Saturday, December 18, 2010

Downgrade of mortgage backed securities and Walkaways re-visited!

President Sarkozy expressed surprise at Moody's downgrade of Ireland yesterday. He should perhaps of seen this coming, or at least suspected some such bad news was heading his way when JP Morgan suggested a €350 billion gift to the PIG, as I blogged here yesterday.

The Housing Crisis which undermines all the economies of the West could by now have been solved had my suggestion, made way back in September 2008, linked here, been accepted. That posting, one of several around that time, concluded as follows:

Nobody yet knows how far UK property prices will plunge but it is essential to be aware that a fall of 20 per cent from peak levels requires a rising property market of 2 per cent above inflation for a period of twelve years before the original peak value is once again achieved. That is far too long to expect an ordinary mortgage holder to maintain mortgage payments for zero return. Once 'walkaways' begin they will spread like a plague with all kinds of consequences such as cross-squatting which will make counter-measures practically impossible - effectively anarchy could be an end result.

Mortgages have always assumed the equity provided by the mortgagee is the first at risk. In this crisis that has to be changed. I suggest that for houses purchased since Gordon Brown, in the words of incoming BoE Governor King, to paraphrase 'moved the Goal Posts and excluded house prices from the CPI' any loss of value on the resale of such houses be directly proportioned between the first mortgage holder and the mortgagee. This is potentially expensive, but less so if it halts further slides in house prices. As the country is effectively bankrupt such a move will need financing and as a further step to somewhat also put the cost of the greed at the door where it lies I would further suggest the exemption of the first home from capital gains tax be withdrawn.

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