This report from the BBC shows that the more wealthy borrowers who are able to service their mortgages are choosing to default because the negative equity is so large. For example, a borrower might face a 40% drop in marketable value and increasing interest rates, so they choose to walk away from the mortgage suffering only the impact on their credit rating.
This situation is more prevalent in recent mortgages which where taken out at the highest property prices and have had the least paid in. The lender is not allowed to pursue the borrower for the remainder – this is appropriate given that the fiduciary (bank) took the house as security and agreed to the loan from a position of intellectual and financial strength.
The consequence is that lenders are ending up with properties at lower market value than taken on their books. This is their just deserts. They should not have pumped up the property market. They should not have loaned on properties at such high prices. This will put pressure on the banks, rather than the borrowers. This might prove to be a good lesson in moral hazard for lenders, investors, fiduciaries and policy makers. It could help clear the market more quickly. Unfortunately, bail out packages will only slow down the process of market clearing and improvement in practices.
It is another example of individuals getting it right while government fails to do its job. But make no mistake, this is painful. Recessionary pain is being felt.
Report from BBC on the US house price bomb.
MP3 from BBC The Trouble With Money (11 MB) with estate agents showing home price drops of 50% and more. (Webpage link here for part two)
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