Bleeding Past Empty
How much pain?
As subprime mortgages crater, here's one of the likely -- and
as-yet-undiscussed -- consequences: Deficiency judgments, and perhaps a
massive wave of them.
Here's how it works: Buying a $500,000 house, you put $50,000 down and
take out an interest-only housing loan for $450,000. Then you can't make
your house payments, two or three years later, and the bank forecloses.
But the foreclosure is part of an enormous set of regional and national
foreclosures, dumping houses on the market while mortgage lenders are
cutting back sharply on new home loans. Far fewer buyers are chasing far
more homes, so housing prices fall sharply; the bank sells your $500,000
house for $375,000.
You're out of a home -- and you're still carrying $75,000 in
Where have we seen this dynamic before? Here's one noteworthy example:
In his 1965 book The Cornbelt Rebellion: The Farmer's Holiday
Association, the historian John Shover discussed the metastasizing farm
foreclosures in Depression-era Iowa, which (among other things) followed
the burst of a farm-buying bubble caused by the decline of European
grain production during the First World War. American farmers rushed to
buy up land on borrowed money so they could expand their production for
hungry European markets; fifteen years later, still carrying debt, they
found themselves caught in a cycle of sharply declining crop prices. And
then the trap closed.
From pages 16-17:
Between 1921 and 1933, 13 percent of Iowa farmland was sold at
foreclosure. Yet at the end of 1932, one billion dollars of debt was
still outstanding on 45 percent of the land in the state...Land values
had declined so greatly (from $140 per acre in the late twenties to $92
per acre in 1932) that proceeds from a forced sale usually did not cover
the full amount of the debt. As a result, the debtor was left with a
deficiency judgment to cover the balance. In 1921, 26.5 percent of
foreclosures in eighteen sampled Iowa counties ended with a bid for less
than the amount of the debt; in 1932, 74 percent carried a deficiency
This number will be worth watching in the years to come, but here's my
guess: A significant number of families who took out subprime housing
loans will not only lose their homes, but will be left with a crushing
load of debt that will inhibit their recovery and hamper their ability
to find new housing.