by John Y. Campbell and Tarun Ramadorai · 25 Jul 2025
is whether to rent it or own it), and a house can easily be seized by a mortgage lender if a borrower defaults: that is, mortgage debt is “secured” by the value of the house. For a similar sized loan, secured debt is typically cheaper than unsecured debt because of the additional
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% of the assets of a typical household in the three developed countries and over 60% in China, India, and Thailand. The bottom panel shows that mortgage debt is the largest liability for a typical household in the three developed countries and China. But people do not have to own the property they
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in the calculation of average shares. The top panel shows assets, with real estate (primarily housing) shown in black. The bottom panel shows liabilities, with mortgage debt used to purchase real estate shown in dark black. Source: authors’ calculations using survey data from US SCF 2022, UK WAS 2020, EU HFCS 2021
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is an unnecessary problem that can be avoided through several means we will discuss in part III. Paying Off a Mortgage A final question about mortgage debt is how and when to pay it off. Whether it has an adjustable interest rate or a fixed interest rate, a traditional “amortizing” mortgage requires
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to sustain the ownership of a house that is too large and expensive.49 This is particularly the case in some US states, which extinguish mortgage debt once a mortgage lender has foreclosed on a house. But even if a borrower remains in debt after a house is foreclosed and sold, giving
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. Wealth in this figure includes financial assets held inside and outside retirement accounts, as well as housing equity (the value of housing over and above mortgage debt). Source: Yimeng Yin, Anqi Chen, and Alicia H. Munnell, “The National Retirement Risk Index: An update from the 2022 SCF,” using data from the Survey
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retirement income, but only if it has not been spent before people retire. With traditional amortizing mortgages, people pay off all or most of their mortgage debt by the time they retire and have substantial home equity. However, the growing availability of second mortgages, together with tempting opportunities to refinance and extract
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, lowering the value of the home and making the debt even harder to pay off if the house is eventually foreclosed. See Brian T. Melzer, “Mortgage debt overhang: Reduced investment by homeowners at risk of default,” Journal of Finance 72 (2017): 575–612. 50. As we have noted, bankruptcy codes differ across
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countries in this regard. In Denmark, as in many other continental European countries, little relief is possible from mortgage debt. There is a Danish saying that “mortgages, not marriage, are till death do us part.” Chapter Six: Living with Risk 1. The distinction between necessities
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(2015): 2364–2398. 40. Maintenance is important for sustaining the value of a home, but some homeowners fail to do it, as Brian T. Melzer, “Mortgage debt overhang: Reduced investment by homeowners at risk of default,” Journal of Finance 72 (2017): 575–612, points out. John Y. Campbell, Stefano Giglio, and Parag
by Geert Mak · 27 Oct 2021 · 722pp · 223,701 words
up to ‘natural’ competition, according to the dogma of the free market. My own country changed rapidly too. From 1995 onwards, Dutch house prices quadrupled, mortgage debt tripled, education was stripped down, housing associations were privatized and the social housing sector was depleted. Public services were increasingly contracted out to private companies
by Mehrsa Baradaran · 14 Sep 2017 · 520pp · 153,517 words
collateralized debt obligation (CDO) was a complex bundle of tradable debt based on mortgage securities. These derivative products created new investments based on “tranches" of mortgage debt. Derivatives split and spliced mortgage loans that were so far removed from the actual mortgage loan that the whole system resembled a house of cards
by William D. Cohan · 15 Nov 2009 · 620pp · 214,639 words
.” And then “Clear Skys Ahead” wrote with an acid pen, “Now that the Fed is lending to primary dealers and accepting unimpeachable items, such as mortgage debt, as collateral things can get back to normal. Now what exactly do we do when the collateral turns out to be worth less than the
by Katrina Vanden Heuvel and William Greider · 9 Jan 2009 · 278pp · 82,069 words
of dollars of closing costs, plus thousands more spent on furniture and remodeling. The indirect impact of the housing bubble is at least as important. Mortgage debt rose by an incredible $2.3 trillion between 2000 and 2003. This borrowing has sustained consumption growth in an environment in which firms have been
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plentiful cash or distributing it to their stockholders. If they don’t, things could get quite unpleasant. So many households have taken on so much mortgage debt that if prices merely stop rising, they’re going to find themselves under water. And the broad economy has become so dependent on home-equity
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, financing arrangements became ever more questionable. Down payments went out of style. Adjustable-rate mortgages and interest-only loans, even negative amortization loans (in which mortgage debt grows month by month), became common. The worst of the speculative financing was in the subprime market, where moderate-income home buyers were persuaded to
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supports un-derneath our shop-till-we-drop economy are considerably weaker. For starters, we have a historic depression in the housing market. Americans’ total mortgage debt now exceeds their home equity, for the first time since 1945. Housing prices have dropped 10 percent since last spring, followed by record foreclosures. Most
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cause, as the lawyers say, of the current financial crisis is the bursting of the housing bubble and the souring of so much of the mortgage debt that financed it, that’s really only part of a much larger story. And while it’s inevitable that the government is going to have
by J. K. Lasser · 5 Oct 2013 · 1,845pp · 567,850 words
an Easement 31.8 Special Tax Credits for Real Estate Investments 31.9 Foreclosures, Repossessions, Short Sales, and Voluntary Conveyances to Creditors 31.10 Restructuring Mortgage Debt 31.11 Abandonments 31.12 Seller’s Repossession After Buyer’s Default on Mortgage 31.13 Foreclosure on Mortgages Other Than Purchase Money 31.14
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price. A mortgagor realizes value to the extent that his or her obligation to repay is relieved by a third party’s assumption of the mortgage debt. 5.15 Finding Your Cost In figuring gain or loss, you need to know the “unadjusted basis” of the property sold. This term refers to
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loss may be claimed as a casualty loss, or in some cases, as an investment loss (18.5). You are held secondarily liable on a mortgage debt assumed but not paid by a buyer of your home. Your payment to the bank or other holder of the mortgage is deductible as a
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fair market value over the amount of the outstanding mortgage. However, you may realize a taxable gain. The IRS and Tax Court treat the transferred mortgage debt as cash received in a part-gift, part-sale subject to the rules for bargain sales of appreciated property (14.8). You will realize a
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’s charitable contribution deduction is $150,000 ($250,000 – $100,000). He also is considered to have made a bargain sale for $100,000 (transferred mortgage debt) on which he realized $40,000 long-term capital gain. 40% of the transaction is treated as a bargain sale: Basis allocated to sale: 40
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and in the five-year carryover period. EXAMPLE The Hodgdons contributed real estate valued at $3.9 million but subject to mortgage debt of $2.6 million. The IRS treated the mortgage debt as sales proceeds and figured gain based on the difference between the debt and the portion of basis allocated to the
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reduces the fair market value limit for home equity debt (15.3). If you refinance your loan, see 15.7. Two-residence limit for qualifying mortgage debt The rules for deducting interest on qualifying home acquisition debt or home equity debt apply to loans secured by your principal residence and one other
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directly to the bank. The IRS disallowed the taxpayer’s deduction for the mortgage interest on the grounds that he was not liable for the mortgage debt; his brother was. However, the Tax Court allowed the deduction, holding that the taxpayer was the equitable owner of the home and that he was
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other property owner. You may deduct your payments of real estate taxes and mortgage interest. You may also deduct taxes and interest paid on the mortgage debt of the project allocable to your share of the property. The deduction of interest from condominium ownership is also subject to the two-residence limit
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an Easement 31.8 Special Tax Credits for Real Estate Investments 31.9 Foreclosures, Repossessions, Short Sales, and Voluntary Conveyances to Creditors 31.10 Restructuring Mortgage Debt 31.11 Abandonments 31.12 Seller’s Repossession After Buyer’s Default on Mortgage 31.13 Foreclosure on Mortgages Other Than Purchase Money 31.14
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income without reducing the amount of cash available for distribution. This tax savings is temporary and limited by the terms and the amount of the mortgage debt on the property. Payments allocated to amortization of mortgage principal reduce the amount of cash available to investors without an offsetting tax deduction. Thus, the
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report the $12,000 income from the debt cancellation as income on his 2013 return. 31.10 Restructuring Mortgage Debt Rather than foreclose on a mortgage, a lender (mortgagee) may be willing to restructure the mortgage debt by cancelling either all or part of the debt. As a borrower (mortgagor), do not overlook the
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value of the transferred property (31.9). Abandoning a partnership interest Where real estate values have sharply declined, partnerships may be holding realty subject to mortgage debt that exceeds the current value of the property. Some investors in such partnerships have claimed that they can abandon their partnership interests and claim abandonment
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interest. The partnership was insolvent beyond hope of rehabilitation: (1) the partnership’s only asset was land with a fair market value less than the mortgage debt; (2) the partnership had no source of income; and (3) the partners refused to contribute more funds to keep the partnership afloat. In a subsequent
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a foreclosure sale to pay off a mortgage that is not a purchase money mortgage, your actual financial loss is the difference between the unpaid mortgage debt and the value of the property. For tax purposes, however, you may realize a capital gain or loss and a bad debt loss that are
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Voluntary Conveyance Instead of forcing you to foreclose, the mortgagor may voluntarily convey the property to you in consideration for your cancelling the mortgage debt. Your loss is the amount by which the mortgage debt plus accrued interest exceeds the fair market value of the property. If, however, the fair market value exceeds the
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mortgage debt plus accrued interest, the difference is taxable gain. The gain or loss is reportable in the year you receive the property. Your basis in the
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value. Suppose your bid was $36,000 and you had $2,000 in expenses. Your bad debt deduction is $6,000—the difference between the mortgage debt of $40,000 and the net bid price of $34,000. You also had a capital loss of $4,000 (the difference between the net
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bid price of $34,000 and the fair market value of $30,000). Where the bid price equals the mortgage debt plus unreported but accrued interest, you report the interest as income. But where the accrued interest has been reported, the unpaid amount is added to
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to Third Party When a third party buys the property in a foreclosure, you, as the mortgagee, receive the purchase price to apply against the mortgage debt. If it is less than the debt, and the mortgagor was personally liable, you may proceed against the mortgagor for the difference. Foreclosure expenses are
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bad debt, but you may not deduct a partially worthless nonbusiness bad debt. Remember this distinction if you are thinking of forgiving part of the mortgage debt as a settlement. If the debt is a nonbusiness bad debt, you will not be able to take a deduction until the entire debt proves
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buys the property for $20,000. Foreclosure expenses amount to $2,000. The deficiency is uncollectible. Your $12,000 loss is figured as follows: Unpaid mortgage debt $30,000 Foreclosure proceeds $20,000 Less: Expenses 2,000 Net proceeds 18,000 Bad debt loss $12,000 31.15 Transferring Mortgaged Realty Mortgaging
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funds Investors in real estate abandonments cancellation of leases for foreclosure on non-purchase money mortgages foreclosure sales to third parties granting of easements for mortgage debt restructuring by property returned to creditors by sales of options for sales of subdivided land by self-employment income of seller’s repossession after buyer
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rates for for real estate placed in service after 1986 recovery periods Modified adjusted gross income (MAGI) More-than-50%-business-use test Mormon missionaries Mortgage debt, restructuring Mortgaged property Mortgage interest credit Mortgage interest deduction Mortgage revenue bonds Mortgages Mortgage subsidies Moving expense deductions 39-week test for employees 78-week
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Residential energy efficient property (REEP) credits Residential rental property Residents (U.S.) Resident tests Restaurants Restricted stock Restrictive convenants, release of Restrictive test Restructuring of mortgage debt Retailers, oil/gas percentage depletion for Retail property, improvements to Retirees Retirement of bonds waiver of estimated tax penalty due to Retirement advice Retirement benefits
by Gillian Tett · 11 May 2009 · 311pp · 99,699 words
. “Once, people shouted at Krishna and made him upset, and Demchak just went ballistic,” one of his teammates later recalled. Varikooty’s judgment on the mortgage debt was clear: he could not see a way to track the potential correlation of defaults with any level of confidence. Without that, he declared, no
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could not get comfortable,” Masters later said. In subsequent months, Duhon heard on the grapevine that other banks were starting to do CDS deals with mortgage debt, and she wondered how the other banks had coped with the data uncertainties that so worried her and Varikooty. Had they found a better way
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those working on Demchak’s team, she had spent her entire career at J.P. Morgan. The team did only one more BISTRO deal with mortgage debt, a few months later, worth $10 billion. Then it dropped the line of development altogether. Years later, Duhon was stunned when she learned of the
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team made no mention of that in the bible. No mention was made, either, of the team’s unease about making BISTRO deals out of mortgage debt. On that glorious, triumphant day in the Cipriani, the team saw no reason to trumpet caution. As far as they were concerned, BISTRO-style CDS
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the century. While that information gap had worried the J.P. Morgan team enough back in 1999 to lead them to forgo BISTRO deals with mortgage debt, by the middle of the new decade most bankers were willing to ignore the risks and sell these investments on a massive scale. Banks repackaged
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which the bank really needed to catch up: mortgage finance. J.P. Morgan should have been able to raise its profile in the repackaging of mortgage debt quickly. Inside the vast, sprawling empire of JPMorgan Chase sat Chase Home Finance, one of America’s largest home loan mortgage originators. But though the
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, Bear Stearns, and others for their mortgage CDO and CDS assembly lines. That was partly because the J.P. Morgan side had less experience with mortgage debt than with corporate loans, and was so leery about the risks involved with BISTRO-like products made from mortgages. Relations between the managers of Chase
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title: “Global Asset Backed Securitization; Towards a New Dawn!” An exuberant crowd included smooth-talking, white-toothed salesmen from large American banks, eagerly selling repackaged mortgage debt; self-deprecating British traders; and earnest, chain-smoking representatives from German insurance companies and banks. Their prey included asset managers from Italy, Spain, Germany, and
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explained. The problem, he added, was that the bank held on its books $43 billion worth of super-senior risk linked to CDOs backed by mortgage debt. Citi had previously assumed that the value of those assets was 100 percent of face value; now the price was falling. Super-senior? Demchak could
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“tough-it-out” strategy was making Bear’s investors and creditors increasingly nervous. Bear was known to be a big player in the field of mortgage debt, and it held a large pile of mortgage securities on its book. Throughout the winter of 2007, the Bear management repeatedly insisted that they were
by Josh Ryan-Collins, Toby Lloyd and Laurie Macfarlane · 28 Feb 2017 · 346pp · 90,371 words
Tenure change in England, 1971–2015 5.1 Index of house price to disposable income ratios in five advanced economies 5.2 House prices and mortgage debt compared to income in the UK 5.3 Disaggregated nominal credit stocks (loans outstanding) as % of GDP in the UK since 1963 5.4 Share
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distribution of land and property wealth across the population, its taxation and the role of the banking system in driving up prices through increases in mortgage debt (Chapter 5) are neglected. Human beings do not and cannot ‘make’ land in the way they can make commodities if more is demanded. Rather, we
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and 6, the consequence of the long house price boom was a huge increase in both the asset wealth of homeowners and the amount of mortgage debt outstanding. The financial crisis triggered a rapid reduction in new mortgage lending, but only a modest correction in house prices, which has since been reversed
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supply via their lending activity with the remaining amount created as cash by the Bank of England and Treasury. As shown in Figure 5.2, mortgage debt outstanding has increased from around 30% of real disposable income in 1987 to almost 100%, helping to drive up average house prices from four times
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areas such as London and the South East the ratio is up to twenty times (ONS, 2015c). Recent research shows that when housing costs (including mortgage debt and rents) are included in an assessment of changing living standards since 2002, over half of UK households across the working age population have seen
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falling or flat living standards (Clarke et al., 2016). Figure 5.2 House prices and mortgage debt compared to income in the UK (source: ONS, Nationwide and Bank of England; data de‹ated using 2010 prices) The impact of rising housing costs
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is not distributed equally across populations of course. In 2013, 1.17 million households had mortgage debts amounting to more than 4.5 times their disposable income – representing nearly one in seven (13.2%) households with mortgages (ONS, 2015a, p. 1). We
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ratio’ remains manageable). As house prices rise, so does their ‘net wealth’ – that is, the paper value of homes and the land beneath them, once mortgage debt has been subtracted. This can make households feel that they are in position to continue spending, even if their debts are increasing in ratio to
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worth asking why policy makers and most economists did not, at least until the crisis of 2007–8, pay more attention to the divergence between mortgage debt, land and property prices and incomes. 5.3 Mortgage finance, the ‘lifecycle’ model and the role of collateral Since the 1960s up until the crisis
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of 2007–8, the dominant conception of the role of house purchase and mortgage debt in economic theory was the ‘lifecycle model’.5 Also described as the ‘permanent income’ hypothesis (Friedman, 1957), the theory suggests that individuals spread or smooth
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as they become more productive. It is assumed there is no constraints on such borrowing. As the household ages, its income increases relative to the mortgage debt, enabling it to pay off its early life debts and also save for retirement. If house prices do temporarily increase under this lifecycle model, this
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. Since, as described in section 5.1, mainstream economic theory also neglected a causal role for money and credit in the economy, house prices and mortgage debt generally were not viewed as important determinants of the long-run dynamics of the economy.6 As a result, modern macroeconomics came to neglect both
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have unlimited ability to borrow and banks have unlimited ability to lend; that, relatedly, there is no risk of default associated with the holding of mortgage debt; that the cost of borrowing does not vary with the amount borrowed; that household earnings do not fluctuate significantly and that households themselves know such
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as a higher proportion of these populations would have accumulated assets compared to the past. In fact, quite the opposite has occurred. Household debt, and mortgage debt in particular, has massively increased in nearly all advanced economies as a percentage of GDP (Jordà et al., 2016). In the US case, a recent
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to be increasingly important in those advanced economies – not least the UK and the US – that liberalised their credit markets and allowed banks to issue mortgage debt. In fact, mortgage lending by the banking sector (as opposed to building societies) is a relatively recent phenomenon in the UK, only really emerging in
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them at higher loan-to-value (LTV) ratios. This in turn enabled larger numbers of people to access homeownership at higher price-to-income and mortgage debt-to-income ratios. The UK’s house price–income ratio doubled between 1997 and the peak of the boom in summer 2007 (see Figure 5
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mortgage payment difficulties and bank forbearance, this prevented foreclosures and repossessions on the scale of the late 1980s crisis (Aron and Muellbauer, 2016) Non-performing mortgage debt was as a result not the main problem facing the banking system in the crisis period. In 2009 £984 million of bad
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mortgage debt was written off in the UK, compared to write-offs of £8.4 billion for unsecured consumer credit and £5.9 billion for non-financial
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is now by far the largest single source of wealth in the UK, making up almost half of total household assets and net wealth. Conversely, mortgage debt makes up by far the largest part of banks’ lending and household liabilities. Wealth comes in different forms. Pension wealth cannot be drawn down to
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increase their borrowing to fund consumption. The sociologist Colin Crouch (2009) has described this as a form of ‘privatised Keynesianism’, with the large injections of mortgage debt via equity withdrawal propping up consumer demand in the face of declining median wages, in contrast to the state supporting demand via fiscal expansion as
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expansion’ (King, 2003, p. 3). In the 2000s, financial innovations, including RMBS, were seen as spreading risk rather than amplifying it. The build-up of mortgage debt smoothed the business cycle but encouraged excessive leverage in both the banking and household sector which eventually resulted in fragilities that led to financial collapse
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, setting limits that will only have effect if there is a major boom in house prices.13 Institutional factors Although the general pattern of increasing mortgage debt and house prices is common across many advanced economies, there are some important exceptions. Many empirical studies find that institutional variation both between countries and
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house price inflation relative to incomes is thus not an inevitable feature of advanced capitalist systems. Individual countries have developed policies to prevent excessive household mortgage debt building up and to provide attractive alternative tenure options to ownership. These policies do not appear to have weakened economic growth or innovation; both Germany
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paper wealth many times more than moving jobs or investing in the stock market or government bonds. As land prices rise well beyond average incomes, mortgage debt-to-income ratios have increased. In order to access landownership, many households have had to increase their debt to the banking system relative to their
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the financial sector can be seen to have capitalised an increasing proportion of the economic rent from land in the form of interest payments on mortgage debts (Hudson, 2010). As homeownership levels have fallen in the UK in the last decade, rents have become more concentrated in the hands of property owners
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households to bring forward the consumption of a long-lived durable consumer good and spread the costs over the course of their lifetime. Rises in mortgage debt relative to income were not seen as problematic given household wealth was also increasing; one cancelled out the other. If banks chose to lend against
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household wealth. As of 2014 the aggregate household gross property wealth in the UK was £4,984 billion. There was also £1,057 billion of mortgage debt, leaving £3,927 billion of net property wealth. Property wealth is currently distributed very unevenly across the population. Figure 6.5 shows the distribution of
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will draw back from investment in production and banks further decrease their productive lending, instead recycling their profits or loans into even more consumer or mortgage debt where demand is greater. Ultimately, these dynamics may be a key explanation of the ‘secular stagnation’ and ‘productivity puzzle’ that has cast a shadow over
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–8, a number of proposals have been put forward suggesting alternatives to debt-based financing for home purchase. It has been argued in particular that mortgage debt should be more ‘equity-like’, with the lender sharing the risk of the home depreciating. This could involve the use of Islamic finance mortgages where
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, 177–8; and housing costs, 179–80; income inequality, 162–3; and inheritance, 182; and land value, 46, 173, 190; and landownership, 26–7; and mortgage debt, 116; property and the state, 17–18; regional inequality, 165, 182–3; and taxation, 168–9; wealth inequality, 163–4, 174–9 infrastructure projects: compulsory
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, 61, 119; interest rates for landlords, 77; lifecycle model, 124–8, 159; loan-to-income limits, 155; loan-to-value (LTV) ratios, 139, 156, 157; mortgage debt-to-GDP ratio, 156–8, 156; mortgage interest relief at source (MIRAS), 86; reform proposals, 211–12; residential mortgage-backed securities (RMBS), 137–9, 140
by Mitch Feierstein · 2 Feb 2012 · 393pp · 115,263 words
had taken on so much debt that investment and growth would be inevitably impaired. People were worried about the incessant increases in credit card and mortgage debt, and the changes in culture that went along with that increase. These worries were neither flippant nor ill-founded. They were the right ones to
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to look at, Britain has too much debt. Too much government debt. Too much household debt. Too many large and leveraged banks. Way too much mortgage debt. Even its corporations are too ready to borrow. Having said all that, however, Britain is still in better shape than the troubled economies of southern
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. Not all of those losses will be borne by the banking sector. Homeowners will take their share. Investors dumb enough to have bought bubble-era mortgage debt at bubble-era prices will take their share. But such comforting thoughts run only so far. You can share the pain of a $1 trillion
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compensation for James E. Cayne,’ May 3, 2007. 8 Data available from the Federal Reserve. Go to the website (www.federalreserve.gov) and search for ‘Mortgage debt outstanding.’ 9 John Gittelsohn, ‘Shiller says U.S. home-price declines of 10% to 25% “wouldn’t surprise me”,’ Bloomberg, June 9, 2011. 10 ‘Rooms
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, 2011. 11 Mortgage data from European Mortgage Federation. Go to the website (www.hypo.org), click on ‘Facts and figures,’ then look for ‘Value of mortgage debt.’ The data in the table are for 2009, the most recent figures available. I’ve used an exchange rate of €1 = $1.371 to convert
by Neil Irwin · 4 Apr 2013 · 597pp · 172,130 words
than half as much. The details were different in other countries where home prices rose, but the basic trend wasn’t: In Spain, for example, mortgage debt rose at an average rate of 20 percent a year from 2000 to 2004, a period in which home prices rose 16 percent a year
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of the 1930s, a large part of what made the Great Depression great. When banks and other lenders suffer major losses, as they did with mortgage debt in 2007, they pare back lending of all kinds. That weakens the economy, which causes banks’ losses to mount further, setting up a vicious cycle
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