Wolf Richter, one smart housing and financial cookie, says, “Yes, when housing downturns are large enough, there can and likely will be a housing/mortgage crisis everywhere.”
Think about it this way. Rising housing markets generally have low down-payment requirements, low interest rates and low default rates. Banks and lenders are (or were in 2005 – 2007) offering mortgages right and left because housing prices only appreciate, right?
But then, interest rates start to rise and home prices start to fall and homeowners start to see that they’re paying monthly interest rates that are higher than the value of their homes and they start to default. We’ve watched this movie before…some of us watched it in real time 10 years ago and some of us just read the book The Big Short or watched the movie by the same name 5 years ago.
What happens when homeowners default on their monthly mortgage payments varies on a state-by-state basis. Some states have recourse mortgage laws. Recourse mortgages allow banks/lenders to foreclose on the collateral in the home AND then pursue the homeowner in court for the difference between the collateral proceeds from the sale of the home and the outstanding mortgage (plus interest, fees, etc.) amount. Lenders can go after the homeowner’s other assets, garnish their wages, etc. until the homeowner pays the bank/ender everything off and settles with the bank. The only other option the borrower has in this situation would be to declare bankruptcy.
A non-recourse mortgage limits the banks/lenders from going after the homeowner for anything on top of the collateral in the house. The lender/bank just has to swallow those losses from unpaid mortgage fees, interest, etc. And the homeowner gets to move on without paying any more debt.
There are 12 non-recourse states (Alabama, Arizona, California, Iowa, Minnesota, Montana, North Carolina, North Dakota, Oregon, Washington, Wisconsin and Nevada. There are 38 states and the District of Columbia that follow recourse laws.
Despite the intention of mortgage laws, nothing about these non-recourse and recourse mortgage laws have done anything to deter homeowners from defaulting on their mortgages and doing damages to mortgage insurers, banks and lenders.
Wolf Richter writes that “mortgage crises happen because the people on the margin – the 10% most vulnerable people – along with people and investors who’ve simply gotten in over their heads during periods of irrational exuberance throw in the towel regardless of any theoretical rights that banks have in chasing after them.”
Such a mortgage crisis happened in Spain in late 2007. Such a crisis could easily happen in Australia and Canada where prices are at all time highs, interest rates are climbing and defaults are beginning to increase. No country is immune from housing busts and mortgage crises.
And because memories are short, no country is immune from (recurring) housing busts and mortgage crises, it’s important to acknowledge that size matters. that, as Richter writes, “when the US catches a cold the world catches pneumonia.”