The current economic problems experienced by the housing industry can be attributed to the previous practice of trouble-free lending.

Easy credit has previously allowed consumers to spend more than what they can afford. With the current state of the economy, credit is increasingly becoming more difficult to acquire. Thus, if credit is no longer as available and as affordable as it previously was, consumers would be forced to spend much less than what they currently do, subsequently injuring the economy further.

Subprime Sector

Specifically, the subprime mortgage sector, which allows high-risk individuals with poor credit to borrow mortgage loans, is losing business. Predictably, these high-risk borrowers have been able to make the necessary payments, and foreclosures are reaching an all-time high. Subprime lenders are filing bankruptcy, resulting in higher default rates for borrowers. Although mainly in the subprime sector, the effects of the foreclosures are gradually spreading to other sectors of the industry. Housing prices are going up, while the equity of housing is depreciating.

New Policies

Recently, mortgage lenders have been adopting policies stating that borrowers will no longer be able to borrow a mortgage loan without paying an initial downpayment. This is a substantial adjustment to the previous mortgage situation, wherein individuals can borrow 100% of the purchase without shelling out anything. Consumers are now currently being required to produce more documentation and demonstrate a better credit history before mortgage loans can be approved.

The turmoil in the mortgage industry has consumers expecting loans to become more expensive. At the same time, the values of the items for which the loans were used are expected to decrease. Stricter mortgage policies will result in the end of easy credit, and will produce a considerable decline in the economy.

[image from CNN Student News]