Strategic Mortgage Defaults - Walkaways (continued).

Two days ago I linked to an article by Larry Doyle on the growing problem in the USA of people, with good credit records and in employment, walking away from their houses and defaulting on their mortgage repayments. I did so as such an event is exactly what this blog predicted would occur one year ago to the day! I have had some internet exchanges with the author of this original article over the past couple of days and quote the latest exchanges below:

Martin Cole says:

September 24, 2009 at 7:43 am

Larry,

Thanks for your reply, a welcome change as my suggestions this side of the pond are inevitably met with a wall of silence.

I agree the retroactive element of my proposal is a drawback, also within the US environment the impact on interest rates a potentially crippling disadvantage.

Let me discuss these factors from a UK standpoint, however, and you might then be better able to determine whether there is later applicability for the US which has the major advantage, when compared with ailing sterling, of the dollar’s reserve currency status.

Even a year ago it was obvious that the pound sterling was assuming junk status, hence my tagging of some posts on my blog with “funny money”.

Here is the key “The loss of a good credit rating earned with “funny money” is of small immediate significance and zero long-term effect” – hence the walkaways.

On the retroactivity consider a UK employee, retiring this year, who has saved a reasonable sum in a pension fund throughout his career. OK some decline would always have been a risk, but post credit-crunch he has been double zapped with both the fall in the funds value and the reduced annuity value which he can now purchase. This has been of such severity that a huge and retroactive pension fund reduction is effectively what has occurred in the private sector.

His peer who has historically ridden the inflated UK property market to the maximum and therefore done nothing to promote the true free-market system with his savings, is presently sitting on a huge untaxed and unearned apparent asset gain.

The UK Government, with the collapse of tax revenues from the City and escalating welfare bills has resorted to printing even funnier money with so-called Quantitative Easing. This is retroactive impoverishment par excellance.

When foreign lenders no longer consider sterling interest rates sufficient to cover the risks of further devaluation where can extra sterling revenue then be found? The presumed wealth of the country, wasted during the apparent high-growth years, now rests in an over-valued private property pool. No surprise then that this week the third largest political party in the country has been the first to suggest property taxes.

In the USA restoring faith in the national currency remains a viable possibility, thus a damaged credit rating might remain a deterrent to strategic mortgage defaults.

In the UK outside of the casino style banking industry, the government and the civil service, people in the country at large have noted the stark reality and will likely start to cut their own losses in far greater numbers, possibly involving agreed cross-squatting (also covered on my blog last year).

Walkaways, mutually agreed cross-squats and property taxes will dish the property market for certain …. and potentially the rule of law in the process.

Things for the UK look sombre, hence my proposal for sharing property equity losses for the period during which Gordon Brown and Mervyn King deliberately distorted inflation indexes.

I would welcome your further thoughts and will link this exchange from my blog.

Reply

Larry Doyle says:

September 24, 2009 at 8:09 am

Martin,

I find your comments to be very interesting. Your perspective from your ’side of the pond’ is on one hand understandable to anybody following economics but on the other hand very difficult to fathom for those of us on ‘this side of the pond.’

What is hard to fathom? The effective ‘taking’ of private property. I think that may create civil unrest of unprecedented proportions. Not that we may not have civil unrest for other reasons.

Suffice it to say, both the UK and US economies have real issues all of which center on excessive debt. No surprise that the sterling and greenback are each having issues.

Are we living through a multi-generational shift in the primacy of what once were two world leaders. I believe we are. To what extent? Time will tell.

Living beyond one’s means is a recipe for underperformance.

In summary, from an American perspective, I have a hard time grasping the government unilaterally assuming a degree of ownership in what was private property.

I thank you for sharing your thoughts and perspectives. I welcome continuing the dialogue on this topic as well as others.

Best.

The earlier exchanges and original article may be read from this link.

Fannie Mae, Walkaways and Sovereign Debt Stormclouds mount

Fox News reports on Fannie Mae one of the main factors behind the present crisis as this blog has always maintained, read it here. Negative homeowner equity will shortly become the major problem facing the coalition government yet no plans are in place to avoid the disaster sure to result. This blog made a suggestion to the disaster that was the Brown Government. I repeat that post below, will anybody now listen:

Monday, September 22, 2008

Curing Britain's Property Price Crash.

The Chancellor of the Exchequer, Alistair Darling, in an interview on the Radio 4 Today programme this morning gave no sign that he was ready to confront the UK housing crisis as I feel sure will still be the case in his conference speech later this morning and that of his Puppet Master tomorrow. The steps being undertaken in the USA over the weekend as reported from an EU perspective are fairly well ( although sometimes inaccurately) summarised in this link. Britain, it is generally acknowledged, has the second gravest property price crunch in the world, yet unlike in the USA with the magic Mr Paulson, the UK government, oh so typically, seems to be doing nothing to address it, content with ignorant BBC interviewers throwing out suggestions of bonus caps in the city and windfall taxes for the energy sector while chucking ever more billions of pounds yet further down the drain for added liquidity for the institutions at fault. In my post of yesterday, immediately beneath this posting, I addressed the problem of the householder in negative equity - particularly in my example number 2, of a family with a mortgage in excess of the value of his home but not yet in default - a potential 'walkaway mortgagee' as separate from one in default and given notice of re-possession. In my view it is the potential 'walkaway' who must first be helped. A decision to quit one's home is grave indeed and places that family in a position of effectively turning their back on the system. It is therefore an action that the government must endeavour to discourage even at great cost. (Re-possessions follow from a considered action of the mortgage holder and form a separate problem). 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.

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.

Mortgage walkaways - the next crisis!

What starts in the USA soon spreads across the Atlantic as we learned in the ongoing sub-prime mortgage inspired credit crunch and Britain's developing bankruptcy and national debt default. As I predicted the problem several months ago and on several different occasions, I chose to call the action "walkaways", or described those involved as "mortgagees handing back the keys". The US has chosen the term "Strategic Mortgage Defaults" read here. The following extract from that article describes the situation:

The number of strategic defaults is far beyond most industry estimates — 588,000 nationwide during 2008, more than double the total in 2007. They represented 18% of all serious delinquencies that extended for more than 60 days in last year’s fourth quarter.

Strategic mortgage defaults are nothing more than a very calculated financial maneuver primarily by people with high credit scores. These people are literally walking away from their homes, and the mortgages on those homes, with little to no warning or indication of stress typically identified by increased delinquencies on the mortgage payment or other credit payments.

Why are people doing this? To fully understand the reasoning behind people strategically defaulting, we need to understand why people bought these homes and took out these mortgages in the first place. The likely result, as predicted in the same article is another crisis, quote: Have loan officers, bank examiners, and regulators factored these strategic defaults into their financial models and loan loss reserves? Rest assured, the thought of strategic mortgage defaults was not incorporated into a bank risk model prior to writing the loan. Now loan officers, bank examiners, and regulators are likely working overtime to incorporate the actuality of this phenomena creating a vicious cycle downward for housing just as the actual lending practices and accompanying purchases of homes drove the housing market higher over the last decade. Did Secretary Geithner incorporate this phenomena into the Bank Stress Tests? Not if we checked the default assumptions on HELOC (Home equity lines of credit) relative to the actual statistics. Have UK politicians considered the likely impact of similar actions in the UK. I earlier predicted such defaults would kick in when price falls began to exceed 20 per cent, a point now reached and with the next downward plunge about to commence as the currency tumbles and Schedule D property taxes look certain to return as one of the few sources for government revenue, a rout to sell at any price appears a possibility. Those walking away from unaffordable mortgages and their homes will start to be such a force they themselves will become a factor not to be ignored. As the non-resignation of Baroness Scotland, supported by the Prime Minister, this evening clearly illustrates, the ministers and leader of this UK administration have not one single moral principle in their make-up. Their financial ignorance in the face of the obvious fact that money has been their sole obsession for many, many years, makes their incompetence and lack of any foresight in the area of economics even more incredible.

Britain's House Price Fall now 27%

The builders Barrett in announcing six month losses approaching six hundred million pounds stated the following: Since the peak of the housing market in June 2007, Barratt added that average prices had fallen about 27 per cent. My proposed solutions last Autumn, here and here, were predicated on the real problems beginning to arise when falls passed the twenty per cent mark so we can soon expect the kind of mass walkaways or returning of keys that will indicate we have reached the point of no return as far as prospects for any short term recovery are concerned.

The unmitigated disaster of scrapping UK mortgage interest tax relief!

Tax relief in the UK was known as Miras, read here, it was introduced in a bid to encourage home ownership. It followed along from the earlier abolition of annual taxation assessed on the market value of property.

Is home ownership a sensible objective? A few minutes spent watching the following video clip may well incline one to that view, albeit relying on the exagerated comedy features of a popular British TV show:



In the UK today, the three main political parties, compete to claim themselves as being the most "progressive", of which, after any brief  analysis, independently minded researchers would likely be convinced is merely a new word describing modern day marxism, it is unlikely therefore that many proponents of the case for private home ownership can be found amongst their ranks.

Amazingly I have recently been informed by e-mail, that such an aboilition is starting to be considered in the USA itself. I provide a link to a site dedicated to fighting such a disastrous course. Read here and here.

Home ownership benefits society in a miriad of ways providing employment not just to local builders, carpenters and plumbers but countless other service providers attracted by serving communities with a vested financial stake in making their communities attractive and prosperous. The one serious drawback I have been offered being that it may have a slight tendency to reduce the mobility of labour.

What can be learnt from the situation that has developed in the UK since Miras was withdrawn by the social engineering New Labour Party at the beginning of this new century?

Robbed of mortgage interest tax relief, the benefits of property ownership became confined to the imperative for an ever escalating price of property. Britain's politicians, beneficiaries of tax-payer funded second home allowances and thus with a double (in some cases even treble) stake in ever overinflating house prices, connived to ensure this could initially be achieved. This corrupt conspiracy peaked when house prices were deliberately removed from the Bank of England's target inflation figures, which revised inflation calculation method was imposed upon (and/or accepted by) the BoE's new Governor, Mervyn King, upon his appointment.

A reintroduction of mortgage interest relief in the upcoming budget of George Osborne would be the first sign of a return to sanity by the supposedly "conservative" portion of Britain's coalition Government. As the sub-prime mortgage debacle has proven, a property owning democracy depends on a decent education system, as a re-introduction of Grammar Schools are similarly not on this government's agenda, a return to a decent society capable of prudent mortgage management, seems mere wishful thinking for the UK.

I hope the USA has more success in fighting off the removal of the small subsidy central government supplies when providing mortgage interest income tax relief. Considering this provides so many other, often intangible benefits, the actual costs must be minimal. Where have the tax funds thus saved by Britain over the past ten years been spent? An area too murky and dreadful even to begin to contemplate.

Other posts from this blog on the present housing crisis may be found by entering some of the following key words in the "Search" section at the head of this blog or clicking on the links:

Walkaways

Fannie Mae

House Price Crash

Mortgages

Other episodes from Keeping up Appearances, illustrating the inevitable delapidation of socially provided housing versus private property (although the implied social divisions are not an essential prerequisite!!!) are available on YouTube. (I believe the programme has been seen on Public Service Broadcasting in the USA, please note we Brits are not all in one category or the other!).

Walkaways, UK Property Crisis,

It has been a while since this blog re-visited this painful topic. Entering the title of this post in the blog's search bar will yield many posts, amongst which are some proposing a possible solution whereby the pending disaster could well have been somewhat mitigated, if not averted, or read them by merely clicking here.

What prompted my return to the topic, other than the fall in mortgages issued in April, as announced this week, and this detailed analysis from the Wall Street Journal, linked here, has been the huge switch to interest only loans in the UK, effectively making your lender your landlord, and soon, almost inevitably also to be your evictor, as interest rates rise, as they eventually must, with inflation now above 5%.

How can the Ministers of the Coalition Government have done nothing to avert this coming catastrophe, merely sitting on their hands over the last twelve months while all around them chaos mounts.  Another large fall in property prices is just round the corner, which must surely be practically certain to be the final straw for the hard-pressed and long-suffering British taxpayer!

Walkaway Mortgagees or Drowning Householders?

Yesterday in the USA the Federal Government unveiled a new fifty billion dollar plan to aid its underwater homeowners. One blog gives its views here. Moral hazard is the phrase much used elsewhere in the USA. In the UK we would describe those unfortunates with mortgages greater than their home values as having negative equity. Drowning seems much more apt. It is many, many months since this blog first warned of the dangers of negative equity being likely to result in Walkaway Mortgagees and likely anarchy to follow. Finally a respected member of the mainstream media has finally awoken to the dangers, read here. Earlier postings on this topic, together with my suggested solution, may be found by using the keywords "Walkaways" or "UK House Price Crash" in the search bar for this blog.

Dying pains of a single industry nation!

Manufacturing output in the UK was down 2.9 per cent in November, almost twice the worst estimate of 1.5 per cent, read here. Imagine the results in February and March given that Honda in Swindon, where the jinx figure of the Prime Slime was to be seen today, have announced zero car production for those two months - and that on top of the Nissan redundancies announced yesterday. What the government and neither of the two opposition parties have yet to grasp in their efforts to cure the economic sickness is that Britain is now a Company town whose Company is broke! The industry involved was of course the "Housing Market" and everything connected with it. Admittedly there was some side activity in the City of London where Computer Screens fulfilled the role of one arm bandits for short term speculators but in the main the only real activity in the country revolved around the ever inflating property market. Service industries flourished on its back. Over one year into the credit crunch, amazed that no steps were being taken to address the ever more serious developing house price crisis I posted a suggested solution, read here. Nothing, needless to say, has been done since EVEN THOUGH as home prices reach some 20 per cent below their peak the problem of walkaways is soon likely to become intense and pass beyond the point of no return. There are no lessons or precedents in history for what has happened to the UK under the stewardship of Gordon Brown, the mass sell-off of productive industry to EU countries leaves the nation at the mercy of imports grossly over-priced due to the reckless slashing of the pound's value. I urge one of the political parties to NOW do something to push a policy to keep ordinary families in their own houses!

Handing back the keys!

The headline to this post is a phrase I heard used on more than one occasion on my recent short trip back to England. Here is an explanation that includes a statement from the Council of Mortgage Lenders in the UK which states that lenders can only chase bad house loans for six years, a fact of which I also was not previously aware. Seems what I have previously described in my blogging as "walkaways" are likely to become even more numerous! An interesting question not covered in the linked comment is whether or not the lender can claim for missed mortgage repayments and interest between the time of the handing back of the keys and end of the six year period for reclaim. If not then the Lloyd's shareholders who foolishly agreed the HBOS acquisition last week must kiss farewell to their investment. Worrying for annuity holders with Legal and General (such as myself) which insurer supported the HBOS takeover and yesterday approved the dilution of their Barclay's equity value - have they really thought all this through?

House Prices and Recessions

This blog has long maintained that the house price crisis, which governments and politicians in the UK and USA have both tried to ignore, remains basic to the dire and contnuing economic crisis, which is now quite clearly once again rearing its head.

The sell off on Wall Street, already well down today on the turmoil underway across the EU, got new legs when US home sales last month were announced as down another 3.5 per cent to the lowest levels for fourteen years!

Amongst all the numbers from the press release, this paragraph in particular caught my eye:

Foreclosures and short sales — when a lender agrees to sell for less than what is owed on a mortgage — made up about 29 percent of all home sales last month. That's up from about 10 percent in past years. And a wave of foreclosures are being held up, either by backlogged courts or lenders awaiting state and federal probes into troubled foreclosure practices.

In the UK the ongoing manipulation of house price statistics, that amazingly contiues in the mainstream media, month after month will quite soon inevitably be sussed out by the intending buyers who are its victims.

A Buyer's Strike is coming, sped on its way by the rapid realisation that owning a property to which you are heavily mortgaged and thus indebted for life, and will likely never more appreciate, is even less likely to prove sensible, when looting, arson and riot could occur anywhere, at any time once our democracy is totally abandoned, as is now becoming the case!

I have suggested possible solutions again and again on these pages, if any interested readers remain, you can find some on the following search links:

Walkaways

Fannie Mae

House Price Crash

Mortgages

Home repossessions, the ticking time bomb under the West!

This blog gave up making what it believed were constructive suggestions regarding the property price crisis long ago, as nothing was being done. Eventually something has to change, the self-delusion that appears to have most of Britain in its grip must be seen for what it is. Across the West there are signs of things coming to a head:

Reuters on Ireland, Spanish repossessions on BBC TV News , Daily Mail on Repossessions and walkaways Beverly Hills style while a new EU directive seems set to accelerate this process, read here.

The picture in the headline spread of the Irish Independent this morning pinpoints the intent behind what occurred and provides a clue as to where the responsibility probably lies.

The article, linked here, has the following chilling introduction soon to be repeated elsewhere is my forbidding guess:

BANKS are telling thousands of families struggling to restructure mortgages they will have to cut back on health insurance, private education, groceries and Sky Sports before any deal can be done.

Mortgage Walkaways

The practice of walking away from a mortgage is growing as warned by this blog over the past two or three years as now reported by this report in the New York Times. Readthe warnings here, here, here and all across the archives of this blog!

Curing Britain's Property Price Crash.

The Chancellor of the Exchequer, Alistair Darling, in an interview on the Radio 4 Today programme this morning gave no sign that he was ready to confront the UK housing crisis as I feel sure will still be the case in his conference speech later this morning and that of his Puppet Master tomorrow. The steps being undertaken in the USA over the weekend as reported from an EU perspective are fairly well ( although sometimes inaccurately) summarised in this link. Britain, it is generally acknowledged, has the second gravest property price crunch in the world, yet unlike in the USA with the magic Mr Paulson, the UK government, oh so typically, seems to be doing nothing to address it, content with ignorant BBC interviewers throwing out suggestions of bonus caps in the city and windfall taxes for the energy sector while chucking ever more billions of pounds yet further down the drain for added liquidity for the institutions at fault. In my post of yesterday, immediately beneath this posting, I addressed the problem of the householder in negative equity - particularly in my example number 2, of a family with a mortgage in excess of the value of his home but not yet in default - a potential 'walkaway mortgagee' as separate from one in default and given notice of re-possession. In my view it is the potential 'walkaway' who must first be helped. A decision to quit one's home is grave indeed and places that family in a position of effectively turning their back on the system. It is therefore an action that the government must endeavour to discourage even at great cost. (Re-possessions follow from a considered action of the mortgage holder and form a separate problem). 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.

My repeated cure for Strategic Mortgage Defaults or Walkaways

Last evening, in the posting immediately beneath this, I returned to the problems of negative equity in the US and UK housing market. I later recalled that I had proffered a solution to avoid this obvious potential problem and reviewing these blog archives I found that such a cure was offered on 22nd September 2008, exactly one year ago from the dire posting of last evening. That post may be read from here in full, it was titled 'Curing Britain's Property Price Crisis', it concluded with the following idea: 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. On the first anniversary of putting forward this so obvious proposal, that was picked by the BBC News web site for recommended reading, I must once again ask on this blog, "Why are we led by such incompetents?"

"Debt Forgiveness" - the monster that should not be named - now appears!

This blog has asserted long, loud and oh so often, that it is the house price crash, underwater home owners, walkaways and re-possessions that lay at the heart of the ongoing economic crisis in the English speaking countries of the West. I have in the past suggested means of solving this crisis, expensive but with costs as nothing compared to this proposal from the Irish Independent, this morning, read here. A quote:

"It [debt forgiveness] will have to be done simply because the Irish economy will not be able to function properly at all levels if we keep the levels of debt as they are. So far, we have spent four years of this crisis loading more debt on to the shoulders of already heavily indebted households and families. It is unsustainable," the Trinity College economist told the Sunday Independent.

Pointing to the direct impact the servicing of this massive debt was having on the middle class, whom he described as the "main productive part of the economy", he added: "We will have to simply allow these people to write down their mortgages to closer to the level of the prices of the homes that these mortgages have been written against. It has to be done very robustly at the level of the middle class. The reason why, is that the middle class is being the hardest squeezed by tax increases at current levels and future ones. They also bear the most burden in terms of debt, but also they are the main productive part of the economy."

IMF wary of "steep drop" in UK house prices!

The latest Article IV notice on the UK economy is here. Titled "Union Jack be nimble, be quick" presumably a sign of the trivialisation of the Fund following the arrival of Mme Lagarde. There are few reasons to smile in the content. The Daily Telegraph, in its coverage this morning, selects this portion to quote:

The scale of household debt remained a threat to the recovery, it added, warning that the Bank of England would have to raise interest rates “gradually” due to the “potentially large effects of higher interest rates on growth”.

“In particular, growth remains vulnerable to a steep drop in house prices, which in turn are highly sensitive to short-term interest rates,” said the Article IV notice, the IMF’s annual “health check” on the economy.

I first suggested a means of easing the plight of the UK house price crisis in September 2008, as again quoted below, since I have repeatedly warned of the danger of Walkaways and horrors of negative equity, read here:

'What value maturing mortgages' Ironies Too Sunday 21/9/08- A "Professor" whose name I twice missed, but one time member of the Bank of England's Monetary Committee was doing the rounds of the 24 hour TV news channel last week stating that mortgages were worth their face value on maturity. It was clear from the interview with the clearly demented Prime Minister Gordon Brown on Friday on Sky News, that it is this mistaken view that is now driving the British nation into ever deeper bankruptcy. Let me explain. 1) If I am a supposed homeowner with a mortgage of eighty per cent of previous values I have a 20 percent share of that price. If prices fall by 10 percent I still have an equity share of 10 per cent and will therefore continue with my mortgage payments in the expectation of future house price rises and a desire not to lose that 10 per cent stake. 2) If I am a supposed homeowner with a mortgage of ninety per cent of previous values I have a 10 per cent share of that price. If prices fall by 20 per cent I have negative equity of 10 per cent and if prices are forecast to continue to fall I have zero incentive to continue the mortgage payments on a property over-valued by 10 per cent. As prices fall and re-possessions mount there will be a growing stock of unoccupied housing exposed to squatters and/or a tumbling rental market causing more foreclosures in the buy to let sector further exacerbating the problem. Hence the panic in the property industry to hide the true depth of the collapse. A mortgage maturing in 20 odd years at face value with inflation above 5 per cent is worth very little on present day values. A mortgage maturing several years in the future in a high inflation environment with no interest payments being made is on a discounted cash flow basis effectively worthless. The losses must lie with the mortgage lenders who made the loans on their assessments of present and future property prices, they can hardly now expect the borrowers to bear the full brunt of their 'professional' errors, if they do (as seems to be the case at present) then they are likely to be mistaken in my view. That is why the Halifax will now likely end by bringing down Lloyds TSB. Where Britain and Brown (if still in post) go from there is anybodies' guess! (Emphasis in last sentence added by blog editor 2/8/11)

My suggested cure was posted the following day, linked here.

House Prices Emergency

Reuters reports that in the UK the house price index had its biggest monthly fall in August since May 2009, read it here. The reality of the crisis now re-appearing will be aggravated by the past government's efforts to keep underwater borrowers, as those with negative equity are sometimes known in the USA, in their home even if unable to meet their mortgage repayments. This category of borrowers will now grow in the UK as the masses of public sector parasites are necessarily shed by a bankrupt state employer. Things are developing faster in the USA where a short term refinancing programme is now being pushed by Fannie Mae, becoming known as an Obama Refi, see this explanatory link which includes the following interesting but alarming fact (with my added emphasis): One of the biggest dangers facing the housing market is the glut of underwater homeowners who could default if their financial situations or home prices worsen. About 11 million borrowers, or 23% of households with a mortgage, were underwater as of June 30, 2010, according to CoreLogic Inc. That number is expected to double next year. The constant stream of encouraging forecasts of stronger economic growth, activity and recovery in the near future presently flowing from the European Commission, the ECB and various former national European Governments, all in direct contradiction of the factual information of deteriorating conditions in the real world can, at the end of the day only make matters worse. If 23% of homeowners are in negative equity today and that number doubles in the coming year to almost half of all homeowners, how many will then become Walkaways sending back their keys? What effect will that have on the still floundering, and in the UK nationalised, banking (so-called) business?