Friday, Feb 15, 2008
Americans simply walk away from debt
Wall Street Journal: The Rise of the Mortgage 'Walkers'
Borrowers in the USA are walking away from mortgage debt, leaving the the mortgage-securities investors stuck with the property. This is the letter of the law in some states and simply common practice in others. Even prime borrowers are tempted to walk away if they are in negative equity as there is no financial penalty for doing so, only a hit to their credit rating. Essentially, mortgage-bond investors unwittingly sold homebuyers a put option without properly pricing it, and now homeowners are exercising that option. Nobody is going to debtors' prison. It's beginning to dawn on lenders and their agents that they could be stuck owning hundreds of thousands of depreciating properties. ----- NOTE that this is not the case in the UK, where borrowers can't just walk away.
4 Comments
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1. guiriduro said...
> NOTE that this is not the case in the UK, where borrowers can't just walk away.
Well, if you consider leaving the debt and the country behind, its doable.
Strange that most financial demagogues would argue that a walk-away right would actually stifle lending, and yet that's not remotely what happened in the US. I guess we could implement that in the UK safe in the knowledge it would have no effect on contracting lending (or any more than is going to happen now anyway.)
2. drewster said...
It would be relatively simple for the banks to add a walk-away clause for an added fee (this would be a "put option", in the stockmarket jargon), but how many home-buyers would pay the extra amount? As it stands, too few buyers even bother paying for Mortgage Payment Protection Insurance.
3. techieman said...
Drewster - I dont know why anyone would pay for MIG if they didnt need to. The premium protects the lender not the purchaser. In any case the insurance company can then come back after the purchaser if the amount secured from the repo doesnt cover the mortgage.So the borrower pays the premium then "gives" the lender the proceeds of the policy and then the insurance company goes after the borrower for the amount unsecured by the enforced sale! So why pay for something when it doesnt protect you anyway!?
4. techieman said...
Sorry Drewster misread - see you meant MPPI not MIG. To revert back to your point, I think its a bit like shared appreciation mortgages. They offer it when its not useful, but withdraw it when it could be.