By and large, yes. There are non-conforming (subprime) lenders in Australia, but they make up a far smaller proportion of lending than in the US or even the UK. And even in that sector performance is better – average delinquencies are about 6.5%, compared with 12% in the UK. The big banks doing prime lending are pretty conservative. There is a fair bit of self-certified mortgage lending going on, but any loans (self-cert or otherwise) with loan to value ratios over 80% are insured, and any prime loans that get securitised are also insured. Delinquencies and defaults are extremely low in Australia – always have been. That said, Australian mortgage lenders have traditionally been big users of securitisation and are having difficulty getting funding, so they are likely to hike their prices and cut back origination.

The net result is that even as payment problems mount, people will carry on taking out bigger mortgages. What choice do they have?

How about selling up and renting? Not ideal, but not a disaster either.

I’m not saying that there are no problems with the UK mortgage market – far from it. Underwriting standards have slipped and rising interest rates and resets will indeed put pressure on borrowers. But the structural differences between the UK and the US are almost all in the UK’s favour. Moreover the UK economy is nowhere near as dependent on construction as the US one has been since 2000/2001, so the wider impact of reduced house buying, if that is what happens, should be less.

For many of these people, foreclosure will be a form of financial salvation rather than catastrophe. What I mean is, when you’re in a house that’s no longer worth what you paid for it, (when, in fact, your equity is negative due to depreciation and a low down payment), and when the mortgage payment has ballooned due to an interest rate adjustment, you are probably much better off walking away than killing yourself (working two jobs for years, perhaps) to keep making inflated payments on a deflated house. If you keep making the payments, you are the one who absorbs all the losses, if you walk away, the mortgage holder (which probably means owners of shares in some equity tranche) take the bath.

But there will be serious damage to your credit rating. And in some states, it won’t be possible to just walk away (particularly from second mortgages), but given the fact that the lender really doesn’t want the house back, borrowers facing foreclosure do have significant negotiating power.

In general, foreclosure in the U.S. doesn’t have to mean bankruptcy, and, on the contrary, it may mean getting out of a huge mortgage payment and into a lower rent payment for a comparable house.

As noted before, D2 and I asked Dean Baker about this. Depends upon the State but “generally” a first mortgage allows that, a second or more (equity release etc) does not.

A WSJ article discussing defaults in the prime market suggests that defaults (and presumably foreclosure filings as well) are disproportionately concentrated among real estate speculators.

It’s the upper-middle class who are going to get unexpectedly screwed on this (the poor are expectedly screwed). The new bankruptcy law lessens protection for those who make above the median income for their state. Telecommuters from California who bought in Texas or Florida better hope they can keep up the payments. They could’ve bought cheap, but many bought big instead.

Thanks, James. I’ve added the link now