CAMBRIDGE – The bursting of America’s housing bubble in the summer of 2006 triggered the global financial crisis and recession. The sharp fall in house prices that followed caused a dramatic downturn in household wealth, leading to lower consumer spending and an overall fall in GDP. By now, wealth in the form of owner-occupied housing is down about 30%, equivalent to a loss of more than $6 trillion of household wealth.
The fall in house prices also led to a sharp rise in mortgage defaults and foreclosures, which has increased the supply of homes on the market and caused house prices to fall further. As a result, one-third of all American homeowners with mortgages are already “underwater” – their mortgage debt exceeds the value of the house. For one-sixth of these homes, the debt is 20% higher than the price of the house.
In addition, high loan-to-value ratios in the US interact with household financial problems to increase the number of defaults and foreclosures. More specifically, the rising unemployment rate, along with the large number of employees on involuntary part-time work, has increased the number of people who cannot afford their monthly mortgage payments.
Unlike virtually every other country, US residential mortgages are effectively “no recourse” loans. If a homeowner stops making mortgage payments, the creditor can take the property but cannot take other assets or a fraction of wages. Even in those states where creditors have the legal authority to take other assets or wage income, the personal bankruptcy laws are so restrictive that creditors don’t bother to try.