Foreclosure and bankruptcy

A few weeks ago, I noticed this piece saying that the mortgage problem in the UK might be worse than that in the US. The reason given (also applicable to Australia) is that the UK boom or bubble in house prices has been much more dramatic than in the US. One statistic quoted in the piece was that there were 14 000 foreclosures in the first half of 2007 a statistic that, as the author notes, makes grim reading. It’s striking then, to read this piece in the NYTimes, predicting 2 million foreclosures in the US this year (since most mortgages are taken out by couples, many with children, the number of people affected is probably more like 4 million). Even allowing for the larger population in the US, this is a huge difference. It now appears that foreclosure has taken over from bankruptcy as the primary mode of financial catastrophe. (Bankruptcy rates plummeted after the “reform” of 2005, but seem certain to rebound in coming months).

2 thoughts on “Foreclosure and bankruptcy

  1. Bankruptcy in the US became an extremely viable option for many years, especially for those who knew the law, and it did not have the stigma attached to it that it does in Australia. States had things like ‘homesteading clauses’ where you could declare bankruptcy but not lose your house (even though the bank loan was the major default item). The reforms were meant to address at least some of these abuses.

    2 million foreclosures is frightening indeed. That is perhaps 1% of households, meaning on average several foreclosures in every suburb of the entire nation. I can hear the rustle of the vultures’ wings from here – “make a fortune out of foreclosures” spam still hits my inbox everyday.

  2. This sounds pretty serious. If the statistics in America are comparable to here (confirmation or otherwise welcomed here — I’m not in finance, and dont know where to ferret this out, other than Googling), then this would represent a default on about 5% of U.S. mortgages (I’m assuming about 1/3 of U.S. homes are under mortgage, as in Oz). With some associated debt defaults from firms caught up in the bad debt cycle, would this test the capital adequacy of some U.S banks?

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