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Peter P
2009 Oct 22, 9:26am
Recourse loans may stop or slow strategic delinquency but I suspect a real solution will involve higher down payment.
Private contracts like mortgages, recourse or not, do not create moral hazards by themselves because any details should have been priced into the price or interest rate. Subsidized mortgages or bailouts, on the other hand, may pose problems.
Thanks Peter P.
Anybody else? Anybody? (echoes)
By a coincidence Prof Michael Hudson of U. Missouri is touring Australia right now and I saw him in Syd last night -- he mentioned that non-recourse loans were created in the US as a response to the Great Depression and bubbles bursting, so that banks could not clean somebody out who was really down on their uppers and hound them into the ground forever on a balance owing when they were completely bankrupt. We are seeing similar conditions post-housing boom, probably more so in the US than Aus at this stage. I put the question to Michael and Prof Steve Keen of UWS afterwards at dinner and Steve Keen suggested anything that hurts the banks and causes more prudential lending is a good thing.
Michael Hudson is currently Distinguished Research Professor of Economics at U. Missouri and was Chief Economic Adviser to Dennis Kuchinich in the recent presidential campaign.
Sean: we have student loans to do that dirty work now. Can’t be discharged in bankruptcy and you will be destroyed forever if you can’t pay it back.
lol, good point. if the banks lose out in one area, they find a way to make it up somewhere else. this was the thrust of prof hudson's talk also, the increasing concentration of wealth in fewer hands, bank usury, etc. I will be putting up the talk on the web sometime this week, btw, will put a link up when it's done...
justme
2009 Oct 24, 1:08am
Different Sean :-),
>>A major political party here is proposing to introduce non-recourse loans in the belief that it will make banks more prudent about lending money,
We're talking Australia here, right? Well, in California, non-recourse did not make the banks prudent, but it sure as heck made the homebuyers extremely reckless, and perhaps even more willing to engage in fraud.
There are two sides to both the recourse case and the non-recourse case. I'm unsure which side is more significant, but I'm fairly certain that Wall St securitized and sold a whole lot of loans that were non-recourse, and the MBS buyers did not pay enough attention to the fine print. That would make non-recourse have a worse effect overall in California.
Hi all,
I'm seeking some advice on the merits or otherwise of non-recourse mortgage legislation in various states -- obviously CA is a big non-recourse state with a huge economy and still had a housing bubble. I believe about 20 US states have non-recourse loans.
A major political party here is proposing to introduce non-recourse loans in the belief that it will make banks more prudent about lending money, and I guess reduce consumers suffering if there is a major price crash with forced sales. What are the pros and cons of going no-recourse for a state? Is there 'moral hazard' for borrowers who will be tempted to borrow too much if they believe they can 'walk away' from a loan they cannot service? Is this countered by prudence from the banks in handing out these loans? Are there cross-state issues between recourse and non-recourse states? Do defaulters end up with trashed credit records anyhow? Is there an improvement for the consumer in the form of less debt or less stress? Any legislative issues in implementing such a system? how do the banks like it? etc.
In short, what are the unanticipated consequences and moral hazards, and how do they pan out in reality?
Thanks.
DS
#housing