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- Sep 25, 2007
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Hi all,
An article from the October 25th-31st edition of the The Economist. Excerpts:
Two features of housing finance make the crisis hard to resolve. The first is "no-recourse" home loans, which are standard in America (though not elsewhere). If a borrower defaults, a bank can claim back the property used as collateral, but nothing more. When the value of a home drops below the size of the mortgage, a borrower has a reason to default to escape his negative equity. Borrowers` freedom to disown their bad housing investments means the housing slump feeds on itself.
An enlightened bank may be better off forgiving a part of a mortgage if that persuades borrowers to remain in their homes. But that route is often closed off because of a second feature of the housing market: securitised mortgages. When a troubled home loan is in a pool with other mortgages, held by a group of investors, there is no easy way to agree on a deal to forgive debt.
He believes the credit crisis will not be resolved until the incentive for borrowers to default—a uniquely American problem—is addressed. The proportion of underwater home-loans would double to around 40%, he reckons, if house prices fall by a further 15%—a drop that is widely forecast. If a fresh wave of borrowers hand back their house keys to lenders, it would leave many more mortgage-backed securities impaired than could be absorbed by the government`s Troubled Asset Relief Programme (TARP).
Given the extent of negative equity and the risk of a negative spiral of defaults and falling prices, efforts to keep homeowners in their homes may yet be necessary to solve the crisis.
http://www.economist.com/finance/economics...ory_id=12470547
Keith
An article from the October 25th-31st edition of the The Economist. Excerpts:
Two features of housing finance make the crisis hard to resolve. The first is "no-recourse" home loans, which are standard in America (though not elsewhere). If a borrower defaults, a bank can claim back the property used as collateral, but nothing more. When the value of a home drops below the size of the mortgage, a borrower has a reason to default to escape his negative equity. Borrowers` freedom to disown their bad housing investments means the housing slump feeds on itself.
An enlightened bank may be better off forgiving a part of a mortgage if that persuades borrowers to remain in their homes. But that route is often closed off because of a second feature of the housing market: securitised mortgages. When a troubled home loan is in a pool with other mortgages, held by a group of investors, there is no easy way to agree on a deal to forgive debt.
He believes the credit crisis will not be resolved until the incentive for borrowers to default—a uniquely American problem—is addressed. The proportion of underwater home-loans would double to around 40%, he reckons, if house prices fall by a further 15%—a drop that is widely forecast. If a fresh wave of borrowers hand back their house keys to lenders, it would leave many more mortgage-backed securities impaired than could be absorbed by the government`s Troubled Asset Relief Programme (TARP).
Given the extent of negative equity and the risk of a negative spiral of defaults and falling prices, efforts to keep homeowners in their homes may yet be necessary to solve the crisis.
http://www.economist.com/finance/economics...ory_id=12470547
Keith
