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

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.

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.

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

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

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

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

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.

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.

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

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

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).

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

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

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.

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).

US banks finance up to 100 of a house s value, sometimes even more, and the sub prime market even includes loans to people without jobs and income.

By 2010, the fall in home prices will be close to 30 with 6.6 trillion of home equity destroyed and 21 million households 40 of the 51 million with a mortgage facing negative equity.

Mortgage debts, too, must be written down.

For example, homeowners signed cash back contracts with builders to feign a higher home value and receive bigger loans, and brokers fees were added to mortgages and the reported values of homes.

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

Derivatives markets for real estate should also facilitate the creation of mortgage loans that help homeowners manage risks by, say, reducing the amount owed if a home s value drops.

If interest rates rise too far, then the collapse in housing values will lead to large scale foreclosures and a collapse in consumption spending as well.

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.

The value of freedom. It's a value of community.

Indeed, the foreclosure rate is increasing.

The problem was not just sub prime mortgages.

The claimant sought from the Court an order of foreclosure.

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

But the paper also shows that domestic prudential policies such as capping home mortgage loans at a certain percentage of the property s value, or increasing banks capital requirements during economic upswings can be effective at restraining lending booms.

But examine the fundamentals in America, real estate prices continue to fall, millions of homes are underwater, with the value of mortgages exceeding the market price, and unemployment is increasing, with hundreds of thousands reaching the end of their 39 weeks of unemployment insurance.

We raised the reward. We continued to increase the reward.

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.