Daniel Thomas, writing in The Financial Times, reports on the latest in negative equity financing here. There are conditions, described in the quotes from the article below. Also, the mortgagee must put up at least 5% of the purchase price. This means that a buyer can pay 130% or more above current market under this scheme.
"Nationwide (http://www.nationwide.co.uk/default.htm) has begun offering its customers suffering from negative equity a mortgage that provides up to 125 per cent of a property’s value, should they want to move."
"The deal is designed to help people who need to move house but who would otherwise be stuck by the potential loss on their property. It is thought that there are other lenders looking at similar launches."
"The mortgage is available only to borrowers who can prove they can afford the payments, but will nonetheless be a surprise – given the more cautious approach to lending by many banks and building societies, as well as government intentions to ensure greater prudence across the financial sector."
My question is: What does this accomplish? Three possibilities come to mind in addition to the transfer of an underwater condition from one house to another (given in the article):
1. Economic stimulus, allowing someone to move and take equity out of a new house above the actual purchase price and market value. This assumes the house was sold at market value.
2. Enabling houses to be sold above current market value to artificially elevate house prices.
3. There is a dislocation in distribution of employment opportunities and this is a way of getting people to move to where they are needed.
I can not see merit in any of these objectives, and I simply do not believe the third situation is likely to exist. Do any readers have better insight than I do?