In the US, reviving the credit markets requires stopping the mortgage defaults driven by negative equity.

German banks grant mortgages only to a maximum of 60 of the value of a house, instead of the 100 mortgages that were frequently seen in the US and United Kingdom.

When housing prices fell, so did the value of the mortgages and the securities based upon them.

The housing recession the worst in US history and worsening every day will eventually see house prices fall by more than 20 , with millions of Americans losing their homes.

This creates a strong incentive to default, because mortgages in the US are effectively non recourse loans the creditor may take the property if the borrower doesn t pay, but cannot take other assets or a portion of wage income.

Negative equity is significant because mortgages in the United States are generally no recourse loans.

For one out of four US mortgages, the debt exceeds the home s value.

Moreover, real estate prices might fall dramatically, in which case many households may find the value of their mortgage exceeding the value of their house.

The Right Weights for Mortgage Risks

Occupy the Mortgage Lenders

So far, the sub prime crisis has had a limited direct impact on Latin America s mortgage markets.

Losses are spreading from sub prime to near prime and prime mortgages, commercial mortgages, and unsecured consumer credit (credit cards, auto loans, student loans).

In the last years before the crisis, the flow of new mortgages had been 60 higher than the value of residential construction.

With mortgages amounting to 95 or more of the value of the house, debt restructuring will not be easy.

As a result, one third of all American homeowners with mortgages are already underwater their mortgage debt exceeds the value of the house.

But, between the sub prime US mortgage crisis and the dollar s ongoing decline, America s exorbitant privilege now looks a bit shaky.

Mortgage debts, too, must be written down.

Given the large number of negative equity homeowners, there is a risk that defaults and foreclosures will continue.

After the subprime crisis erupted, mortgage and consumer debt was paid down by households either with their savings or by default.

Third, we could adopt an alternative approach that directly reduces the value of underwater mortgages.

Mortgages became more widely available.

Mortgage brokers were happy to get in on the act.

It was called securitized mortgages.

Unlike virtually every other country, US residential mortgages are effectively no recourse loans.

In the last years before the crisis, the flow of new mortgages had been 60 higher than the value of residential construction. Now it is 150 lower.

Indeed, the foreclosure rate is increasing.

The problem was not just sub prime mortgages.

Moreover, the US housing market appears to be stabilizing....Overall, the US mortgage market has remained resilient, although the sub prime segment has deteriorated a bit more rapidly than had been expected.

a rapid reduction of insolvent households debt burden, preceded by a temporary freeze on all foreclosures

As a result, mortgage brokers maximize their income by generating larger volumes of mortgages, as do the banks that package these loans into mortgage backed securities (MBS s).

In Mexico, all mortgages carry fixed interest rates, unlike the infamous exploding ARMs that left US homeowners ruing their choice of adjustable rate mortgages when interest rates rose. Mexican mortgages are indexed to inflation, but the state mortgage agency links that index to the minimum wage and makes up the difference if mortgage interest adjustments for inflation outpace wage growth.

But mortgage markets remain underdeveloped in most emerging economies.

What is needed is a quick write down of the value of the mortgages.

In the fourth act, the real estate bubble will burst.

Its members could not agree even on how to define subprime mortgages and calculate how many such mortgages there were in the United States at the time of the crisis.

The state is an epicenter of the housing bust and the foreclosure crisis.

Around sixty sub prime lenders have already gone bankrupt.

Some limited previous experience with mortgage modifications is not encouraging.

First, housing can be made more affordable for poor and middle income Americans by converting the mortgage deduction into a cashable tax credit.

Wall Street has polluted the economy with toxic mortgages.

Sub prime mortgages made the American dream come true.

One place to start is the tax deduction for interest payments on home mortgages.

The sub prime crisis has exposed serious problems that we must address.

Paying down debt on credit cards or mortgages also counts as saving but increases in the value of existing assets like stocks or real estate do not, even though they increase the value of household wealth.

With one out of four mortgages in the US under water more owed than the house is worth there is a growing consensus that the only way to deal with the mess is to write down the value of the principal (what is owed).