Down Payments Prevent Foreclosures Real Estate

The Federal Reserve Bank of Cleveland is reporting that our recent mortgage markets make an excellent case study for why down payments prevent foreclosures. Not too long ago, homebuyers had to put 20% down, have proof of income, and good credit before they qualified for a mortgage. These standards were changed in the 1990s, when unemployment was low, and the housing market was booming.

Lending standards decreased, down payments were eliminated and income was not verified. The good news was the rate of homeownership increased from 65 percent in 1996 to a record 69 percent in 2006. However, the lending practices became unsustainable. Many homeowners lost their homes during the crisis, and some neighborhoods fell into disrepair or were not completed.

Lenders underestimated the effects of the lack of Down Payment and decreased standards. Before the crisis, lenders relied on rising home values to protect themselves from loss. Rising home values reduce the likelihood of foreclosure or default. Its easy to see now that this was a recipe for disaster for the Real Estate Market in Nashville and the Nation.

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