Wednesday, Feb 24, 2010
Is this why the UK is supporting house prices?
FT: US housing market hit by 'walkaways'
In the US it's much easier to walk away from a mortgage. Many there who can afford payments walk away if they're in nequity. Those in nequity and close to retirement may walk away because they don't want to keep paying after they retire - especially since the lender is not the local bank manager but is somewhere in the ether. The mortgage is no longer the last debt on which you would default This generates a downward spiral - whole neighborhoods can deteriorate, and who will lend knowing that (a) even people with good credit histories can default if in nequity and (b) the foreclosure / walkaway pipeline means prices have further to fall? Take away Fannie and Freddie and there's no mortgage market. And how does all this affect world economic recovery?
12 Comments
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1. 51ck-6-51x said...
Icarus said, "Is this why the UK is supporting house prices?"
In the U.S. a mortgage is (generally) a no-recourse loan, so the owner may walk away and the bank ges the property and that's all - the walker gets a huge black mark on their credit rating and will not be able to get another mortgage (which may not be a problem for some walkers). In Britain where the lender can chase up for the excess loss /is/ a support to the market, but I fail to see how it would be a /reason/ for the UK to support prices.
2. icarus said...
Support for banks' assets (therefore support for asset prices) is the main aim of government economic policy.The disincentives for 'walkers' in the UK also support prices. The question is meant to focus on the problems that can be caused by falling house prices (as in the US) and asks whether the UK has looked at these problems and decided not to let that happen here.
3. icarus said...
A snippet from the article regarding credit ratings of 'walkers' - (Residential) landlords already have signs out saying "bad credit accepted".
4. 51ck-6-51x said...
icarus -
1) It's the policy of the U.S. to only allow non-recourse (bar some special cases) rather than that of the U.K. disallowing it, so I don't think it's really questionable in that respect.
2) sure, they'll let bad credit rent, 'cos they can easily evict non-payees. But getting another mortgage ain't the same :)
5. Elizabeth said...
A difference between the US and UK crash is that we had a crash 18 years earlier. If you managed to keep hold of the house through that recession then you benefitted from high wage inflation whittling the value of the mortgage away followed by a period of ever decreasing interest rates, but of course the only thing the great british property owning public ever notice is the price of their house which went up and up and up. So people are doing anything, anything, to avoid selling their house at the moment because prices will go up and up when the crash is over. Except of course they won't, it's just that the up and up and up mentalitity is more ingrained here. I'll cease to consider the probability of further nominal falls when I see some evidence of wage inflation (outpacing tax increases and job cuts).
6. a saver said...
Remember that ratings agencies gave top ratings to CDOs based on these US mortages that you could just walk away from.
And they say no one saw it coming.
7. icarus said...
666 - not sure what your first point is. Point 2 - Agreed, but it does help the decision to STR and it will be a long time before these people want another mortgage anyway - and it may signify a general lack of stigma for defaulters.
I think this illustrates a 'rock and a hard place' dilemma. You won't get recovery until you let markets correct but the problems of letting house prices fall, as outlined in this article, are not trivial.
8. jallan said...
I find it hard to believe that the US has left itself open to people simply abandoning a mortgage because of negative equity. No wonder the US housing market has fallen dramatically, the more it falls the more people walk away. If it was the same here the crash would be bigger, although the previous boom would have been bigger too, as people wouldn't have had the spectre of a bank chasing them for negative equity, in event of a default, to tempre their bids.
9. icarus said...
jallan - agreed. It illustrates the massive importance of law and policy in affecting markets.
10. markj69 str05 said...
Icarus, I believe 666's point1, is implying that UK walk-aways still mean that banks can claimed back the balance of the debt from the 'walker'. Thereby making the 'walk-away' option it less attractive.
This is an important issue/factor in the UK. It means that people in nequity are not inclined to walk-away based on nequity alone. Look back at the late 80's early 90's, there was a lot of nequity, but the real killer at teh time was unaffordable interest rates. I know people who threw the keys in because they just could not afford to live there any more. I also know people who could just about afford to survive and did, dispite nequity. The idea of being 'black-listed' was not an attractive one.
The gov't could have let the market crach a bit. Especially after teh low IR's.
11. icarus said...
markj69 - If ease/difficulty of handing in the keys was the point then it was covered in summary form in my first intro sentence - and that's what the whole article was about. I was hoping the thread might move on to issues stemming from that.
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