Jump to content
House Price Crash Forum
Della

What Happens If There Is A Mass Mortgage Payers Default: Scenarios

Recommended Posts

More money has been promised to pay in terms of mortgages than can possibly be repaid, how will it pan out. You have to understand, the situation as it exists cannot persist, somebody is going to get wiped out, somebody is going to suffer, and each group will try to ensure it isn't them.

Mass non-payment

Scenario:

It becomes the fashion to not pay your mortgage because it is kind of unaffordable anyway. This could be called a payment strike, mass default, mass action, debt strike or something like that. It will ride in on a wave, either organically person-person, through reaction to something in the news, or mediated through some social network.

Assumptions:

If enough people default at once then the systems to punish defaulting as they exist will seaze up or at least take multiple decades to deal with it all. Not everyone can go to jail because there ain't enough jail cells, and you can't chuck too many people out of their home since that would be highly destabalising to the society making revolution highly likley. You can probably assume printy-printy in both scenarios to some extent since that seems to be the knee jerk reaction to everything these days.

Likely follow on:

Scenario 1: Iron fisted government reaction (which mostly succeeds)

- Government takes action to make punishing mortgage default much faster

- There is a reaction to this government action either in the form of riots, revolution, removal from office, people physically attack policy makers. The stakes are very high so far as this issue is concerned so expect very strong reactions.

- Goverment finds levers of power don't work very well because there is too much resistance to a resumption of the status quo ante.

- Very difficult to get a mortgage afterwards

- Too many people get dumped on the street at one time and they mass up and take on their enemies either in the form of riots, insurection, mass squating, carving out seperate states, marching on the capital.

- House prices fall to 1-2.5 times earnings

- Interest rates go higher

- Major prison camp realted scandals, large amounts of people die in gulag.

- Economy wildly unstable

- Some of the economy dies, maybe upto 10-20%, growth laxidasical afterwards as large capital misallocations have NOT been corrected.

- Something else happens later that has a similar effect as a mass payment default.

Scenario 2: Non payment successs

- Becomes impossible to get a mortgage since it can't be enforced

- Houses prices drop to a level where someone could buy a house with less than one years income since otherwise they could never sell. A situation of totally static market will persist till this level is reached, the market cannot be totally illiquid because some houses must be sold quickly because of e.g. death of the homeowner.

- Banks will go bankrupt, most of them.

- Savings will be wiped out because a large part of them will in some roundabout way make to the assumption that people pay thier mortgages.

- Working capital in buisnesses will evaporate leading to capital shortage related business failure, this might lead to a fast alteration in the economic system to stop this happeneing, some form of rationing.

- Interest rates go very high, but it is all rather irrelivent since it is hard to get permission from a lender to be in debt anyway

- Some of the economy dies, maybe upto 20-50%, growth very very strong afterwards as large capital misallocations have been corrected.

Share this post


Link to post
Share on other sites

Scenario 3: Regulated Non Payment

-Acknowledgement by banks that repayment of loans is largely non-enforceable without triggering a HPC.

-HPC would destroy banks=government collapse. Government will act "in the national interest" to protect banking system.

-Maintaining high house prices is a central policy of government, BoE and regulators.

-Government introduces a regulated relief from mortgage debt, according to income and circumstances. For the unemployed, whole debt is written off. For others the tax/benefit system decides on the prortion of debt repayable.

-Government nationalises all mortgage banking.

-Low IRs, high inflation, regular QE become "normal monetary policy".

-New lending is a problem. But those in work will borrow from government banks, for shared equity homes. Secure in knowledge that value of equity wil rise faster than income.................they will eventually become owners.

-Tax relief on mortgage interest is introduced.

-House prices and level of home-ownership increases.

-Halifax index hits £1m in 2018

-Future chancellor declares an end to boom and bust.

EDIT: sorry, most of the above just describes the current status quo, so lack of imagination on my part. Just slight extrapolation from current situation.

Edited by ingermany

Share this post


Link to post
Share on other sites

If there is mass default why would people end up in jail?

It would be unenforceable unless we suddenly are living in a dictatorship and I'd suspect that the govt of the time would take the peoples side for popular support.

There is too much leverage in the system, stagnation is the best they can hope for without trigging either a deflationary collapse or a hyper-inflationary one.

Share this post


Link to post
Share on other sites

Scenario 4 - ****-up rather than conspiracy.

1. A significant proportion of mortgage holders fall into arrears.

2. Banks do not want to repo on a large scale, as this would trigger a HPC, but at the same time no mortgage payments = no revenue.

3. Banks start to repo selectively, based on their assessment of who is likely to continue paying something in the long term and who is not; and the long term prospects for the value of the property in question. For example, a twenty-something who has bought a new-build flat on 8x their income and has lost their job with no immediate prospect of a new one will be repo-ed, but a 50-something couple with nearly paid off suburban semi who have suffered a 20% drop in income probably won't be.

4. House prices decline significantly, but not to the extent of an apocalyptic crash.

5. The growing divide between OOs and people who do not own property becomes a bigger political issue, as the latter grow older, more numerous and more likely to vote. Politicians preaching an anti-landlord and anti-bank ticket are increasingly being elected.

6. Increased taxation of and regulation of OOs and BTL-ers drives the market down gradually to long term norms over an extended time period.

Share this post


Link to post
Share on other sites

If there is mass default why would people end up in jail?

It would be unenforceable unless we suddenly are living in a dictatorship and I'd suspect that the govt of the time would take the peoples side for popular support.

There is too much leverage in the system, stagnation is the best they can hope for without trigging either a deflationary collapse or a hyper-inflationary one.

banks would collapse overnight. non payment is the same as a bank run.

no-one could get cash.

business would halt.

martial law.

ALL banks would fail.

the debt remains, and on recovery some months later, the creditors will be out looking for repayment.

Share this post


Link to post
Share on other sites

- Banks take possession but let proles stay on as renters.

- Banks own all houses forever more.

- All citizens become serfs.

- Apart from bankers who are the new aristos.

Share this post


Link to post
Share on other sites

Sorry I just woke up.

Is it time to grab my beans and had down to the bunker?

:lol::lol::lol:

Mass default - hysterical.

The British will justbent over, hand back the keys and be in debt for the rest of their lives or until the next housing boom.

Whenever I read threads on here about mass protests I wonder if the posters are actually British or just naive youngsters still full of youth but ot let aware of the way of things in this country.

How can you protest when people have to go home to watch soaps and reality TV.

Share this post


Link to post
Share on other sites

:lol::lol::lol:

Mass default - hysterical.

The British will justbent over, hand back the keys and be in debt for the rest of their lives or until the next housing boom.

Whenever I read threads on here about mass protests I wonder if the posters are actually British or just naive youngsters still full of youth but ot let aware of the way of things in this country.

How can you protest when people have to go home to watch soaps and reality TV.

not only that, 40,000 every month get a new mortgage to live the dream...they've done it, sacrifised all, to do it....why would they protest to help those that cant be arsed to get on the ladder?

Share this post


Link to post
Share on other sites

not only that, 40,000 every month get a new mortgage to live the dream...they've done it, sacrifised all, to do it....why would they protest to help those that cant be arsed to get on the ladder?

The trouble the young people for a large part don't understand exactly what is going on.

"Stop Quantative Easing!"

"End Credit Default Swaps!"

is not as simple as

"Ban the Bomb!"

or

"Stop the Vietnam War"

Although I do agree that they/we should be marching about the cost of shelter.

Share this post


Link to post
Share on other sites

- Banks take possession but let proles stay on as renters.

- Banks own all houses forever more.

- All citizens become serfs.

- Apart from bankers who are the new aristos.

This scenario has played out before here, quite likely again.

Share this post


Link to post
Share on other sites

banks would collapse overnight. non payment is the same as a bank run.

no-one could get cash.

business would halt.

martial law.

ALL banks would fail.

the debt remains, and on recovery some months later, the creditors will be out looking for repayment.

I agree mostly up to your last point (the first point is bang on the nail) - I don't think they would ever get repayment and sooner or later the debts would be written off.

- Banks take possession but let proles stay on as renters.

- Banks own all houses forever more.

- All citizens become serfs.

- Apart from bankers who are the new aristos.

Banks are only allowed to repossess property to liquidate. Maybe these rules are/will be being bent, but it is not their property to hold on to, IIRC - they are merely allowed to liquidate it to pay off the debt (or as much of it as possible).

Share this post


Link to post
Share on other sites

More money has been promised to pay in terms of mortgages than can possibly be repaid, how will it pan out. You have to understand, the situation as it exists cannot persist, somebody is going to get wiped out, somebody is going to suffer, and each group will try to ensure it isn't them.

Good OP, but...

There is enough money to repay the loans. Every time credit is extended, the borrower's account is debited and the payee's account is credited - in other words, the money to repay the debt is out there somewhere.

Defaults are not inevitable... they will only occur if those with all of the credit (ie. savings) don't spend it, to in turn, allow the debts to be extinguished. The challenge to everyone, is getting this money moving and how it is done.

We know a few things - the poor have little money and often lots of debt, the middle class have lots of cash savings and the rich have their wealth squirrelled away in assets (much likely in land/property, considering the boom).

If we do nothing and those holding cash keep tightly hold of it, there will be defaults. The inevitable result is hair cuts or debasement - either way, cash holders lose.

If we implement a land value tax, the asset rich will have to liquidate, to gain access to the money, to pay the tax. This would hit the primary beneficiaries of the credit boom most and rebalance the spread of wealth (which is a huge gulf). This money would then be released to allow the poor to pay down their debts. In essence, this switches the demand for cash from the poor to the rich, with the latter much more able to cope (with the lack of supply of it).

In addition, I would free up markets, stop bailing out the rich and let the chips lie where they fall. The problem is, the state system supported the credit boom and unless it reverses it, the asset rich will get away with it and the middle classes will be wiped out, while the poor struggle to stay above the bread line.

To summarise, those who benefited most from the credit boom need to pay for it. The gains weren't from toil, but from exploiting a the state and should be returned to allow the economy to rebalance. If this doesn't happen, I fear variations on your scenarios will be inevitable.

EDIT: P.S. Businesses are apparently very cash rich too, after the credit crunch almost broke them. If this money is invested in staff, the money will find its way to extinguishing debts too.

Edited by Traktion

Share this post


Link to post
Share on other sites

I agree mostly up to your last point (the first point is bang on the nail) - I don't think they would ever get repayment and sooner or later the debts would be written off.

Banks are only allowed to repossess property to liquidate. Maybe these rules are/will be being bent, but it is not their property to hold on to, IIRC - they are merely allowed to liquidate it to pay off the debt (or as much of it as possible).

whilst I agree in theory with your comment, I just look back to what happened in Germany, Poland aand other places that emerged from, Eastern Bloc control....the heirs of landowners trufed out and killed by Governments turned up and demanded their property back, or compo.

Share this post


Link to post
Share on other sites

More money has been promised to pay in terms of mortgages than can possibly be repaid, how will it pan out. You have to understand, the situation as it exists cannot persist, somebody is going to get wiped out, somebody is going to suffer, and each group will try to ensure it isn't them.

Mass non-payment

Scenario:

It becomes the fashion to not pay your mortgage because it is kind of unaffordable anyway. This could be called a payment strike, mass default, mass action, debt strike or something like that. It will ride in on a wave, either organically person-person, through reaction to something in the news, or mediated through some social network.

Assumptions:

If enough people default at once then the systems to punish defaulting as they exist will seaze up or at least take multiple decades to deal with it all. Not everyone can go to jail because there ain't enough jail cells, and you can't chuck too many people out of their home since that would be highly destabalising to the society making revolution highly likley. You can probably assume printy-printy in both scenarios to some extent since that seems to be the knee jerk reaction to everything these days.

Likely follow on:

Scenario 1: Iron fisted government reaction (which mostly succeeds)

- Government takes action to make punishing mortgage default much faster

- There is a reaction to this government action either in the form of riots, revolution, removal from office, people physically attack policy makers. The stakes are very high so far as this issue is concerned so expect very strong reactions.

- Goverment finds levers of power don't work very well because there is too much resistance to a resumption of the status quo ante.

- Very difficult to get a mortgage afterwards

- Too many people get dumped on the street at one time and they mass up and take on their enemies either in the form of riots, insurection, mass squating, carving out seperate states, marching on the capital.

- House prices fall to 1-2.5 times earnings

- Interest rates go higher

- Major prison camp realted scandals, large amounts of people die in gulag.

- Economy wildly unstable

- Some of the economy dies, maybe upto 10-20%, growth laxidasical afterwards as large capital misallocations have NOT been corrected.

- Something else happens later that has a similar effect as a mass payment default.

Scenario 2: Non payment successs

- Becomes impossible to get a mortgage since it can't be enforced

- Houses prices drop to a level where someone could buy a house with less than one years income since otherwise they could never sell. A situation of totally static market will persist till this level is reached, the market cannot be totally illiquid because some houses must be sold quickly because of e.g. death of the homeowner.

- Banks will go bankrupt, most of them.

- Savings will be wiped out because a large part of them will in some roundabout way make to the assumption that people pay thier mortgages.

- Working capital in buisnesses will evaporate leading to capital shortage related business failure, this might lead to a fast alteration in the economic system to stop this happeneing, some form of rationing.

- Interest rates go very high, but it is all rather irrelivent since it is hard to get permission from a lender to be in debt anyway

- Some of the economy dies, maybe upto 20-50%, growth very very strong afterwards as large capital misallocations have been corrected.

good post 1 is effectively a move to authoritarian rule, 2 remains democratic, i think you will get both in various countries, but 2 is very much my take on whats happening,

Share this post


Link to post
Share on other sites

The trouble the young people for a large part don't understand exactly what is going on.

"Stop Quantative Easing!"

"End Credit Default Swaps!"

is not as simple as

"Ban the Bomb!"

or

"Stop the Vietnam War"

Although I do agree that they/we should be marching about the cost of shelter.

It's not so different to "No Poll Tax".

And that was - eventually - successful.

Share this post


Link to post
Share on other sites

so capital is never stored in asset classes other than cash?

It doesn't matter - if you buy an asset, you give someone else the cash. The cash isn't destroyed in this process.

the system is leveraged at 30:1 if not higher.post basel 1/2,the banking system is no longer based on cash reserves but capital reserves.therefore if that capital takes a haircut,the system is even more leveraged than 30:1.qwuite simply,there isn't enough cash to repay the loans,unless velocity moves through the roof which is extremely unlikely in a major once in 80 year debt deflation.

Forget about the leverage levels in regard to debt repayment - it's mostly a red herring.

High leverage means you need high velocity of money to ensure that debts keep being extinguished. It makes for a fragile banking system, as assets can go bad very quickly (putting pressure on liabilities), but it doesn't mean there is insufficient money to repay debts - that is impossible.

The important point is that whenever a bank extends credit, the receiver goes into debt and the person they pay (with the loan money) goes into credit. This credit will always be out there until the debt is repaid. There is as much debt as there is credit.

EDIT: BTW, velocity doesn't even need to go as high as it was before the crash, with all that printed money sloshing about. I agree that it needs to increase if debts are to be repaid though.

of course the govt could print the moeny to repay the banks that it will have nationalised by then.ie default.

The government can print and recapitalise the banks, sure, but then you have increased the monetary base. You will have saved depositors nominally, but at the expense of their money being debased. As the bank assets are worth less than their liabilities, there isn't much choice - hair cut or debasement.

Those holding out for deflation better have their money out of the bank and hope the government doesn't refuse to accept them at face value in the future. Otherwise, a deflationary environment will destroy bank deposits (bank liabilities) just as quickly as the loans (bank assets) will go bad.

Edited by Traktion

Share this post


Link to post
Share on other sites

a lot of middle class people are deep in the hole too.so are a lot of supposedly wealthy people.

The money is somewhere. If the majority are in lots of debt, the minority must have lots of savings in the bank.

not necessarily,as the banking system deleverages,cash./anything holding it's value reloatively well, will be king

If you're holding physical cash and not bank credit, then yes. That depends on the government taking money at the face value though. They could do a compulsary 10:1 switch (ie. chop a zero off the end) at some point if inflation goes nuts. As cash is dependant on the government honouring it, I'd rather be holding 'stuff' than paper.

the money's gone.

No it hasn't - it's sitting in bank accounts somewhere.

Dick Fuld and Fred the Shred have left the building.

The money has gone somewhere. I doubt the likes of them are holding onto paper.

As land values have rocketed during the boom, I would say much of the wealth is tied up there, with the middle classes and businesses holding the cash. You either tax the land and create demand for cash from the wealthy, due to liquidation of said assets or you watch the debtors default and the middle classes get wiped out. So far the government has been happy to do the latter, but it doesn't have to be this way.

Share this post


Link to post
Share on other sites

Not quite like for like, but remember the New Orleans disaster when lots of homes got wiped out and people were left with nothing?

One of the first things Bush did was to make sure the bankruptcy laws were tightened up.

Can't have people mass-defaulting and getting away without paying their masters...

Share this post


Link to post
Share on other sites

3. Banks start to repo selectively, based on their assessment of who is likely to continue paying something in the long term and who is not; and the long term prospects for the value of the property in question. For example, a twenty-something who has bought a new-build flat on 8x their income and has lost their job with no immediate prospect of a new one will be repo-ed, but a 50-something couple with nearly paid off suburban semi who have suffered a 20% drop in income probably won't be.

Selective repo-ing yes, but why would banks want to own a home that is worth significantly less than the amount they've extended? Banks only want to own to sell. If they sell at below the loan then they will have to recognise the loss. So it will be the 50-something couple who are on the street and the 8 times income couple who are sitting pretty with no mortgage repayments.

Share this post


Link to post
Share on other sites

Selective repo-ing yes, but why would banks want to own a home that is worth significantly less than the amount they've extended? Banks only want to own to sell. If they sell at below the loan then they will have to recognise the loss. So it will be the 50-something couple who are on the street and the 8 times income couple who are sitting pretty with no mortgage repayments.

banks never own the possession...they cash it in, the rest they write off against tax..

forget this nonsense about them not wanting to cash in and lose a bit...bad debts are written off...holding on and hoping, they remain on the books.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 149 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.