Friday, February 15, 2008
Americans simply walk away from debt
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.