PowerSwitch

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

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."

Another credit crunch time bomb just starting to go off.

Yeah! Walk brothers walk!!!!

Surely this is just hyperbole to support changing the US mortgage laws that mean that the mortgage lives with the house and not with the person?

As I understand it in the US if you post your keys to the mortgage co, and walk from the house, they can't touch you.....

In the UK, you have the mortgage, and it follows you till you pay it back or become insolvent.

Obviously the US banks want to be able to keep people to their debt obligations. This is an arrow in the bank's quiver isn't it?

I've read that the difference is that the us loans are non-recourse loans whereas over here they are recourse loans.

I do wonder what would have happened here if all house loans were non recourse - would it have made the lenders
more cautious ... probably not going by the US experience.

Cheers,

Steve

SunnyJim wrote:In the UK, you have the mortgage, and it follows you till you pay it back or become insolvent.

And once you become insolvent... what happens next in theory? When would the debt be written off? I imagine many thousands of people are going to be declaring themselves bankrupt in the near future and they could probably remain that way for years/forever. And in that case it would still be the bank that ends up with the debt. (I guess the debt would then be re-sold down the line to dodgier and dodgier debt-collecting companies, until eventually it gets sold down the pub for a fiver to Mr Knuckles who will then pay the defaulter a nice friendly visit...)

Currently the debt is written off and you get a black mark against your name. You are a 'credit risk' which means you will not be able to profit from the next housing boom by buying at the bottom of the market as no-one will lend you money for the next seven years. By that time the market will be picking up again and you'll have to buy mid market from someone who bought the place for 3 first class stamps and a doughnut.

But yes, ultimately some of the losses will be taken by the banks (who obtain real solid assets in the form of houses instead of fiat money) and I suspect many losses will find their way into pension funds who have bought that bad debt in the form of CDO's etc.

Is anyone prepared to lend me 3 first class stamps and a doughnut?

SunnyJim wrote:But yes, ultimately some of the losses will be taken by the banks (who obtain real solid assets in the form of houses instead of fiat money) and I suspect many losses will find their way into pension funds who have bought that bad debt in the form of CDO's etc.

But in America right now what are those houses worth - and can that value be cashed in? I see a massive cash flow problem and quite a few imploding banks over the coming months. Whether or not the same thing happens here the toxic effect is bound to affect our banks too.

SunnyJim wrote:As I understand it in the US if you post your keys to the mortgage co, and walk from the house, they can't touch you.....

In the UK, you have the mortgage, and it follows you till you pay it back or become insolvent.

AFAIK, that's not the case SJ. In the early 90's I was caught in the negative equity trap, but discovered that the mortgage company had made me pay for indemnity insurance for them. It's insurance that protects them from loss. When I handed back the keys and walked away, they would've claimed and lost no money.

I didn't need to become insolvent. In theory the insurers could've chased me up to 5 years later, but they never did, and I was back on the property ladder within a year or two.

Well that's good to know.

Did you get a CCJ? If so how did you manage to get back on the property ladder? i.e. Did you have to pay alot for your mortgage because you had a history, or do you think the indemnity company simply didn't file a case against you?

No CCJ. I would have had if I'd become insolvent. I don't even know who the indemnity insurance company was as it was wrapped up in the arrangement fee.

The next time I got a mortgage, I declared the default, but nobody seemed to care.

My point is that this voluntary defaulting is going to spread the bad debt liability into the insurance sector rather than restricting it to the banking sector.

I see your point. Also those CDO's were insured by various mono-lines etc such that they could be graded AAA! That's going to wipe those insurers out surely?

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.

Ive been watching this debacle quite closely since it started this time last year. Professor Roubini ( http://www.rgemonitor.com/blog/roubini ) seems to be the only economist quoted by the mainstream media in the USA who has got his head on straight, or isn't straight down lying to prop the system up.

Despite his doomerish views he's also well regarded enough to be called as an expert witness at Congressional committee hearings. He's been calling it on the button so far, but some of the solutions he's been offering have been a bit too 'socialist' for American taste.

With the recent writedowns led by Australian banks, and now Merrill , the media is at last starting to get its head round the scale of the problem. At least the Post's figure is now in the right ballpark.

http://www.financialpost.com/story.html?id=688494

As it took £100 billion to dispose of Northern Rock, one wonders what's still hiding under the table in the British banking system.

SunnyJim wrote:Also those CDO's were insured by various mono-lines etc such that they could be graded AAA! That's going to wipe those insurers out surely?

Potentially, and given that those insurers hold a vast number of peoples' pensions...?

RenewableCandy wrote:Is anyone prepared to lend me 3 first class stamps and a doughnut?

I can offer you 5 second class Correos stamps and a half a bag of stale churros ( I can never get through all of them, especially when con chocolate. )

I didn't know that Merrill Lynch have just taken a further write down...