The American Home Mortgage Crisis
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America is undergoing a severe crisis in the home mortgage lending industry. The New York Times today has an article which suggests that an even far larger wave of home loan defaults is coming.
LINK: http://www.nytimes.com/2008/08/04/business/04lend.html
Because many of these home loans have been securitized and then were sold to foreign investors, this home mortgage crisis has now become worldwide. It is even resulting in banks failing in prosperous countries like Germany.
In America when you get a mortgage to buy a home this is essentially where you pledge the property to the lender as security for the loan. Until the loan is fully paid off, the lender has an interest in the land. In most cases the lender can foreclose on the mortgaged property if the borrower stops making the payments, or gets too far behind. If this happens the lender has the right to take back the property and sell it. Any amounts received from the sale of the house (net of costs) are used to pay off the loan.
In most cases in America these home loans are “non-recourse loans.” What this means is that if the money received from selling the foreclosed house is not enough to pay off the loan, this loss is the lender’s problem, not the borrower’s. So if the borrower loses his job, or just wants to, he can simply turn the house back to the lender and walk away with no further obligations. All he has lost is any payments he has made on the loan (plus the down payment).
If the home was bought during a boom market, then the bust comes and the value of the house declines significantly, the homeowner may find that even after his down payment and all the payments he has already made, the house is worth far less than the amount still owed to the lender. If the homeowner decides that it makes sound financial sense to stop his losses and just walk away, he can legally do so. He then leaves the lender responsible for the loss.
In most other countries this kind of home loan is viewed like some sort of a fairy tale. In their country the borrower pledges the property, so the lender can foreclose if the payments are not being made on time, but in this situation once the house is sold if the amount of money received is not enough to fully pay off the loan, the borrower is still responsible the this remaining amount.
So home loans in most of the world are a combination of a mortgage with the home pledged as security for the loan plus what Americans would view as a personal loan.
When this form of home loan is used with a requirement of at least a 10% or 20% down payment, one has a much more stable and sound system financial system. Integral to this is the legal requirement that money may not be borrowed to make a down payment on another loan. This approach is much sounder, is less prone to abuse, and less encouraging of the boom-and-bust economy than the system which is in place in America.
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