The Cause of the GFC Continues.....

Generali

We can argue the ins and outs of who is/was to blame for the GFC, be it the bankers, regulators, Bill Clinton or me. However, fundamentally the underlying losses came from people being unwilling or unable to repay their debts.

http://money.usnews.com/money/personal-finance/real-estate/articles/2010/01/19/strategic-defaults-and-the-foreclosure-crisis.html

Nearly a year after the Obama administration unveiled its ambitious housing rescue program, foreclosure tallies continue to break records. Foreclosure filings were reported on more than 2.8 million properties in 2009, up 21 percent from the previous year and 120 percent from 2007, according to RealtyTrac.......

Homeowners have found themselves in foreclosure for a number of reasons. Some purchased properties they could never really afford. Others lost their jobs--the national unemployment rate remains in the double digits--and had no way to make mortgage payments. But as the crisis rumbles forward, an additional driver of home foreclosures has become clear: Many borrowers have the means to keep paying the mortgage but are simply walking away because they believe it's best for their finances.


The number of so called "strategic defaults" more than doubled, to 588,000, from 2007 to 2008, according to a study by Experian and Oliver Wyman. A separate 2009 survey found that more than a quarter of all existing defaults were strategic. Meanwhile, a growing number of academics are touting the financial benefits of walking away. "Homeowners should be walking away in droves," Brent T. White, a University of Arizona law school professor, said in a recent paper. "The financial costs of foreclosure, while not insignificant, are minimal compared to the financial benefit of strategic default."

It's well worth reading the rest of the article, especially the worked example about why it's better for many just to walk away from their debt.


The article concludes:

Although Uncle Sam has reduced mortgage payments for more than 850,000 borrowers so far—for a median savings of more than $500—the government will remain under pressure to take more aggressive action as long as the foreclosure epidemic keeps churning. Mark Zandi, the chief economist at Moody's Economy.com, believes the government may take steps to tackle the issue of negative equity head-on this year by incorporating principal write downs—which reduce a borrower's negative equity position—into the housing rescue program.

Basically they are saying the only way to resolve this problem is for the taxpayer to take on the burden of the difference between the value of the home and the value of the mortgage. How would you feel about future tax payers (your kids) taking on the burden of negative equity for millions? I'd be pretty miffed myself.

GeneHunt_2

I'd be amazed if the Americans put up with this. I can't ever imagine Brits going down this route either.

The Americans just don't believe in moral hazard, do they?

madeupname1

Generali wrote: »

Basically they are saying the only way to resolve this problem is for the taxpayer to take on the burden of the difference between the value of the home and the value of the mortgage. How would you feel about future tax payers (your kids) taking on the burden of negative equity for millions? I'd be pretty miffed myself.

Interesting article. Whilst I understand your frustration at people walking away from their liabilities, you can see why for some it is the only sensible option. Servicing a 560k debt on a property only worth 170k and unlikely to recover what you paid for it doesn't make financial sense. Its a choice between thowing away everything you earn down a black hole for the next 30 years or drawing a line in the sand now and starting again in a few years.

antrobus

In many US states, mortgage lending is made on what is called a non-recourse basis i.e. if and when a borrower defaults on their mortgage; whilst the lender can foreclose and repossess the property it has no further recourse to the borrower for any shortfall arising. Which means people can, and do walk away from negative equity if they chose to do so.

Fortunately or unfortunately (depending on your point of view) mortgage lending in the UK is made on a recourse basis, and so that option is unavailable.

JP45

Interesting article but worth bearing in mind that it's only speculation at this point:

Mark Zandi, the chief economist at Moody's Economy.com, believes the government may take steps to tackle the issue of negative equity head-on this year by incorporating principal write downs—which reduce a borrower's negative equity position—into the housing rescue program.

I reckon there'd be a massive public outcry if our own government were to even contemplate such a move. But I doubt for one moment that they would. Not only would it prove extremely unpopular with the vast majority of the electorate, it would also run completely counter to the government's stance on reducing the deficit.

1984ReturnsForReal_2

Whoever is responsible for Gillingham Football Club has a lot to answer for I can assure you.

Wookster

It is quite clear that most of the problems in the US banking system have been postponed rather than solved.

Quite how the rest of this plays out will be interesting to watch.

I can see another great bank bailout in the next 2 years in the US.

HAMISH_MCTAVISH

Generali wrote: »

However, fundamentally the underlying losses came from people being unwilling or unable to repay their debts..

American people unable or unwilling to repay their debts.

The banks have not incurred significant losses from UK residential mortgage lending as our lending standards were far better, on average.

UK banks incurred most of their losses from commercial lending, and from overseas investments.

Generali

HAMISH_MCTAVISH wrote: »

American people unable or unwilling to repay their debts.

The banks have not incurred significant losses from UK residential mortgage lending as our lending standards were far better, on average.

UK banks incurred most of their losses from commercial lending, and from overseas investments.

American people and European businesses.

In the UK the largest amount of bank losses will have come from US mortgages I suspect. The second largest is probably UK commercial property especially shops. The article is about the US banks though and should be read in that light. It's more a post about economy than house prices.

Thrugelmir

Generali wrote: »

In the UK the largest amount of bank losses will have come from US mortgages I suspect. The second largest is probably UK commercial property especially shops. The article is about the US banks though and should be read in that light. It's more a post about economy than house prices.

UK banks and financial institutions are now known to have been lending at minimal margins some even at loss making rates. With a restoration of new mortgage lending to at least 2% above base rate. Commercial normality will be returned in due course. As the previously extended credit lines wind down.

ash28

Generali wrote: »

American people and European businesses.

In the UK the largest amount of bank losses will have come from US mortgages I suspect. The second largest is probably UK commercial property especially shops. The article is about the US banks though and should be read in that light. It's more a post about economy than house prices.

We've not long returned from holiday in the US and in addition to the on going foreclosure crisis, something else has jumped up to bite them on the bum. The mistakes of the banks when setting up mortgages and selling mortgage bundles on, and now the fraud or forgery or incompetence of the banks and the firms they hired to handle foreclosure.

The US banks and lenders screwed up mightily during the boom - they tended to use a system called MERS - Mortgage Electronic Registry - that saved money and speeded up the process of securitising and selling on mortgage bundles.
Along the way 2 elements seem to have been mislaid (in a lot of cases) one was the mortgage agreement and the other the mortgage assignment. Not too clever.

When instigating the foreclosure process they (banks) didn't always process the documents correctly and used what are termed "robo signers" to rubber stamp thousands of foreclosure documents and affidavits with out checking they were accurate. Sometimes forging signatures and back dating documents.

The ensuing claims ranging from forgery to fraud has cast doubt on who owns the title to the property and who actually owns the loan.

The banks have even tried to foreclosed on people who don't actually have a mortgage.

An investigation has been set up by the 50 state attorneys general.

Here is a pretty good article about "foreclosuregate" or "fraudclosure" - well worth a read.

http://finance.yahoo.com/news/Robosigners-Mortgage-apf-382327091.html?x=0&sec=topStories&pos=main&asset=&ccode=