, but which is also being hard-hit by the current situation. And the banks - who started the whole "tumble" - and who "profited greatly" in creating the "tumble" - are still profiting BIG !
First, let's talk about the houseowner. In the 1990's, banks developed a GOLDMINE in the housing industry...the equity cash advance. They began a huge marketing program to encourage individuals to take their cash (savings) out of their houses and spend it. They touted that the houseowner could "use the cash for anything you want - a vacation, house improvements, college tuition, new car, whatever". The banks then proceeded to appraise the house over the house's actual value and cash advance individuals equity up to 125% of the house's value. This meant that individuals would no longer have any savings in their house - they would owe the whole value of the house at that time. Anyone who didn't take out the cash and spend it, was considered foolish - to have credit cards or pay interest on anything else, when they had cash available in their house that they could pull out. individuals used their houses like an ATM. Anytime the bills got too big, they just refinanced and took cash out or borrowed on an equity cash advance. Who made the most with interest and fees? The banks.
Who made the most cash on these cash advances? Yes, the banks. The houseowners didn't care about the fees the banks charged or the closing costs. The only thing they looked at was the big fat amount of cash they could pull out and spend - as if it were the lottery. Who profited big? The banks.
As times were good and house values steadily increased, another segment of the housing market developed. In times of affluence, ordinary individuals became investors, purchasing houses and condos to offer as rental property. This is an intelligent way to save cash on taxes and serve those who cannot afford to purchase their own house, by providing a nice place to live for a reasonable monthly rent. The other advantage, of course, was the appreciation on the property and having someone else help you pay the mortgage on the cash advance. The problem, however, was that much of the cash they used to invest, came from house equity cash advances that they had taken out on their primary residences. The banks made this easier by providing "second mortgages", with high fees of course, and added prepayment fees and penalties to ensure they made a high profit, regardless of the life of the cash advance and with second mortgages, you could purchase a 2nd or 3rd or 4th house or condo with very little down. But when the market values slipped and the appreciation never came, individuals lost cash on the rentals and it resulted in losing on their personal residences also, because of the house equity cash advances we talked about above. The only ones still guaranteed to make cash? The banks.
Now, that individuals have spent all of their savings in their houses and they owe more than the house could be sold for, many houseowners are letting the house go back to the bank...in foreclosure. As many foreclosures as there are, it's still a small percentage of the total market. Because it is such a small percentage, the banks can "dump" the houses for half of what would be the real value. This further devalues the market price of the other houses that are for sale. It's peanuts to the banks, but to the other houseowners out there that have to sell for one reason or another - it's devastating.
Worst part, when the crisis hit, the government instituted programs to bail out whom? The banks !