2016 05.04

Short Sales and the Recent Subprime Mortgage Crisis

The subprime mortgage crisis was a major shock to the American economic system. It helped contribute to the recession of 2008. Low interest rates fueled a high demand for real estate as prices increased in the midst of a sellers' market. A building boom pushed more developers to build, and more Americans took out mortgages on their properties. A bubble was brewing as everyone seemed to believe that property values would keep increasing indefinitely and that there would always be enough money to pay off creditors. 

Those who could not afford conventional mortgages because of their low income or bad credit received subprime mortgages instead. These mortgages often had low initial interest rates which then increased over time. As a result, the owners of these properties could no longer afford their mortgages. They ran the risk of foreclosure.  

Those who attempted to sell their homes discovered that their property values were inflated. This inflation occurred in part because there was a surplus of houses on the market. Prices were falling, and the houses that people hoped to sell were not worth as much as they were before. These circumstances led to the occurrence of "short sales." Short sales are those sales of real estate where the seller owes more on the property than it is actually worth, and so must sell "short," i.e., at a price that causes the seller to incur a loss. Nevertheless, the owner still must pay the outstanding mortgage on the property.

Short sales should not be entered into lightly. They should be avoided if possible because they may result in a negative credit report against the property owner, and they may make it difficult for that person to obtain a mortgage in the future. If a home owner can afford a mortgage, it is better to pay it off than to try to sell in a falling market.