However, if the risk to the bank was greater, then that would imply that interest rates would be higher.
No, I am suggesting that mortgages should be non-recourse. Personal loans would, by definition, not be non-recourse.But your main point is, I think, that we should ban non-recourse lending.
Yes, that is taking it to its extreme. I don’t see why that should be the case.There are pros and cons.
If you follow your logic to its extreme, we should ban all personal loans. We should only give out non-recourse loans. So overdrafts and personal loans would be banned. You would not be able to borrow to buy a car - although I suppose HP would be allowed. Extend it to companies and they would not be able to borrow at all except non-recourse against assets.
I agree that interest rates would be higher but it follows that prices would be lower since the price is set by the total repayment that the lender can make each month.There is nothing at all to stop a lender offering a non-recourse loan. Say Bank of Ireland decided in the morning that it would offer non-recourse loans.
We are going through a rough patch at the moment. We have to make sure that we don't make it rougher by introducing some new restrictions.
- They would, lend only around 50% LTV
- They would charge a higher interest rate
- They would repossess a home as soon as the borrower missed a few payments
Brendan
I don’t think it’s a good idea to make such changes universally compulsory in a depressed market but it shouldn’t be rules out in the longer term.
And who to you expect will finance this dream world??? The banks lend the money placed on deposit with them - after all that has happened, how many people do you think would be will to place their savings on deposit with an institution that has such an high exposure to the property market.... or do you expect the government to provide a guarantee?
The type of mortgage you have described is that currently offered in the US, but you have failed to take into account what happened over there. Fanny Mae, Freddy Mac and MBS came into existence in the USA, because banks were unwilling to provide the financing required - and look what a mess that turned out to be!
Jim.
Brendan, I'm looking to think this one through, I'm not proposing anything at this time.Sorry Purple, that was a typo - I had realised what you meant.
What if someone borrows from their bank to set up a business venture? If the venture fails, they should not have to repay the loan?
if the car value falls below the amount of a loan outstanding on that car, they should just give back the car?
As I said earlier, if any bank wants to provide non-recourse lending, they are free to do so.
But they should not be banned from providing recourse lending.
Brendan, I'm looking to think this one through, I'm not proposing anything at this time.
But to answer your questions;
If someone borrowed for a business venture which was secured against X then X is all they should lose if things go pear-shaped. As long as the bank is fully aware of what the venture is and what X is, and have charged accordingly, then what's the problem?
On the car example; that happens already. It's called lease-purchase and the borrower pays more to share the risk with the bank.
Hi Purple
I think you are missing the point of "security". It's a comfort to the lender - that is all.
If I borrow from a bank for a business without security, I must repay it all. You are suggesting that if I borrow with security, that my loss is limited to the security.
The car finance shows the problem with the suggestion. In a lease-purchase, the bank buys a car and leases it to a customer. The bank owns the car not the customer. But the law allows for non-recourse lending i.e. lease purchase and recourse lending, normal car loan. It's the exact same for houses. recourse lending should not be outlawed for a house or for a car.
Brendan
. I have no problem with people taking out personal loans in order to buy a house but many people, didn't get that their exposure went beyond the value of the property they purchased.
Do not understand this? It seems to me that during the tiger people bought thinking that property would only go up. They compounded this madness by borrowing additional money for furniture, gardens etc and then to top it off borrowed more for lifestyle.
The illusion that they would be also to recover loan values above and beyond the market value of the property encouraged banks to lend recklessly as it blurred their risk.
I seem to be missing the point somewhat. A mortgage is different to a personal loan because it is secured against an asset. By having the mortgage on the property no other creditor can take the value of the asset only the bank. That is the reason for mortgages.
I wasn't aware of that.yet in the UK, the bank can only recover the value of the property.
True. I'm just talking this through. Would you agree that the more the risk is shared the better it is generally?Purple, you mentioned moral hazzard in your OP with regard to the banks. The same exists with regard to borrowers and non-recourse mortgages.
Agreed. Knowing this would it not be the case that banks would be more careful about lending in the first place?If we had non-recourse mortgages, people in negative equity now would have an incentive not to pay their mortgage. They would simply hand back the keys knowing that the bank can't come after their other assets (doesn't work as simply as that of course).
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