[smiley]

Can anyone post the language from a mortgage contract that allows for this? I'm in the US but am interested in other countries as well.

I haven't heard of such a clause, and I don't think it exists. If a bank collapses the outstanding mortgages are considered as assets and are sold. That means that in case of a bankruptcy another bank will take over the mortgage.

One thing you have to consider is that a mortgage has to be covered by a collateral. When the housing market collapses and the value of a house decreases, the situation can occur where your debt is no longer covered by the value of the house.

Some mortgages have a clause that requires you to pay off the excess debt. This depends on the type of mortgage though.

[JayHMorrison]

One thing you have to consider is that a mortgage has to be covered by a collateral. When the housing market collapses and the value of a house decreases, the situation can occur where your debt is no longer covered by the value of the house.

Initially with Peak Oil the more likely scenario is to have higher inflation. Thus increasing the market price of your house but the total debt value stays constant. That actually increases the equity in your home.

Inflation sucks for banks because existing loans outstanding (mortgages) become worth much less. The outstanding loans for 30 years at 5.5% interest really suck when inflation is over 5.5%. It is a free loan at that point for the home owner.

[linlithgowoil]

i think most mortgages have a clause that says they can demand payment in full should you become bankrupt/made insolvent, thats about it. i dont think they put in clauses that say they can demand payment in full for no reason at all. i doubt theyd be allowed to in the UK

[seahorse]

I'm a lawyer and have never seen or heard of such a clause. Keep in mind that the mortgage secures the note. You're rights are determined by your note, the mortgage is security for the bank of you fail to pay in accordance with the note. Therefore, if you sign a thirty year note, you have 20 years to repay. The mortgage may give the lender certain rights if there is a "default" on the note, and may even define what a "default" is. However, no matter how "default" is defined, if you are making your payments on time and in the amount specified by the note, the mortgage may not be foreclosed. Default will sometimes include the filing of bankruptcy, however, since the note is secured by a mortgage, this doesn't mean you automatically lose the house. Even in bankruptcy, you are allowed to keep paying on certain debts if you so desire. So, if you want to keep the house and in fact have the ability to keep paying for it, even in bankruptcy, you may do so.

[OldSprocket]

I'm a lawyer and have never seen or heard of such a clause. Keep in mind that the mortgage secures the note. You're rights are determined by your note, the mortgage is security for the bank of you fail to pay in accordance with the note. Therefore, if you sign a thirty year note, you have 20 years to repay. . . .

If you sign a 30-year note and pay it off in 20 you could save significantly on the interest. Or you could pay the entire interest and a prepayment penalty. It is VERY important to read the mortgage. When you finance land or a house, make sure the loan is not callable. Make sure there is no big penalty for early payoff. When I last had a mortgage, real-estate interest was progressive, but our friendly bankers are dreaming up ways of skinning their customers every day. It's their job.

Mortgage: mort (death) gage (pledge) death pledge

[JayHMorrison]

A mortgage is an installment loan with a fixed set of payments. As opposed to a credit card where the amount of the loan is variable.

If a mortgage installment loan is in place, the lender cannot call the loan in unless you default on the terms. So long as you are in compliance with the payments, your loan cannot be adjusted.

In fact, with an installment loan (car, house) the lender cannot even pull your credit report after the loan has started. They can only pull your credit report at the beginning to determine if you are eligible. This is because the terms of an installment loan are not amendable in mid-loan. Thus under the Fair Credit Reporting Act, an installment loan lender does not have a permissible purpose to view your credit file.

That is all a bit off topic, but it points out how an installment loan (car, house) is much different from a revolving (credit card). A revolving line of credit can be cancelled very easily and for almost any reason.

[threadbear]

Jaye-- Prices can only keep inflating in homes, if wages start to do the same thing. The recent runups have been due to low interest rates and increasing accumulation of debt. Speculation helped fuel the fire.

What will happen if interest rates go up, even modestly?

Just because there's price inflation in other goods, doesn't mean there can't be a correction downward in real estate.

[Evltre]

our (ex) mortgage had that clause - basically said that if our financial position changed and the bank deemed we were at risk of defaulting (even if we didn't) they could recall the loan, or if we withheld information about a change of job, or renting the house to someone else - things like that. It's was the same with our last house, different bank even.

[JayHMorrison]

Jaye-- Prices can only keep inflating in homes, if wages start to do the same thing. The recent runups have been due to low interest rates and increasing accumulation of debt. Speculation helped fuel the fire.

What will happen if interest rates go up, even modestly?

Just because there's price inflation in other goods, doesn't mean there can't be a correction downward in real estate.

That is true. But historically real estate has been a good hedge against inflation. An era of high inflation typically involves a corresponding increase in real estate prices.

In an economic depression, real value will likely be lost in homes. But initial peak oil times will likely involve inflation more than anything. The actualy recession/depression will likely come a few years later.

[linlithgowoil]

house prices will never totally collapse to very low levels i dont imagine. however, i can see all the gains in house prices since around 2000 being wiped out if unemployment and inflation rise in the UK - and all the predictions are that this should happen this year, as the consumer boom appears to be over. people are in credit up to their ears and cant afford to spend any moreoney on frivolous things.

also, wages in the UK have barely changed in many jobs for years - so the massive increase in house prices - by around 100-150% in my area over the past 4 years, must be supported by something else - cheap credit/low interest. i know that most people's wages in private firms have been increasing by about 3% per year. Also, council tax in our area is going up about 5-6% per year so people are actually experiencing declining amouts of money year on year.

[smiley]

Initially with Peak Oil the more likely scenario is to have higher inflation. Thus increasing the market price of your house but the total debt value stays constant. That actually increases the equity in your home.

You could be right but I'm not sure. Historically the price of houses is set by the amount people are able and willing to pay for it. That depends on the following factors.

1) Disposable income
2) Interest rates
3) Mortgage requirements
4) Availability

If we look at these factors individually

1) Disposable income

I think we can be fairly certain that PO is going to increase the cost of daily living. That means that the amount of money that you can spare to pay a mortgage will decrease.

I've done some calculations on this. If your monthly expenses increase by $100 per month, it will cut $30.000 of the size of the mortgage you'll be able to afford.

2) Interest rates
Many people believe that the interest rates are going to rise. I'm not so certain of that but if they will it will also have a strong effect on the height of the mortgage you're able to service.

For a typical mortgage a one percent interest rate hike will cut about $25.000 on the amount of mortgage you're able to afford.

3) Mortgage requirements

In the past you could only finance 90% of your house by a mortgage. 10% had to be financed by own means. Now financing goes up to 125%. When confronted with a lot of defaulting, banks may drop that leniency. They probably won't go back to 90%, but even 100% would mean that young adults will have to safe for a few years to get the necessary money to get a house. this will temporarily slow down demand.

4) Availability

Right now the housing market is still very tight. In the next few years I expect this situation to change.

The baby boomer's are now retiring. Within a few years they will start moving to smaller apartments and homes for the elderly which will free up a large part of the housing market. The second generation of baby boomer's has just moved to a house. Therefore the demand will temporarily slow down. This is essentially also what happened in the seventies, which marked the gap between the first and the second generation of baby boomer's.

Secondly a deteriorating economic climate will cause children to stay longer with their parents, reversing the trend that has been going on for the past decades.




The past decades we had a very favorable climate for houses. Wages grew faster than inflation in consumer goods, mortgages became more affordable, and demographic conditions ensured a high demand. When you look at these factors you can understand why for instance the value of my parents house increased by 1000% in the past 20 years. However many of these things are reversible and perhaps will be reversed in the next few years.

So while inflation (or currency deflation) is expected to drive prices up I also see some strong arguments in favor of a decline. It all depends on how the wages will develop. If wage growth is stronger than the factors above, housing prices will stay level or increase. Otherwise they will decline.

[rerere]

Jaye-- Prices can only keep inflating in homes, if wages start to do the same thing. .

Not at all. If the overall population drops, the demand for shelter will be lowered and so will prices.

"Land - They ain't making any more of it".

Peak Oil expressed as cheap energy will make homes near manufactoring/transportation more desirable and land away from water less desirable - eventually.

The only way to be insulated is to have land/buildings paid off. And that is a damn hard thing to do.

[threadbear]

There are many factors that support house prices falling. A possible reduction in population is one of them. But you can have an increase in population and still have prices turn down. It all depends on wages and interest rates.

Pray tell me, in the present economic environment why wages would go up? Cost of borrowing and cost of energy increasing, with increased competition in labour market, is suddenly going to find corporations becoming all cuddly and altruistic? Don't think so.

Good post, sensible ideas, Smiley.