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Why a US-Style Housing Bust & Mortgage Crisis Can Happen in Canada, Australia, and Other Bubble Markets

Why a US-Style Housing Bust & Mortgage Crisis Can Happen in Canada, Australia, and Other Bubble Markets

Despite persistent and false memes to the contrary.

When a housing downturn gets big enough, there will be a mortgage crisis, and it will hit banks, shadow banks, and mortgage insurers no matter what the mortgage laws are: that’s what the US mortgage crisis has demonstrated. Yet many industry organs and media outlets in Canada, Australia, and other places with acute housing bubbles are trying to hide behind a false meme about US mortgage laws. What happened there cannot happen here, they say.

So we’re going to debunk this meme.

“Jingle mail” was a phenomenon during the US mortgage crisis when homeowners and small-scale investors, unable or unwilling to make mortgage payments, abandoned the place, figuratively mailing the keys to the bank. This phenomenon took various forms, such as homeowners who stopped making payments but continued to live in the home, sometimes for years, because the foreclosure process was hopelessly bogged down.

All this became a problem only after home prices dropped substantially below the amount people owed on their mortgages, which made it impossible for them to sell the home and pay off the mortgage.

This is rarely a problem in a rising housing market. Default rates are minuscule because it’s easy to sell the home and pay off the mortgage. And during these times, lenders hide behind these low default rates. But these default rates are only low because home prices are rising.

But when home prices drop sharply, after years of low-down-payment requirements and thus little equity cushion, suddenly soaring defaults are a problem that “came out of nowhere.”

…click on the above link to read the rest of the article…

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