As interest rates rose throughout the economy, it became more difficult to qualify for a mortgage at the same time that interest rates were resetting higher on existing mortgages. This had the effect of causing a severe decline in property values and a resulting credit crisis. So many mortgages have gone bad that it has become nearly impossible to figure out who owns these loans and what can be done about them.
The Federal Reserve has been lowering interest rates over nearly the past year in an effort to create more liquidity in the financial markets and alleviate some of the burden on homeowners. Interest rates are still resetting and causing mortgage payments to skyrocket, but they are smaller increases than they otherwise would be if interest rates were higher.
The already high foreclosure rates are also contributing to higher interest rates for new borrowers applying for mortgages. Lenders now know that giving out mortgages to people who had no income and did not put any money down was not the way to create lasting business. Lending standards have tightened dramatically, and banks are now requiring homeowners to put money down and prove that they can afford the mortgage.
But even this is somewhat counterproductive, as tighter lending means fewer people are able to qualify for mortgages, and property values need to decrease even further. Homeowners in foreclosure often find out that they are now underwater, owing more on their homes than they are worth. Borrowers, in order to qualify for loans at higher interest rates, are able to offer sellers less than if interest rates were lower; and the lack of qualified buyers in the market means that more properties will be available for sale. Homeowners who have to sell in this market environment may have to accept less or convince their lenders to accept a short sale.