You could say that maybe the property market wouldn’t have crashed so hard if full-recourse loans were around. However, the loss would still be there, but they’d have more of a zombie market like we do, and much less recovery.

When mistakes get made, it’s vital that the old is brushed away to allow renewal. For every person that suffers a loss, someone else is gaining, and crucially people can move on with their lives. We will have people still servicing loans in 15 years, still unable to sell their property for enough to pay down the loan. That’s not healthy for growth, labour mobility or even the banks.

There is nothing inherently wrong with a no-recourse loan, or, effectively a loan tied to the property rather than the title-holder.

Nothing wrong?

The clearing out of people from suburbs and the resulting stripping of the houses by criminals destroyed the values of many potentially saleable assets.

I see a problem with this in terms of property rights.

As I understand it, though it removed stock from the market, there was an avoidable loss of value due to the speed of the process.

There is nothing inherently wrong with a no-recourse loan, or, effectively a loan tied to the property rather than the title-holder.

A no-recourse loan means that the creditor bears an equal amount of risk on the property to the debtor. It’s wrong to think people can just send in the keys and walk away – having such a large default will seriously affect their ability to get credit in the near future, and is not a costless option for buyers.

In Australia we blindly accept that the debtor bears the majority the risk with the property – given that many people have to pay to insure the bank against default. We are so trained by our former-nationalised banks to roll over and take it up the tailpipe that we don’t even think that a freer, more creative credit market is possible.

The problem in the US is not non-recourse loans, it’s the fact that the creditors have been taught that, if they make a bad credit decision, the taxpayer will pick up the tab. So the borrowers and the lenders freely entered into high risk contracts, with the implicit understanding that both would be bailed out by the taxpayer if things go bad, which they did, and the taxpayer has fronted up the difference.

We shouldn’t be prescribing one style of credit over the other – the banks should be free to lend how they see fit, if they can make the numbers work. What should be made clear, however, is that ‘too big to fail’ does not exist, and if you lend a pile of money to bad credit risks, and you go down, tough.

The full-recourse loans in Australia, coupled with stamp duties, have created a zombie-market in many areas. While prices ostensibly have not dropped much, what you see is wafer-thin volume at the current price level. It’s not much of a stretch to imagine a very large downward-gap of prices to a much lower level, given the market is so illiquid. You have a situation where existing people must stay in underwater homes because they can’t afford to get out, and can’t afford to move because of the obscene tax payments on moving house.

A proper functioning market would see those people cut their losses, the banks would take their hit on bad lending decisions, the property market would clear and the houses could be purchased by new families.

Pretending that the Australian home market and mortgage market is somehow better because of full-recourse loans is foolish back-patting and navel-gazing.

Not sure about the government making efforts to prevent banks from enforcing loans. The US governments and Courts have been woeful in ignoring and excusing procedural failures by lenders. see for example, roboloans. At the same time individual borrowers, who did what everyone was doing on liar loans, have been sent to jail.

The ratings agencies were a far bigger contributor! These were the same agencies that went around giving AAA ratings to crap, and then when the gig was up they turned around and said, “well, we can’t be expected to understand things”. The problem was that they weren’t just taken for a ride by the big investment banks. They were working hand in hand with them! When creating all the junk, the agencies were right there giving advice about what they’d give AAA to. i.e. “include these, and these but not these, and we’ll be okay with that”.

Had the ratings agencies not been handing out AAA ratings (for massive fees) then crap loans would never have spread as widely as they did, and junk buying by Freddie & Frannie on some nonsense notion of ‘equality’ would have crippled those institutions early in the piece.

The biggest contributor to the financial crisis (those before it and the next one coming) is that those who have the most to gain from risk (in the collection of fees, salaries and bonuses) have become removed from the potential losses from those risks. i.e. the ‘financial manager/board etc’ rake in the big fees and bonuses when big risks pay off, but loose nothing when those big risks wipeout the investment. That, toegther with government bailouts, have made it a game of betting big with other people’s money.

I do not accept this being due to the law of unintended consequences.

Neither do I. It obviously was part of the same scheme which had this crazy plan:

The financial crisis was generated not by any rating agency, but by a cross-party political conspiracy to bludgeon mortgage companies to extend mortgages to minority households that had no resources to enter into home ownership.

I presented the student loans as a contrast to show that it is not the norm in the US for debtors to have such an easy option to leave a contract.