Negative Equity Loans? What Could Possibly Go Wrong?


Ricochet member Mark Simon sent this along, from the Irish Independent. The newest thing to hit the zombiefied, hobbled home finance business? Negative Equity Loans, which allow borrowers in trouble – those who are upside-down on their houses, where what they owe is larger than what the house is worth – to move into a new house, bringing the negative equity they still owe to the new property:

It could help revitalise the listless property market and provide a lifeline for homeowners trapped in a location where they no longer want to live.

But it would effectively mean that homeowners are moving straight into negative equity once again, albeit in a new location.

The introduction of negative equity mortgages in the UK in the last year generated huge criticism amid fears that those taking them out will just end up deeper in debt.

UK building society Nationwide was attacked after introducing a negative equity mortgage that allows consumers to borrow up to 125pc of the value of their new home.

Coming soon to a mortgage lender near you. Followed, eighteen months later, by another round of foreclosures and an even sicker housing market. The way out of this mess isn’t coming up with more home finance products. It’s by letting the foreclosures come now, letting the market work out the bad stuff.

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  1. Profile Photo Thatcher

    Fannie Mae and Freddie Mac please call your office!

    • #1
  2. Profile Photo Inactive

    Actually this 125% “product” was offered for a while in the pre-meltdown days. But the products offered were not really the problem. The detachment of interest rates from risk was the main problem in sub-prime lending. When sub-prime products first hit the market the interest rates were naturally very high (12% -18% in an 8% environment). On the consumer side this limited the appeal of these loans and helped insure that they were a tool used with caution. There was also a built in incentive for the high risk borrower to get the financial house in order – two years of good performance would allow for a refinance with a substantial interest rate reduction. On the investor side the high interest rate assures that there is a higher tolerance for default – the instrument is profitable even with a higher foreclosure rate. The improper grading of mortgage backed securities was the main breakdown. Another is that the foreclosing institutions insist on selling their foreclosed properties at fire sale prices. Because quicker is better, right? This is the force which drives the market values lower – devaluing the rest of their collateral and putting everyone upside down. – Go figure.

    • #2
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