Different dilemmas in America and the eurozone

[mawilson 2,133]

Where is the European Central Bank? The attention of financial markets seems

to be riveted on the US Federal Reserve, which has by now cut interest rates by

300 basis points and is widely expected to cut by more soon. By contrast, the ECB

has not moved rates at all since the outbreak of the crisis in August last year and

speculation about whether it will cut any time soon has in effect ceased.

Moreover, the Fed has announced a series of innovations in the way it implements

monetary policy. Again, the ECB has been much less active, adjusting its armoury

of monetary policy instruments only marginally over the past few months.

Why this transatlantic difference? Is the ECB right to shun the activism of the Fed?

It is usually assumed that the ECB has been largely inactive because it places a

greater (absolute?) weight on combating inflation. However, the main difference

may be another one: the Fed faces a different problem from that of the ECB.

At first sight one might assume the Fed and the ECB were facing the same problem,

since housing prices have risen way beyond equilibrium levels on both sides of the

Atlantic.

But in the US the housing boom has been accompanied by a boom of mortgage

lending, with an increasing proportion in the subprime segment. In Europe mortgage

lending has grown more moderately, without much of a subprime element.

However, another, seldom mentioned, difference is even more important: in the US,

most mortgages are “no recourse”, which means that the lender (the bank) has no

recourse to the owner of the house. If the value of the house is lower than the

mortgage on it the borrower can just walk away and simply send the keys to the bank.

This is called “jingle mail”, and it is becoming more common throughout the US as house

prices are declining almost everywhere.

This “no recourse” nature of US mortgages means that a fall in house prices leads to

severe problems for the banking system because mortgages still make up almost half

of all lending by US banks. By some estimates the US banking system might lose all

of its capital if house prices were to fall by 20-25 per cent, as they must if they are to

go back to average pre-bubble valuations.

In Europe borrowers cannot just walk away from a mortgage, since they remain liable

for any difference between the value of the property and the amount of the loan.

In Europe a fall in house prices may make consumers poorer and less willing to spend,

but it does not threaten the stability of the banking system.

Another often overlooked transatlantic variance lies in a more subtle difference in the

mandate of the two central banks. The main difference is not so much the emphasis on

inflation, but the financial system. The website of the Federal Reserve proudly proclaims

that it “provides the nation with a safe, flexible and stable monetary and financial system”.

This is totally different from the eurozone, where the stability of the financial system

is not even mentioned among the secondary objectives of the ECB.

Given these two differences, it is no mystery why the Fed had little choice but to slash

interest rates, hoping that this would help the banking system, whereas the ECB has not

moved an inch. However, since rate cuts cannot stabilise house prices in the short run

it is also clear to the Fed that even cutting 300 basis points cannot stop the crisis from

spreading.

This is where the second difference comes in: the Fed had to overhaul rapidly the

instruments by which it provides liquidity to the banking sector. Until last week it

accepted only government paper as collateral. Now it is accepting a wide variety of

private sector assets, even the mortgage-backed securities the market shuns.

By contrast, the ECB has accepted private sector collateral for years. There was little

need to change instruments in response to financial market difficulties.

Monetary policy thus cannot be judged independently from the state of the financial

system. The ECB is facing a different problem and is thus right to concentrate on the

fight against inflation, whereas the Fed is driven by a deterioration in financial market

conditions that it ultimately will not be able to control alone.

As jingle mail spreads, the US government will have to intervene to save the US

banking system.

FT

[one...two...tree 2,762]

I'm not sure what they mean that the banks have no recourse since walking away from a mortgage, even handing the keys to the bank, doesn't absolve you of being financially liable for whatever you still owe after the house is auctioned off.

I just can't imagine that most homeowners would easily walk away from their mortgage knowing full well that not only are they giving up their home, but will be financial ruin for long time.

[tom&tata 2]

I'm not sure what they mean that the banks have no recourse since walking away from a mortgage, even handing the keys to the bank, doesn't absolve you of being financially liable for whatever you still owe after the house is auctioned off.

I read that in some states, banks cannot go after owners for the difference. But I do not think it is the same for all states.

[mawilson 2,133]

I'm not sure what they mean that the banks have no recourse since walking away from a mortgage, even handing the keys to the bank, doesn't absolve you of being financially liable for whatever you still owe after the house is auctioned off.

Apparently it does.

Let it sink - if you're upside-down in your house, just walk away!

Are California Mortgages "No Recourse"?

On Trulia.com, the Real Estate Search Engine, a reader asks if mortgage loans in

California are "No Recourse," meaning that once the borrower turns over the house,

he or she owes the lender nothing more.

Hemet Real Estate Broker Christopher Walker answers:

California does not provide recourse for "purchase money" loans with only rare exceptions.

Purchase money is when you are taking a loan at the time of purchase. If you have

re-financed your home, taken out a HELOC or other loan after the time of purchase,

your lender may have the ability to collect from you even after foreclosure. It is imperative

that you seek the advice of a competent real estate attorney immediately.

Excellent advice. If you didn't completely read and understand your mortgage when you

signed it, then make sure you talk to an attorney before you give your house back to the bank.

An attorney may be expensive, but you want to make sure that you cover all your bases.

[one...two...tree 2,762]

I'm not sure what they mean that the banks have no recourse since walking away from a mortgage, even handing the keys to the bank, doesn't absolve you of being financially liable for whatever you still owe after the house is auctioned off.

Apparently it does.

Let it sink - if you're upside-down in your house, just walk away!

Are California Mortgages "No Recourse"?

On Trulia.com, the Real Estate Search Engine, a reader asks if mortgage loans in

California are "No Recourse," meaning that once the borrower turns over the house,

he or she owes the lender nothing more.

Hemet Real Estate Broker Christopher Walker answers:

California does not provide recourse for "purchase money" loans with only rare exceptions.

Purchase money is when you are taking a loan at the time of purchase. If you have

re-financed your home, taken out a HELOC or other loan after the time of purchase,

your lender may have the ability to collect from you even after foreclosure. It is imperative

that you seek the advice of a competent real estate attorney immediately.

Excellent advice. If you didn't completely read and understand your mortgage when you

signed it, then make sure you talk to an attorney before you give your house back to the bank.

An attorney may be expensive, but you want to make sure that you cover all your bases.

Ah, ok. Interesting.

[Heracles 417]

I'm not sure what they mean that the banks have no recourse since walking away from a mortgage, even handing the keys to the bank, doesn't absolve you of being financially liable for whatever you still owe after the house is auctioned off.

Apparently it does.

Let it sink - if you're upside-down in your house, just walk away!

Are California Mortgages "No Recourse"?

I cannot see any lender providing someone who does this with a line of credit in the future.

[mawilson 2,133]

I'm not sure what they mean that the banks have no recourse since walking away from a mortgage, even handing the keys to the bank, doesn't absolve you of being financially liable for whatever you still owe after the house is auctioned off.

Apparently it does.

Let it sink - if you're upside-down in your house, just walk away!

Are California Mortgages "No Recourse"?

I cannot see any lender providing someone who does this with a line of credit in the future.

Why not?? The debt will be marked "settled" or "satisfied in full" on your credit report.

[Heracles 417]

Why not?? The debt will be marked "settled" or "satisfied in full" on your credit report.

If a large number of people did that in CA, the state economy would be finished. Not to mention that it would probably drag the country into a depression.

[mawilson 2,133]

Why not?? The debt will be marked "settled" or "satisfied in full" on your credit report.

If a large number of people did that in CA, the state economy would be finished. Not to mention that it would probably drag the country into a depression.

Wake up, dude. Why do you think the banking system is f###ed and we're headed for recession?

Why do you think the government is so worried about foreclosures? You think they care so much about the poor folks having to sell their homes?