I don’t remember the source but I recall reading that American Homeowners tend to walk away from property if they are in negative equity at 110% LTV and on the buy to let front they walk away if the rent doesn’t cover the mortgage over a relatively short period of time.
So in the States, negative equity is a necessary, but not necessarily a sufficient condition for foreclosure, as not all houses that are in negative equity will go into the foreclosure process. (I say necessary on the assumption that if you are not in negative equity, you can just sell the property).
This may be the case in the States, will that behaviour transfer across the atlantic or have we really a Bull McCabe philosophy about property, have we really misconceptions that we own our heavily mortgaged properties and do we really believe that the banks won’t let you walk away from a property in Ireland, (not seen in the figures amid the rumours that banks are letting properties back to defaulters). Despite the reports in the media about debtors going to prison due to 1940’s law, surely the Banks in the current climate will want to keep hush on defaults and minimise the fear about the underlying assets that are collateral for their loans through loss mitigation, forebearance etc.
The US authorities/lenders can estimate with confidence the number of defaulters going forward, and the number of potential foreclosures based on facts, they track loan amounts, property prices, defaults etc they are all public record.
Are our Authorities pissing into the wind, how do you come up with a plan if you don’t know what the problem is, let alone the scale of the problem, spinned information on sales and mortgages are not accurate, if we can’t get a handle on what a properties are worth, how can you tell how many people are in negative equity, (admittedly most other counties have an advantage in assessing values for property tax purposes).
As property prices in Ireland are coming from such a low base historically, how can we know that we are indeed different, i.e. compliant borrowers whilst in negative equity and that repossessions won’t be an issue here if we haven’t been in this position before?
If repo’s do snowball, it will be interesting to see the reaction of the banks, most foreclosures by Lenders in the states are by the likes of Aurora, Countrywide or in the name of some Trustee representing MBS/CMOs, not banks as we know them, image isn’t really of any concern, whereas we all know our Banks to be warm and fuzzy just like their ads.
No they don’t! If the mortgage is ‘non recourse’, which most of them are apparently, then the property itself is the only security for the loan - and once the home is foreclosed then the mortgage debt is discharged. The person gets a big black mark on their credit rating. They might own four other houses outright but the bank can’t touch their other assets if there is a shortfall after disposing of the security.
That’s why the US financial system is absolutely screwed.
You’re both right gentlemen - it’s a biscuit and a bar. Whether a mortgage debt is non-recourse depends on a couple of different things. The first is what state you’re in. Some states only allow non-recourse on residential mortgages. Debtors in other states are in the same position as Irish ones. Secondly, what do you owe the money for? In a non-recourse state, your borrowing to buy the house is non-recourse - but any subsequent equity withdrawal usually isn’t.
Depends on why the second mortgage was taken out AFAIK.
Possibility #1 - You buy a house. A few years later you cash out some equity using a second mortgage. This is recourse.
Possibility #2 - You buy a house for in excess of the sum that the US GSEs will buy (a jumbo mortgage). To get around this, the bank may give you two mortgages at the time of purchase. The first mortgage falls within the GSE limits (is conforming) and can be sold on. The second, for the balance, is subordinate and remains on their books. In this case, both mortgages are for the purchase of the home and are non-recourse.
Most sub-prime borrowers had non-recourse mortages which is why they all walked in droves as soon as negative equity set in, as such delinquencies SUDDENLY got out of control and set off the negative chain reaction. At the end of the day, no-one walks away from positive equity, which keeps delinquencies low.
Some sub-prime borrowers will have walked away from homes before, which is why they could only secure sub-prime financing this time around.
They will rent now for 5-10 years and hope for another credit bubble!
In the UK and Irl the ‘fear’ of being chased by a bank for years will keep people stomaching negative equity for as long as they can afford it. Although at some point leaving the keys in the door, moving to Canada and learning to ski becomes an interesting option! By the time the bank has figured out where you are they have already written the loan off. Many stories of this happening in the UK in early 90s
As I understand it true non-recourse mortgages are rare in the US. You might see them in commercial property transactions but not in residential. The majority of states are full recourse.
In some states (eg California) the lenders can pursue the defaulter through the courts to win a judgement against the defaulter’s other assets (a judicial foreclosure). The lender’s second option is to go the non-judicial foreclosure route in which case the lender recovers what it can from the property and the defaulter walks away, albeit it with a battered credit record.
The great wave of defaults means that lenders don’t have the time or resources to follow individual cases through the courts, so they settle for the second option.
From my understanding bankruptcy in the US and bankruptcy in Ireland are very different and have very different impacts on your life.
In the US it is relatively simple to go bankrupt, it’s also relatively common and bankruptcy really does wipe out your debts. The idea behind bankruptcy in the US is that it gives you a clean slate and a fresh start and you get back to normal relatively quickly.
In Ireland it’s not common and it doesn’t really wipe out your debts and you don’t get back to normal for 12 years, and possibly ever.
Bankruptcy also has virtually no stigma attached to it in the US, which is why people, especially successful business people are happy to tell you they have been bankrupt at some time in the past. It helps to make taking a risk at setting up a business much more reasonable & I think has helped the US economy over the years.
There is however one debt that you can’t write-off, ever, with bankruptcy in the US, & thats a state or federal college loan. In the US those can be a pretty serious chunk of change.
Bankruptcy comes in a few shapes and forms in the States, chapter 7 & 11 would be what we consider traditional bankrupcy, however a lot of people in the pre-foreclosure process choose Chapter 13 bankrupcy wherby they re-organise their debt and have 3 or 5 years to repay, depending on income levels. This stops the foreclosure process dead and gives the homeowners time to re-group. There used to be straight out of Bankrupcy loan programs a couple of years back, but alas I suspect they are no more.