Amend Jingle Mail Laws

As U.S. house values fall below mortgage values, homeowners mail their house keys (jingle, jingle) back to the bank. The banks take a hit when selling the foreclosed property since i) they don’t recoup all the funds lent out and ii) foreclosure sales put further downward pressures on house prices (in turn pushing more houses into positions of negative equity).

In Europe, there is little walking away from houses with negative equity because Europeans are legally liable for negative differences between their house value and mortgage amount (as noted in a March 25 Financial Times article by Daniel Gros). That means there are far fewer downward pressures on house prices overseas and considerably less risk of destabilizing the financial system (the European Central Bank has not had to cut rates once yet).

It would thus appear a simple legislative amendment could greatly help stabilize the U.S housing market and financial system. If banks have recourse to recover funds lost on sales of negative-equity houses, mail bags dumped on the bank manager’s desk would stop sounding like Jingle Bells. And this amendment would cost far less than the policy measures, valued in the hundreds of billions of dollars, currently proposed as solutions to the housing and financial crisis.

Comments

[dkhkch:]

Man, what a dopey article. I say dopey because of the comment, "In Europe, there is little walking away from houses with negative equity because Europeans are legally liable for negative differences between their house value and mortgage amount."

In America, homeowners are legally liable too. A homeowner signs a legal, binding, ENFORCEABLE CONTRACT, and if the moneowner walks away from the house (or mails the keys), a bank can, AND WILL, take the homeowner to court to get a judgement for the amount owed. If judgement is granted the bank, the homeowner's wages can be garnished to satisfy the judgement.

You make it sound like the laws and courts systems in Europe take contractual law more seriously then in the U.S., well thats bull. Homeowners who default on their mortgages will be taken to court. A bank's loss on an $8000 credit card will probably be written off, but a banks loss of $75000 on a mortgage will cause the bank to seek legal counsel to try and recover what they can.

There is no "FREE" lunch, not in Europe, and definitely not in America, just try to walk away from a mortagage with a large balance due and see what happens...

2008 Mar 31 06:10 PM

[Paul Price:]

Jim Cramer was actually encouraging under-water homeowners to walk away. He said it just 'made sense' for those folks. No mention of what they'd be doing to their credit ratings.

What an a**hole.

2008 Mar 31 06:14 PM

[Roger Cuddy:]

Look up the laws in states such as washington. There are numerous states where foreclosure is non-recourse and the lender cannot go after the borrower for anything beyond what the lender gets for the house itself. There is an industry springing up in these states to guide people through the process of walking out on the mortgage.

2008 Mar 31 07:08 PM

[Jason Rines...:]

Part of the solution is that the U.S. economy as a whole sucks. Many responsible middle class homeowners are in jeapordy as well now. Layoffs, sustained for years food and energy inflation and little availability to credit. If Treasury wants a fix, try job creation into energy now and have U.S. government de-regulate nuke plants and ALL drilling EVERYWHERE. But no, let's have this worthless government keep talking about global warming, light bulbs, toilets, the seals and homos, yeah that's the way out of financial catastrophe.

2008 Mar 31 07:32 PM

[HARM:]

I hope the author is kidding. If a strict no-recourse policy were implemented in the U.S. today, it would trigger a massive spike in personal bankruptcies that would dwarf anything seen today. It would probably also send the housing market into a decades-long Japan-style bear market.

One of the relative STRENGTHS of the U.S. housing market is, insolvent borrowers *can* walk away from houses they cannot afford. This allows for a rapid mark-to-market process, where the abandoned inventory is returned to open market and a new clearing price can be quickly discovered. The defaulting borrower can also recover financially and eventually go back being a productive taxpayer and consumer vs. being shackled to unrepayable debt forever.

The drop in prices may be painful for some, but at least it's happening fairly quickly, allowing the housing market to bottem and recover in a fairly short time frame. Compare that to Japan's 16+ years of "zombie" loans that languished on bank ledgers indefinitely, and and entire "lost" decade.

Does the author really want a de-facto debtor's prison for insolvent, underwater borrowers, or is he just pulling our legs here?

2008 Mar 31 07:56 PM

[mangy cat:]

am unaware of the actual legal technicalities, which seem to be on a state by state basis
but an act closing the option for existing contracts
seems dubya even more of a banana republican than one could ever have guessed

2008 Mar 31 08:37 PM

[jimbomo:]

California has a "non-recourse" law for the purchase mortgage if the home is the primary residence. However, I think this is the exception rather than the rule. I practiced law in Texas and we used to make jokes about "non-recourse" loans because we could not believe any banker loan money without having the right to sue the borrower for the balance due after the collateral was sold.
EOM

2008 Apr 01 01:10 AM

[Mbuna:]

If this idea were part of a broader more comprehensive view that was inclusive of BOTH sides of the transaction then it might be a good idea. That it was presented singly however makes me suspect. "Free market" hypocrites and their sense of entitlement to greed are rampant. How about some balancing "quid pro quo" to this idea of yours Mr. MacDonald? Take for example the ballot measure in Colorado that will make corporation executives criminally liable for laws that the corporation they manage break. You can take every major mortgage company that wrote all these loans and find enough to prosecute management in every single of one them, guaranteed, if such laws were enacted. Don't you think that would help solve the problem?

2008 Apr 01 02:09 AM

[HARM:]

Excellent point, Mbuna. Why is it that every mortgage "reform" proposal is always so one-sided in targeting only the *borrower's* supposed lack of ethics? What happened to sane lending standards over the past 8 years? Who was there to police mortgage brokers that just "filled in" income/assets columns on loan applications? Who raised a red flag when appraisers were being routinely pressured by banks to "hit the number" or lose future business?

Where is the concern over lack of ethics and accountability for banksters?

2008 Apr 01 03:06 PM