We all know the problems the sub prime mortgage crisis caused in the USA. In fact it had repercussions around the world sparking the Global Financial Crisis.
These were non-recourse loans lent to people who could never afford to repay them and the stack of cards had to eventually fall down.
Now there are suggestions that the US may be about to run into a prime mortgage crisis even more devastating than the sub-prime one.
More than a third of all prime U.S. mortgage owners are currently underwater — a number expected to increase to 50 percent soon.
BNet.com reported that according to Fitch Ratings, currently more than 12% of all prime borrowers are seriously delinquent (60+ days) on their mortgages — an all time high.
The report says home equity — and not inability to pay — is the driving factor in mortgage defaults.
“ [The] increase in prime delinquencies corresponded to two developments in mid-2008. First, housing prices had declined to a point where a significant portion of prime borrowers were becoming underwater on their mortgages. Second, the unemployment rate began to increase significantly. While both occurrences are highly correlated to the increase in prime delinquencies, Fitch views the eroding equity as the more influential factor.”
This means many people are taking the economically rational and morally problematic action of going into default if they owe more than the house is worth, even when they can pay the mortgage.
Unfortunately this has a significant impact on other homeowners. As more people walk away from their homes it increases the supply of houses for sale and decreases the price, thus putting more owners into negative equity.
Another tidal wave of trouble?
There is a lot of concern this will turn into another contagion for banks still carrying an as-yet-undetermined amount of debt from the sub-prime debacle.
If this does occur, the ripples (waves) will be felt in financial markets around the world.
In the meantime, if you’re thinking of investing in US property – don’t. I’ve explained my thoughts in previous blogs that you can read here:
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