REVS Posted February 1, 2009 Share Posted February 1, 2009 Just had lunch with some friends, one of whom says the home mortgage laws are very different in the US compared with Australia. I'd like some confirmation of that, please. My friend was saying that in the US, if you default on your home mortgage, no matter how much you have owing, you lose the house but you can just walk away without owing any more money to the bank. The bank owns the house, you don't owe the bank anything, and the bank has to recoup as much money from the sale of the house as it can manage. Is that right? Here in Australia, if you default on your house mortgage you lose the house, but you still owe the bank the total amount of the mortgage. The bank sells the house, and that amount goes towards paying off some of your mortgage, but if there is still money owing, you owe the bank that amount of money still owing. So, if you still owe $500K on the house, but it's only worth $400K on the current market, you still owe the bank $100K. If you can't pay up, you end up in the bankruptcy court here, losing all your assets, maybe with the exception of what the court thinks is necessary for you to earn a living (eg, sometimes people get to keep their van or their tradesmen's tools). But the essence of the law here is that a mortgage is an amount of money you owe someone. When you're made bankrupt the debt is wiped, but all your assets are seized and distributed to the people you owe money to, and your chances of getting new finance later on aren't that terrific, either. At the lunch I was at today, my friend claimed that in the US taking out a home mortgage loan isn't such an onerous personal financial commitment as it is here in Australia. If anyone who could enlighten me on this matter it would be greatly appreciated. 0 Quote Link to comment Share on other sites More sharing options...
Sergei Posted February 1, 2009 Share Posted February 1, 2009 Apparently it is so. But hey, surely creditors considered the risks of house prices falling. Like, no one would value THIS to be worth $103,000: Oops. 0 Quote Link to comment Share on other sites More sharing options...
gunnergoz Posted February 1, 2009 Share Posted February 1, 2009 This mortgage mess certainly has fingers pointing in all directions, doesn't it? Like many nightmares, it begins with the best intentions - helping people buy homes, someone makes a profit. It ends when wholesale greed, thoughtless deregulation, government incompetence and consumer irresponsibility all combined into one heady brew that the whole nation now has a vicious hangover from. Hopefully it will not poison us into oblivion before we can recover. One interesting aside - when I was in Ukraine in the Summer of 2007, a friend who owns banks in both Russia and Ukraine asked me if I was concerned about the looming US housing finance sector crash. I did my best Alfred E. Neumann impression - "What, me worry?" I mumbled something about the strength of US economy because frankly, I hadn't a clue then of what he was talking about. But sure as heck, this guy and others overseas could see it coming. If ex-communists could see this coming over 18 months ago, why didn't our own leaders and bankers see it then too? Could it be because our guys had either (A) their heads up their own rectii, or ( their hands in the till and not on the tiller? You tell me. 0 Quote Link to comment Share on other sites More sharing options...
costard Posted February 1, 2009 Share Posted February 1, 2009 C) - both. The derivatives market was essentially corrupt - bad loans knowingly made and sold off as low risk, earn your four percent here. Unfortunately, as with a lot of these fashions in business, those companies that didn't invest in the derivatives were only making something like the real rate of growth as return; it turns out that when you strip out the derivatives and their -ahem- earnings, the world economy was only growing at about 1 to 2 percent per annum over the last decade. These companies came under pressure from the market, which would sell the shares and devalue the company. The directors would be fired by angry (and not terribly bright) shareholders, and the company would start to invest in the derivatives - where else was it possible to get a four percent return for doing nothing? At the end of the cycle - everyone is left holding trash and the corporations are managed by the intellectually incapable: those that believed the fairy tale would last forever. This mechanism for sinking an entire economy is a fairly important one to understand - the same sort of process takes place when legislation is passed that allows for the deterioration of working conditions: a company that doesn't pass on the cost savings is necessarily at a disadvantage when competing against a company that does. The market drives the behaviour: short term profit is the only recognisable measure of a corporation's success, it says. Too bad that this is fundamentally in opposition to the philosophy behind the creation of corporations in the first place, and it's just tough that there is no such thing as a nation that can afford to plan only in the short term. It is my belief that the sophist interpretations of the law that allowed this to take place started at the top, with the leadership - with intellectually dishonest arguments concerning torture, motivations and justifications for waging war, etc. It is hardly surprising, really, as the same people making the money out of those interpretations were making money out of going to war. Len Deighton does a nice little story of the importance of a corrupt legal system for the furthering of Nazi Germany in "Winter". And if you think we weren't headed the same way, I'd invite you to go and do some reading and remembering. We dodged it by about eighteen months, I reckon. Thank god for the American artist: writers mostly. 0 Quote Link to comment Share on other sites More sharing options...
Michael Emrys Posted February 1, 2009 Share Posted February 1, 2009 To put it another way, the "unseen hand" is not always a friendly or even rational one. Having been randomly whacked by it a few times, I could have told them that. Michael 0 Quote Link to comment Share on other sites More sharing options...
REVS Posted February 1, 2009 Author Share Posted February 1, 2009 Thanks for your opinions and general comments on the state of the financial universe, but what's the answer to my specific query? Yep or nae? 0 Quote Link to comment Share on other sites More sharing options...
Sergei Posted February 1, 2009 Share Posted February 1, 2009 Did you look at the BBC link I gave? Though banks can repossess and sell the homes of borrowers who stop paying their mortgages, under a legal quirk originating in the Great Depression of the 1930s, banks cannot easily pursue borrowers for any balance outstanding on the main mortgage on their homes. 0 Quote Link to comment Share on other sites More sharing options...
costard Posted February 1, 2009 Share Posted February 1, 2009 REVS - the law was only changed quite recently here in Australia: in the late nineties I think. It was a deliberate sell-off of the populace into debt slavery that went mostly un-noticed by the press. I seem to remember a similar set of legal changes mooted in the US, but I'm not sure if it got up. It could be that the legislators there recognised that it removed the onus on the lender to quantify the risk before lending, instead placing the responsibility on the borrower. The lenders in the States decided to get around this by deliberately understating the risk - "as safe as houses." while making quarter million dollar NINJA loans- No Income, No Job (or) Assets. To some extent they were aided and abetted by the legislation introduced by the Democrats which had as its raison d'etre the provision of housing to low income citizens; for the most part it was because everyone in the lending industry was being paid by commission and no-one was prepared to point out that the outcome was likely to be exactly what came to pass (not while they were raking in the dough. Hell, they were printing it - watering the currency by way of lending against hugely overpriced assets.). Anyone with brains enough not to **** in their boot before putting it on had got out of the market before July 2007 and converted what they had to cash, but as the guy in Davos said, the cashed-up aren't buying cheap assets, they're running for the hills and keeping their cash. 0 Quote Link to comment Share on other sites More sharing options...
REVS Posted February 1, 2009 Author Share Posted February 1, 2009 Thanks for all that everyone, (and Sergei, I did miss your link originally, sorry about that!). 0 Quote Link to comment Share on other sites More sharing options...
Lars Posted February 1, 2009 Share Posted February 1, 2009 Thanks for your opinions and general comments on the state of the financial universe, but what's the answer to my specific query? Yep or nae? You still have to declare bankruptcy in order to wipe the slate clean, just like everywhere else. 0 Quote Link to comment Share on other sites More sharing options...
Affentitten Posted February 1, 2009 Share Posted February 1, 2009 One interesting aside - when I was in Ukraine in the Summer of 2007, a friend who owns banks in both Russia and Ukraine asked me if I was concerned about the looming US housing finance sector crash. I did my best Alfred E. Neumann impression - "What, me worry?" I mumbled something about the strength of US economy because frankly, I hadn't a clue then of what he was talking about. But sure as heck, this guy and others overseas could see it coming. If ex-communists could see this coming over 18 months ago, why didn't our own leaders and bankers see it then too? Could it be because our guys had either (A) their heads up their own rectii, or ( their hands in the till and not on the tiller? You tell me. In September 2008 an edition of the Australian 4 Corners show was aired. It discussed the potential collapse of the American mortgage market, the ludicrous mathematics of the sub-prime loan re-selling and the way that this would affect the world economy. It was actually an episode that was made and first broadcast in mid 2007. And it had the whole thing down to the letter. Many times during the show I thought “Oh, this must be a recent update.” But no. It was just that the writing was on the wall that far ahead. The kicker was a guy from Bear Stearns (or possibly ML) who was dismissing the doomsayers as Chicken Littles who were perennially crying wolf. 0 Quote Link to comment Share on other sites More sharing options...
Stalins Organ Posted February 1, 2009 Share Posted February 1, 2009 the law was only changed quite recently here in Australia: in the late nineties I think. It was a deliberate sell-off of the populace into debt slavery that went mostly un-noticed by the press. It's been the case here in New Zealand since time immemorial even for loans from Govt agencies such as my parents got in the early 60's - you contract for the loan and you are liable for the entire amount. It's no more debt slavery than any other hire-purchase contract with the same arrrangement is - and it makes a great deal more sense. 0 Quote Link to comment Share on other sites More sharing options...
Affentitten Posted February 1, 2009 Share Posted February 1, 2009 even for loans from Govt agencies such as my parents got in the early 60's Speak plainly. It's called the dole. 0 Quote Link to comment Share on other sites More sharing options...
costard Posted February 1, 2009 Share Posted February 1, 2009 It's no more debt slavery than any other hire-purchase contract with the same arrrangement is - and it makes a great deal more sense. The problem I have with it is the changeable nature of the contract - one entered into with the understanding that you are not liable for the entire value of the contract (i.e including any and all interest chargeable, that too varying) if you go bankrupt becomes one where you are. 0 Quote Link to comment Share on other sites More sharing options...
Stalins Organ Posted February 1, 2009 Share Posted February 1, 2009 Why's that? I'm not suggeting that the terms of contracts be changed - just that future ones get to be a bit more rational. Or that the law is changed to allow them to be. 0 Quote Link to comment Share on other sites More sharing options...
costard Posted February 2, 2009 Share Posted February 2, 2009 Why's that? I'm not suggeting that the terms of contracts be changed - just that future ones get to be a bit more rational. Or that the law is changed to allow them to be. I agree that it makes sense - borrowers need to understand that they shouldn't just walk away from their debt obligation. I just don't see that the legislation should be different for business borrowers - that a limited liability company should be less obliged than a taxpaying citizen. After all - a citizen votes, a company doesn't. 0 Quote Link to comment Share on other sites More sharing options...
Stalins Organ Posted February 2, 2009 Share Posted February 2, 2009 Over here the directors of a company can now often be held liable for any outstanding debts when a company fails.......it's beginning to make them a little less blase about carrying on trading when they shouldn't! However I don't see how companies are that much different - an individual can declaer bankruptcy as has been pointed out. 0 Quote Link to comment Share on other sites More sharing options...
costard Posted February 2, 2009 Share Posted February 2, 2009 Yes, they can declare bankruptcy - but they are still held liable for the defaulted contract. Their future earnings will be garnished to pay this debt. There is no "walk away, no more to pay". I know this seems contrary to the spirit of the idea of bankruptcy, and truly seems to be idiotic legislation, but it is what stands in this country. My brother the lawyer was certain I'd cocked this up when I tried to explain, so he went and checked (he gets cranky when laypeople try to tell him what the law is). Truly amazing stuff in Oz. 0 Quote Link to comment Share on other sites More sharing options...
hoolaman Posted February 2, 2009 Share Posted February 2, 2009 It's my understanding that some US states are "recourse" and some are "non-recourse" being that the lender cannot persue you for the money owed after the house is repossed. I think they still CAN come after you for the balance, it is just hard to do it, so often these people can just walk away. There may also be a tax bill from the "gain" of being forgiven a large amount of the debt. 0 Quote Link to comment Share on other sites More sharing options...
Stalins Organ Posted February 2, 2009 Share Posted February 2, 2009 Yes, they can declare bankruptcy - but they are still held liable for the defaulted contract. Here the official assignee (who administers bankrupticies) can garner your income for 3 years, but is legally obliged to leave you a reasonable income and some assets - IIRC a family home cannot be seized. 0 Quote Link to comment Share on other sites More sharing options...
costard Posted February 2, 2009 Share Posted February 2, 2009 Heh - it gets better. In Australia, we're talking about defaulting on the family home loan. The only thing preventing the banks from coming in and taking over the whole shebang is a very real understanding of the consequences - where the law as practiced in the courts has a very limited application. Too, what point in becoming the ruler of the midden? Better by far to keep milking gently. It's kinda nice - the law is written in such a way as to force the recognition of unwritten law... 0 Quote Link to comment Share on other sites More sharing options...
Stalins Organ Posted February 3, 2009 Share Posted February 3, 2009 Just for information, the Assets FAQ for the NZ Insolvency & Trustee Service is here 0 Quote Link to comment Share on other sites More sharing options...
Kanonier Reichmann Posted February 3, 2009 Share Posted February 3, 2009 REVS - the law was only changed quite recently here in Australia: in the late nineties I think. It was a deliberate sell-off of the populace into debt slavery that went mostly un-noticed by the press. That's news to me. I've been involved in the finance industry for the past 20 years or so here in Oz and I don't believe that's the case. The mortgagee (the bank) could always recoup any shortfall from the mortgagor (the owner) should there be one when selling the property as mortagagee in possesion due to a loan default. That's the way it's been for yonks. From what I gather, the American home loan system reverses the situation (from our standpoint) with the bank being the actual legal owner of the property (mortgagor) and the loan recipients and occupiers, the mortgagees. I guess that's why it's easier for the borrowers and home occupiers to simply walk off the property and wash their hands of the matter. The reality here of course, is that banks only go down the mortgagee in possesion path as a last resort if literally every other possibility has first been exhausted as they generally try to avoid the bad press they inevitably receive for it and let's face it, their general standing in the community at the moment and the past few years has not been exactly stellar. Regards Jim R. 0 Quote Link to comment Share on other sites More sharing options...
Recommended Posts
Join the conversation
You can post now and register later. If you have an account, sign in now to post with your account.