Columbia International Affairs Online: Working Papers

CIAO DATE: 11/2009

Why are US home foreclosures so high?

June 2009

Oxford Economics

Abstract

US mortgage foreclosures have risen to extraordinary heights in recent months, with the scale of the distress in the US mortgage market much greater than in the UK. Key factors behind this divergent performance include laxer underwriting standards in the US and the widespread existence of 'non-recourse’ loans. The latter allow borrowers in negative equity to walk away from their mortgage debt and sap the incentive to remain current on ‘underwater’ loans. As a result, steep house price falls can generate a sharp rise in foreclosures even without high interest rates or unemployment. In the UK, by contrast, there are strong incentives for home owners to remain in their properties, even when in negative equity.