A mortgage, by definition, is a loan secured on “real” property.
Therefore the lender is securing the loan against the property in question. If the borrower cannot pay their debt then the lender can take ownership of the property. That’s how mortgages work; the property is the collateral and the lender cannot pursue the borrower for losses greater than the value of that collateral. That’s how it works in the USA (that’s how the lender can “hand back the keys”.
What we have is personal loans with property offered as part collateral but the bank shoulders no moral hazard in the case of asset depreciation. This encouraged banks to make loans against property when they knew it would be in negative equity within the term of the loan as they knew they could pursue the borrower beyond the value of the property. In other works they were (in theory) in a no lose situation.
This lack of moral hazard is one of the main reasons that our banks behaved in such a stupid fashion; the risk was not visible up-front.
So my question; should the borrowers liability on a mortgage be limited to the market value of the property? In other words should they be mortgages?
Therefore the lender is securing the loan against the property in question. If the borrower cannot pay their debt then the lender can take ownership of the property. That’s how mortgages work; the property is the collateral and the lender cannot pursue the borrower for losses greater than the value of that collateral. That’s how it works in the USA (that’s how the lender can “hand back the keys”.
What we have is personal loans with property offered as part collateral but the bank shoulders no moral hazard in the case of asset depreciation. This encouraged banks to make loans against property when they knew it would be in negative equity within the term of the loan as they knew they could pursue the borrower beyond the value of the property. In other works they were (in theory) in a no lose situation.
This lack of moral hazard is one of the main reasons that our banks behaved in such a stupid fashion; the risk was not visible up-front.
So my question; should the borrowers liability on a mortgage be limited to the market value of the property? In other words should they be mortgages?