Bits of the Financial Crisis

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I've been following the financial crisis closely over the last year, partly through the net but also party through the utterly excellent Financial Times, a UK paper that makes you smarter when you read it because its use of English is so good. FT is printed in Sydney, and available for $15 on order for the weekend edition.

There is this behaviour in the US that I didn't understand until today. If you think your house isn't worth the mortgage that you have on it then the thing to do in many states in the US is to mail your house keys to the bank and to tell them you are giving up.

In the lead up to the crash at the end of the house bubble people where refinancing their houses each time they went up in value and taking money OUT of the deal to spend on cars, boats and holiday homes.

If you tried this trick in NZ, which is possible but difficult, and then your house went down in value, and then you mailed the keys to the bank, then the bank would seize all your assets and flog them all at auction and then make you declare yourself bankrupt.

In many states in the US however this is NOT what happens. Something else is at play, a different set of laws which frankly create a different kind of capitalism.

In these states you can use a provision called "without recourse" to just get away with it without consequences. This frankly turn adults back into children, and takes the mort part out of mortgages.

"The willingness of homeowners to walk away from their "underwater" mortgages was increased by the designation of mortgages as "without recourse" in most states. In essence, non-recourse mortgages mean that defaulting homeowners are not personally responsible for paying any difference between the value of the home and the principal amount of the mortgage obligation, or that the process for enforcing this obligation is so burdensome and time-consuming that lenders simply do not bother. The homeowner's opportunity to walk away from a home that is no longer more valuable than the mortgage it carries exacerbates the effect of the cash-out refinancing. "

The whole article is here, and it talks about the many forces in play that caused Americans Banks and home owners to act like morons.

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In this youtube snippet an American senator talks intelligently and factually about what the American Government did, and had to do on a particular day of the crash.

It starts with an irate woman rant for about a minute. About 2 minutes in it gets worth the watch.