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.

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).

They are likely to place much greater emphasis on consumer lending, especially mortgages and credit cards.

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.

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.

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

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.

But it is the economic slowdown that renders all developed countries less resistant to the financial shocks resulting from the sub prime problem and from the mixed loan packages that are then used to dilute the risks attached to sub prime debt.

The fundamental question today is who monitors opaque loans, whether of the sub prime or any other variety.

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

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.

The Right Weights for Mortgage Risks

Occupy the Mortgage Lenders

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

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

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

Securitization putting large numbers of mortgages together to be sold to pension funds and investors around the world worked only because there were rating agencies that were trusted to ensure that mortgage loans were given to people who would repay them.

The Treasury has asked for authority to purchase 700 billion of mortgages to get them off of the private sector's books.

Some of the innovations associated with the sub prime crisis notably option ARM s, when extended to borrowers who couldn t handle them seem to have little redeeming value.

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

For example, the US Treasury suggests that originators of mortgages should retain a material financial interest in the loans they make, in contrast to the recent practice of securitizing them.

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

In the UK, similarly, we have had problems with mid sized mortgage banks, and with poor commercial real estate lending by mutual building societies, as well as problems with two large banks.

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.

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.

Sub prime mortgages made the American dream come true.

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.

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

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

Reducing the face value of mortgages and providing the upside in case home prices were to rise in the long run to the creditor banks is another way to convert mortgage debt partly into shareholder equity.

When normal mortgages did not prime the pump enough, he encouraged them to take out variable rate mortgages at a time when interest rates had nowhere to go but up.

Thus, although delinquency rates have risen slightly in Mexico since the mortgage market was created in 2003, only about 5 of mortgages are between 31 and 60 days late. Only 2 are between 61 and 90 days late.

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.