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America's House Price Time Bomb

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It wouldn't surprise me. I'm not arguing the point, just wondering if anyone could substantiate this?

There were some people on this forum a couple of years ago who related their stories about how the banks let them get back on their feet and then came after them 10 years after repossession. Nasty stuff, especially as they lump all sorts of charges and interest onto the debt.

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http://news.bbc.co.uk/1/hi/business/7529277.stm

With the American housing market in its worst crisis since the Great Depression of the 1930s, President Bush is expected to sign into law a massive new government intervention designed to slow the slide.

Faced with seemingly never-ending falls in the value of their properties, some American home-owners are taking radical action; they are choosing to walk away from homes and their mortgages.

In May 2006, at the height of the housing boom, Karen Trainer bought a $500,000 apartment in California - with money borrowed from her bank.

By this year, Karen still owed $500,000 on her mortgage, but her apartment was worth $200,000 less.

So she was deep in negative equity and, to make matters worse, the interest rate on her loan was about to increase.

"I thought 'this is crazy'," Ms Trainer says. "It just does not make financial sense."

Take the hit

As a successful professional, Karen could comfortably have managed the higher mortgage payments her bank demanded.

Instead, she decided to stop her mortgage payments altogether and let her bank repossess her apartment.

Her credit record will be badly damaged by the decision, but Ms Trainer expects this to recover soon.

"Generally speaking, within 5 years you are about back where you were, so my husband and I decided we'll take the hit and live with it."

Over to the bank

In California and much of the rest of America, there is a powerful incentive for homeowners such as Ms Trainer to walk away from their mortgage obligations.

Though banks can repossess and sell the homes of borrowers who stop paying their mortgages, under a legal quirk originating in the Great Depression of the 1930s, banks cannot easily pursue borrowers for any balance outstanding on the main mortgage on their homes.

Consequently, by walking away from her apartment, Ms Trainer has also walked away from the $200,000 loss on her property.

Her bank gets stuck with that.

Unthinkable option

Traditionally in America there is a social stigma attached to those who default on their debts, which should be a deterrent to walking away from your home.

But according to Susan Wachter, professor of real estate and finance at Wharton School of Business, in the depth of this crisis the social attitudes to such actions are changing.

"This is the kind of conversation that's going on at cocktail parties, at swimming pools," Professor Wachter says. "And suddenly this option which was truly unthinkable in the past becomes thinkable."

Worrying development

Ms Trainer says she feels no moral obligation to go on paying a loan on a property that is going to go on losing her money. She says her friends support her decision.

"I think people are taking a more cold-hearted look at it," she says.

"Is the bank going to pay for my retirement because I was a good girl and paid my mortgage, even though legally I didn't have to?"

Professor Wachter believes that, to date, most people have had their homes repossessed because they could not manage the repayments.

The trend of people now positively choosing to walk away because it makes financial sense to do so is a worrying new development.

"The dangers are extraordinary," Professor Wachter says.

"If all that is needed is that the house value is less than the mortgage value, there is a large number of homeowners in the United States who are in that situation".

No renegotiation

In the city of Stockton - the foreclosure, or repossession, capital of the US for 2007 - estate agent Kevin Morgan sells repossessed houses on behalf of the banks that now own them.

According to him, walking away has become commonplace.

"I would say it's probably 70% of the volume of our foreclosures right now," he says.

"It's a business decision for their family that the smartest thing they can do is walk away from their home."

As a sign of the changing times, some 60% of borrowers do not even bother to contact their banks to attempt a renegotiation of their loan, Mr Moran explains.

"They stop paying and they stop talking," he says. "They just plain walk away."

Total disaster

It is impossible to know for sure how many of the people who are now walking away from their homes could have gone on paying their mortgages.

But Professor Nouriel Roubini of New York University, one of the first economists to warn of the dangers of the American house price boom, believes the number of people positively choosing to walk away is growing rapidly.

"This is becoming a tsunami of voluntary defaults," Professor Roubini says.

"The losses for the financial system from people walking away could be of the order of one trillion dollars when the entire capital of the US banking system is only $1.3 trillion.

"You could have most of the US banking system wiped out, so this is a total disaster."

Which is why it is not just US policymakers who are hoping America's new, multi-billion dollar initiative to stabilise the housing market will succeed in its aims and thus make walking away less attractive.

Because if it fails, the economic fallout could be felt far beyond America's shores.

Michael Robinson's two-part series "The Trouble with Money" is broadcast on 30 July and 6 August on BBC World Service. You can hear the programmes online by going to:

It appears that the liars at the banks may have undone themselves by not reading the small print. The bigger the boom the bigger the bust this time it appears that it will be banks going under before the people.

If I was in the US and in the same position I wouldn't hesitate to walk away, it makes economic sense why have a $500,000 mortgage when you can have the same house and only a $250,000 mortgage.

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Though banks can repossess and sell the homes of borrowers who stop paying their mortgages, under a legal quirk originating in the Great Depression of the 1930s, banks cannot easily pursue borrowers for any balance outstanding on the main mortgage on their homes.

I know that this has been discussed on HPC before, but can anyone provide evidence that this is not the case here in the UK?

I cannot see a bank chasing a debt of +£200K, having already taken everything and seriously expecting people to pay up.

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I know that this has been discussed on HPC before, but can anyone provide evidence that this is not the case here in the UK?

I cannot see a bank chasing a debt of +£200K, having already taken everything and seriously expecting people to pay up.

British banks just wait for years to go by, for you to get back on your feet and then they hit you with a demand for payment. This is another reason why the crash in the UK will be more painful than in the US - you can't walk away here.

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British banks just wait for years to go by, for you to get back on your feet and then they hit you with a demand for payment. This is another reason why the crash in the UK will be more painful than in the US - you can't walk away here.

It wouldn't surprise me. I'm not arguing the point, just wondering if anyone could substantiate this?

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Wasn't there a couple in the news/papers recently that owed a good few grand after their home was reposessed in GC1. Then 10 or so years later when they got back on their feet financially, the bank come after them for the rest of the money.

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It wouldn't surprise me. I'm not arguing the point, just wondering if anyone could substantiate this?

I can. I worked in a county court between 1989-1995 (I didn't realise the significance of this period at the time :unsure::rolleyes::o ) and saw how callous / unforgiving banks become when owed money. They started proceedings at the drop of a hat and enforced swiftly if they were not certain of recovering the debt. Also, I was implicated in some mortgage fraud last time around but did not realise until the banks insurers started chasing me (one of 2 others) in an attempt to recover 30k. A house had been fraudently purchased and later repossessed. Eventually, I was able to prove I was an innocent party. The bank obtained charging orders / attachment of earnings and other measures on the other parties who had "moved on" with their lives and purchased new properties. These experiences are the reason I am so cautious when borrowing and have not been prepared to overstretch to get on the so called propeerty ladder. I really have seen it all before, including the misery of evictions................................but this time will be far worse than the last correction / crash etc.

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In England and Wales tens of thousands of people were chased for negative equity following repossession (voluntary or forced) after the last crash

There have been high profile court cases to decide whether the time limit for the bank to make the claim was 6 or 12 years and which date the time limit starts from

In addition, under an insurance policy called a Mortgage Indemnity Guarantee banks were often insured for the negative equity by an insurance company (using a ploicy the borrower paid for). Rather incredibly, even though they had got their money from the insurance company, the banks still sued the borrower on behalf of the insurance company to get back the money the insurance comapony had paid them using a "right of subrogation"

The cards are absolutley stacked in the lender's favour in all aspects of English and Welsh mortgage law and any legal challenge is fraught with danger because the lender has a presumptive right to court costs even if you win thereby adding extra thousands to yuor mortgage debt. Don't know if it's the same in Scotland and NI

EDIT insert "thereby"

Edited by newdman

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British banks just wait for years to go by, for you to get back on your feet and then they hit you with a demand for payment. This is another reason why the crash in the UK will be more painful than in the US - you can't walk away here.

True. I know of someone who foolishly was reposessed in the 90's after his friend who shared the mortgage did a runner. He went to Spain to get out of it and moved off the "Grid". Came back. Didn't get a credit card.Statyed clear of personal loans. Got his mortage in his wife's name then one day decided to get Sky installed.

Within a week there was a 20000 demand for payment from the bag holder bank. This was about 10 years after the reposession.

He paid them off in the end. He had to.

There is no way UK banks will let anything go. And why should they?

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wouldn't filing for bankruptcy clear the debt to the bank?

Obviously not. And rightly so. You pay your debts. Either that or you should go to prison.

Too many have thought, ah well, if I cant pay, I will bankrupt. F*ck that. Moral Hazard. Chase those debt ridden scum to the grave.... :angry:

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It wouldn't surprise me. I'm not arguing the point, just wondering if anyone could substantiate this?

Its the law. substantiatingit would be like asking if the police enforce speeding, because you have been speeding and never got caught, you wonder if they do.

Banks HAve to follow through. a default has a double wammy for them, one the lost profit and loan, and the House, now in their possession is a liability on the books.

and they do follow through, not necessarily themselves, but they sell the debt on. The you got the not so nice DCA chasing you up.

The best way to get them off your back is bankruptcy.

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So the advice here is if you get repossessed made sure you go bankrupt?

Obviously not. And rightly so. You pay your debts. Either that or you should go to prison.

Too many have thought, ah well, if I cant pay, I will bankrupt. F*ck that. Moral Hazard. Chase those debt ridden scum to the grave.... :angry:

Irrespective of how irresponsible the banks have been lending stupid amounts of money in the first place.

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...if the US had any sense ..they would close this loop hole....are they crazy...?.... <_<

This won't be on the agenda this side of the Presidential election, because if either of the parties seriously proposed it, they'd be signing their own political death warrant and strapping themselves into Old Sparky.

After the election, however...

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This won't be on the agenda this side of the Presidential election, because if either of the parties seriously proposed it, they'd be signing their own political death warrant and strapping themselves into Old Sparky.

After the election, however...

The could have got away with it just after the 2004 election, with house prices rocketing no one would have been using it anyway.

US bankruptcy laws were always designed to help the ideal of the small businessman - i.e. you try your first business, go bust/bankrupt, start again with a clean slate; the walk-away thing is part of that. This is under pressure from the bigger VIs..

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If the article is factual, I find this incredible. Selling to rent is one thing but selling to rent and damaging your credit rating for 5 years in the process, is another.

Assuming you were financially sound. In order to make this decision you would have to firmly believe that house prices would be substantially less in 5 years time (when you were able to get a mortgage again). Renting would also have to be less than your current interest payments ( If similar to the UK not hard ).

It is a ballsey decision by Ms Trainer and time will tell if the right one. Couldn't help thinking though........why the hell did they buy in May 2006?

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I know that this has been discussed on HPC before, but can anyone provide evidence that this is not the case here in the UK?

I cannot see a bank chasing a debt of +£200K, having already taken everything and seriously expecting people to pay up.

British Banks used to just wait until you were back on your feet, now they are starting to actively chase mortgage shortfalls

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I believe that debts are "Statute barred" after 6 years UNLESS they original debt was secured on a property or a CCJ was issued. I dont believe the debt is ever "gone" (unless Bankrupt) and so if the debt is/was secured on a property the lender can chase it forever. In the interests of financial sense, banks tend to wait a while for the defaulter to get back on their feet so there is actually some money to get hold of, otherwise they will just go bankrupt and the lender gets nothing.

Moral of the story is that if you are repossessed and your credit file is screwed anyway, you may as well go the whole hog and go bankrupt and have everything written off I reckon. Unless of course you are in a job that means you cant work as a bankrupt. At which point, I reckon its a simple maths calculation at that point. Does the job pay enough to get whacked with the shortfall in a fews years to be worth it?!

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I don't see it as a loophole - IMO if you are going to accept collateral against a loan, then the only thing at risk should be that collateral. That ought to sharpen minds a bit at the banks and make mortgages more conservative, as the bank would be under water if house prices fell below the value of the loan. I say ought to of course this situation applies more or less in the states and it did no such thing!

Yes, the banks charge an interest rate for taking on the loan. they are therefore party to the whole deal, as is the borrower.

in order for the risk to be equitable, the bank should be liable for its part if it all goes wrong.

As it is, the borrower is 100% responsible.

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The question

Can you see house prices climbing over $200k in the next 5 years???

and reply

Peronsonally no. If I had to make a prediction I would say that 2013 for the UK would be about the bottom and another 5 years after that to get back to peak levels of 2007. We are all just guessing though.

None of us have a crystal ball or access to the data that say inflation is anything near 2-3% right.

Most people question the inflation figures and based on M3 money it must be running close to double digits.

What we do know is the value of the pound has dropped 20% against the euro during the past year and six times income loans can not be sustained i think.

I'm sure the real value of property will fall even if the price goes up as the BoE is and will continue to run the printing press to bail out banks and maintain the ilusion that house prices never go down much so the question is can you see the cost of houses being above 3 new BMW 318i over the next 5 years.

Inflation is going up and interest rates seem to have no direction as the BoE is stuck between a rock and a hard place so for now it's a case of letting the GBP drop against a basket of currencies and yes given these conditions a house could well cost more than $200k in five years time or did you forget that house prices in Zimbarwi are going up 500% a day :o but on the BMW index they are worth less than one.

The ECB may put presure on the BoE as they want the euro to replace the $USD as the worlds reserve currency and thats the only thing i can see thats will stop the UK becoming another 1930's Germany and if the BoE tells the ECB to get stuffed then be afraid, very afraid

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Can you see house prices climbing over $200k in the next 5 years???

Peronsonally no. If I had to make a prediction I would say that 2013 for the UK would be about the bottom and another 5 years after that to get back to peak levels of 2007. We are all just guessing though.

Most STRs here have the option to buy with a mortgage at some stage in the future.

If the rules were the same in this country, would you do the same in the circumstances in the article? I don't think many here would.

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...if the US had any sense ..they would close this loop hole....are they crazy...?.... <_<

Actually, the "loophole" is a sensible one in my opinion. It should force banks to be careful about how much they lend and as a group take care not to inflate the housing market to the point where people are willing to send the keys back. Unfortunately, the banks found a way to sell these mortgages on and the buyers of the CDOs probably did not understand this aspect of law in many US states. Quite frankly, I think no recourse loans for mortgages make lots of sense in terms of controlling house prices, provided investors understand that that is what these loans are.

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  • 395 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%



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