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America's house price time bomb - BBC
carolt
Posts: 8,531 Forumite
Apologies if posted before. I was listening to this on the radio last night, and it really is pretty scary stuff.....
http://news.bbc.co.uk/1/hi/business/7529277.stm
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."
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 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."
....
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".
.....
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."
..
http://news.bbc.co.uk/1/hi/business/7529277.stm
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."
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 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."
....
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".
.....
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."
..
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Comments
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Morning Carol, missed you yesterday0
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0
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I read this, this morning and was a little surprised.
Last night, I watched a program live regarding stocks and shares in the US as they were closing and most sectors showed rises.
It was all happy news with regards to the finance sector, building etc.
Amex results were up see here http://www.amex.com/ and in the top righ corner table, click on the gainers to see the top ones were all financial and housebuilders.
Incidently, you will see that there are also financials dropping as well, they did look at UltraShort focussing why they were dropping, but it was very late and I cant recall why
They discussed it as a result of Oil price reducing and the dollar being stronger.
The FTSE is showing a 1.25% increase already this morning
Seems like there will be a lot of conflicting news reports in the coming months:wall:
What we've got here is....... failure to communicate.
Some men you just can't reach.
:wall:0 -
FTSE going up/down in one day means nothing. This article is a much longer term affair.
Come back in 6 months and see what the stockmarket/housing markets are doing then and see if there's a correlation. (And there may not be - the stock markets are often wilfully blind.)0 -
The stock market going up like that is just a function of the way it works. This is a bear market rally, take a look at the DOW or FTSE over the last year and you'll see it falling, then rallying but not quite back to where it started. The overall trend is down.
Traders don't make cash when the market is static - therefore it has to fall and rise. The trick is to jump on the bandwagon early and then off it before the wheels come off.
You can also make money on the way down due to short selling but the authorities are doing their best to restrict that as they've decided to blame it for all the market's ills.--
Every pound less borrowed (to buy a house) is more than two pounds less to repay and more than three pounds less to earn, over the course of a typical mortgage.0 -
Technically this isn't 100%accurate. In the case of Karen Trainer i believe the 200k she is walking away from would be classed by the IRS as Income and therefore she would be taxed on it. Something to do with some kind of Banking Reform Act in 2001 (not totally sure of the name and the year). So if she was lets say a 40% tax payer, she would still be liable to he IRS for $80k. So she is not getting away scot free but its still a lot cheaper than the 200k"Dance like nobody's watching; love like you've never been hurt. Sing like nobody's listening; live like its heaven on earth." - Mark Twain0
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Did the BBC mention that America is 18 months ahead of the UK :rolleyes: ?
Another piece of reporting from our overpaid masters that doesn't give us the full picture.0 -
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 loss on her property. Her bank gets stuck with that.
Unlike here of course. It's definitely not a good idea to walk away here.Trying to keep it simple...
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No - no authority at all. Sorry if I give that entirely misleading impression. No, I am nothing more (or less) than an opinionated amateur, like most of the people who post on here, mortgage advisers and Generali excepted. Probably better informed than the average, owing to the amount of time I spend reading articles etc on the subject, but definitely entirely unqualified to speak.
That said, this being a public forum, I feel my voice is as valid as the next man (or woman). If anyone doesn't like it, they are more than welcome to ignore me. 0
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