The current foreclosure crisis was completely avoidable in theory, but there were too many concurrent events that led to everyone in the real estate and mortgage industry enjoying the loose lending and overvalued properties. Real estate agents made boatloads of money in commissions from selling properties that were way too expensive, lenders made money by originating loans that they could sell to investors, and hedge funds made money by taking the payments on these properties and selling the properties that ended up in foreclosures because values were rising so quickly.

But as a greater number of foreclosures happened in a short time soon after the loans were made, property values sank and the banks that owned these properties were unable to sell them or make any profit. The loans that were originated and sold to investors were worthless and defaulted almost immediately. Once this happened, investors would no longer take the loans from the mortgage companies and lenders were no longer able to make such careless loans. Credit dried up, causing overvalued homes to drop in price as new home buyers could not qualify for such high loan amounts. When homeowners could not sell their houses, they lowered the asking price even further, continuing to drive prices downward.

Homeowners are also not blameless victims of the banking industry, though, as their own greed led them to lying on mortgage applications and overstating their income to purchase homes they could never afford. Teaser rates aside, if a homeowner has no job and their credit score is under 500, they should be immediately suspicious if someone offers to loan them $750,000 for a $1,000 per month payment. But similar loans were made to hundreds of thousands of homeowners whom the banks never intended to allow to keep their homes for very long. Some of these loans defaulted almost as soon as the closing paperwork was signed, while others lasted less than a year after being originated.

The original mortgage companies, too, acted on greed by making these loans, knowing they could sell the loans at a profit before they defaulted, and use their ill-gotten profits make even more bad loans. Investors who bought the loans exercised their own greed by believing they could make some money now and a lot more when the loans reset to higher rates. They would either collect higher payments if the homeowners could afford to pay, or they would foreclose on the houses and sell them for even greater profits. With such rapidly rising property values, this was not such an unrealistic scenario, and many foreclosure victims lost their homes in exactly this way, unable to pay the higher rate and with credit that made them unqualified to stop foreclosure.

It's just too bad the entire charade came crashing down so quickly. Now it is "government bailout time," with banks and homeowners scrambling for a piece of the newly created money by the Federal Reserve, which pumped billions of dollars into the economy and has now cut interest rates. This is a sign of impending inflation, and homeowners who are concerned about paying their mortgage now will find it even more difficult when prices for food, gas, and utilities rises even higher over the next year.

Now is the time to begin preparing for the worst, especially as more loans will be resetting to higher interest rates just in time for the winter season, when heating bills will push many homeowners into foreclosure before the end of the year. If there is anything that homeowners can do now to pay off other debt or establish an emergency fund to get them through the winter, they should begin as soon as possible. Preventing foreclosure is a much easier process than having to figure out a solution when there is already a clear and present danger of losing the home. As the summer ends with a devaluation of the dollar due to inflation by the central bank, and heating bills become a concern for many more homeowners, it is vitally important that plans are laid for avoiding a personal financial crash.

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