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Foreclosure Crisis in Europe vs US

posted by Alan White

While European markets have seen increases in mortgage foreclosures, more robust regulatory intervention seems to have kept defaults and foreclosures to much lower levels than we are experiencing in the United States.  At the peak of the crisis a year ago, Screen shot 2011-08-24 at 10.52.26 AMabout 9% of US mortgages were in serious default (90 days or more past due or in foreclosure.)  The United Kingdom and Spain had default rates of less than 3%, which they still regard as a crisis.  The only EU country with mortgage defaults exceeding US levels is Latvia.  Detailed information on European foreclosure rates and prevention measures are available at the EU web site on the new mortgage credit legislation.  The report containing the table on the right is available here.

 European banks argue that the lower default rates are a result of less reckless lending prior to the crisis, compared to the US subprime market, and that may be true.  It is also clear from the EU Commission summaries that most European countries have actively required or strongly encouraged lenders to work out as many troubled mortgage loans as possible, and have introduced delays and procedural hurdles in the foreclosure process to further stimulate workouts. 

The UK launched two subsidy programs at about the same time that the US Administration launched HAMP in 2009.  The Homeowner Mortgage Support allowed borrowers with a temporary income loss to defer payments for up to two years, with the government providing the lender a guarantee in the event the borrower defaults in repaying the deferred interest.  It expired in April 2011.  The Mortgage Rescue Scheme provided government support for shared equity and right to rent programs, and the Support for Mortgage Interest program subsidizes interest payments for homeowners receiving income support benefits.

In 2009 there were about one million completed foreclosure sales in the US (out of about 60 million mortgages outstanding.)  In the UK there were 54,000 (out of about 15 million mortgages.)

Comments

I suspect that the two (related) major reasons for there being fewer foreclosures in the UK so far, compared to the US, is that:

The vast majority of mortgages in the UK are variable rate (not fixed rate), so the very low interest rates of the last three-four years has resulted in low mortgage repayments. (Even the so-called fixed rate products in the UK are typically fixed only for a 2-5 years.)

Also, house prices have not yet fallen from their peak values anything like the extent that they have in the US. In the UK, peak was approximately July '07, Nationwide average price = GBP184k, most recent =GBP168k, fall is approx 9%. In the US, CaseShiller 20 city index, peak = July '06 - index = 207, most recent = 140, fall = 32%. Therefore, borrowers are, in general, less likely to be underwater than in the US, and therefore have greater incentive to dispose of a house they can no longer afford outside the foreclosure process. (And, of course, all of the UK is a "with recourse" state; walking away from negative equity housing is not without consequence.)


Finally , employment is considerably stickier in the UK too, and cuts in public sector employment has not yet come into effect.

I have not run the empirical tests, but I would be surprised if these factors combined were not more responsible for the lower level of foreclosures in the UK than any differences in governmental policies HAMP cf MRS/SMI).

I am very skeptical of cross-country (here, cross-continental) comparisons in all areas and this is no exception.
Among the variables that need to be taken into account: US houses are meaningfully bigger and generally have less persons living in them per square foot or per room, than European houses; further, generations of US families are often more dispersed geographically than Europeans, so the amount of income being generated by residents in the house, relative to how much house they have to support, will tend to be lower in the US than in Europe. This situation is legendary in Italy, where adult children often live in their parents' house basically until the parents die.

Then, you have the issue of what the house is mortgaged for - education, medical expenses, etc. which may not be borne to the same degree by the residents of the European household.

Then there is the question of home ownership rates which may affect home lending credit quality; although the US is generally in the middle of the pack, vis a vis Europe, I suspect, because there is much less mobility of population in Europe, a lot of owned homes in Europe have been passed down from previous generations, reducing the need for new purchase money financing. Perhaps not all mortgages in Europe are for purchase, perhaps some are financing repair work that is too large to be paid out of cash flow and are prudently secured by the house, I could imagine.

This link talks about some of the cross-country comparison issues between the US and Europe re housing.

http://www.nahb.org/generic.aspx?genericContentID=57411

I'd also note that it appears to me that many of the US households in foreclosure are headed by persons whose income was tied to the residential market, i.e., they derived their income from construction or mortgage lending, or supporting services, and basically drank the Koolaid of their industry, and that sector is much larger as a percentage of the US economy than Europe. So there are a lot of variables that need to be thought about in this kind of analysis.

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