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The simplest approach would be ... The nationalised mortgage firms that guarantee the bonds ... should be forced to raise their capital buffers and increase the

by n00b101 10y ago

The simplest approach would be ... The nationalised mortgage firms that guarantee the bonds ... should be forced to raise their capital buffers and increase their fees Raising capital requirements seems like a minor tweak, a band-aid cure. I would argue that the systemic risk could better be managed by changing the fundamental economics of the financial instrument in question: the classic residential mortgage. I'm surprised the Economist didn't mention the short-selling idea which Richard Schiller has been pitching [1] since the Financial Crisis. The basic idea is to make it possible to accurately short-sell residential real estate. This would allow homeowners and lenders to be partially protected against declines in real estate prices (the risk being transferred to third-party speculators and investors). Just like a lender requires homeowners to buy property insurance, it could also require homeowners to enter into financial protection against declines in property value. This would protect the homeowner against negative equity (where the property value falls significantly below the borrowed principal). It was because of negative equity that so many homeowners defaulted on their mortgages during the Financial Crisis, leading to a vicious cycle of foreclosures, sales and declining property values. [1] http://www.nytimes.com/2015/07/26/upshot/the-housing-market-still-isnt-rational.html http://www.nytimes.com/2015/07/26/upshot/the-housing-market-...

lintiness 10y ago
the "protection" against negative equity is the down payment. negative equity only matters if incomes take a hit and sales are forced.
- n00b101 10y ago
  The down payment is equity, it's not really the same as protection. Although the higher your down payment, the lower your leverage risk. Let's say you put $100k down to purchase a property for $500k (i.e. you borrow $400k). If the property value falls to $400k (20% drop), your entire equity is wiped out. If you sell the property, the proceeds go to the bank to pay back the loan, and you have lost 100% of your the original $100k down payment ... This is due to leverage. If the property value falls below $400k, then you are in a negative equity situation ... Get deep enough into negative equity and it becomes rational for some people to just default and "walk away."
  - lintiness 10y ago
    very few non-recourse loans in the housing market these days. a 20% decline in housing prices, and there's limited - zero systemic risk (ie the banks via linked derivatives that the author's so worried about); only the owner loses.

by n00b101 10y ago

lintiness 10y ago

the "protection" against negative equity is the down payment. negative equity only matters if incomes take a hit and sales are forced.

n00b101 10y ago
The down payment is equity, it's not really the same as protection. Although the higher your down payment, the lower your leverage risk. Let's say you put $100k down to purchase a property for $500k (i.e. you borrow $400k). If the property value falls to $400k (20% drop), your entire equity is wiped out. If you sell the property, the proceeds go to the bank to pay back the loan, and you have lost 100% of your the original $100k down payment ... This is due to leverage. If the property value falls below $400k, then you are in a negative equity situation ... Get deep enough into negative equity and it becomes rational for some people to just default and "walk away."
- lintiness 10y ago
  very few non-recourse loans in the housing market these days. a 20% decline in housing prices, and there's limited - zero systemic risk (ie the banks via linked derivatives that the author's so worried about); only the owner loses.