Ticking Time Bomb in Housing Market Ripples Through Financial Arena As Government Scrambles to Intervene
Jul 29th, 2008 by Jennifer Lynn
In the midst of ‘a tsunami of voluntary housing defaults’, Dr. Roubini fears a disastrous new trend “could have most of the U.S. banking system wiped out.” The damage of people who are now willingly walking away from their mortgages could be over one trillion dollars - when the entire balance of the U.S. banking system is only $1.3 trillion. The damage, some economists warn, could be extraordinary.
America’s House Price Time Bomb
BBC News
July 29, 2008
Faced with seemingly never-ending falls in the value of their properties, some American home-owners are taking radical action; they are choosing to walk away from homes and their mortgages.
In May 2006, at the height of the housing boom, Karen Trainer bought a $500,000 apartment in California - with money borrowed from her bank. By this year, Karen still owed $500,000 on her mortgage, but her apartment was worth $200,000 less. So she was deep in negative equity and, to make matters worse, the interest rate on her loan was about to increase.
“I thought ‘this is crazy’,” Ms Trainer says. “It just does not make financial sense… Is the bank going to pay for my retirement because I was a good girl and paid my mortgage?”
As a successful professional, Karen could comfortably have managed the higher mortgage payments her bank demanded. Instead, she decided to stop her mortgage payments altogether and let her bank repossess her apartment.
Previously, folks were losing their homes because they couldn’t afford to pay. Now an increasing number of financially secure buyers on upside-down mortgages are turning in their keys, abandoning their residence and voluntarily defaulting.
As a sign of the changing times, some 60% of borrowers do not even bother to contact their banks to attempt a renegotiation of their loan, Mr Moran explains. “They stop paying and they stop talking,” he says. “They just plain walk away.”
Which leaves U.S. policymakers now scrambling for a multi-billion dollar initiative to dissuade this disturbing new trend, aiming to make simply deserting a mortgage appear much less attractive.
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