‘Non-recourse’ loans

Following comments on modern banking, I’ve discovered an idea with which I was previously unfamiliar ‘Non-recourse loans’.

A minority of US states have non-recourse loans, including California and Washington State, so nobody can suggest they are incompatible with Common Law systems or are unworkable or punitive for lenders.

A non-recourse loan is where, if you cannot pay your mortgage and your house is repossessed, the lender is entitled only to what they can raise through the sale of the house. Should that be inadequate (and of course there are usually fees and charges added) then the mortgagor is not liable for the rest, whereas under English law – and as far as I’m aware everywhere else in Europe – you can be pursued indefinitely for any balance outstanding.

If UK mortgages (I’d suggest both commercial and domestic) were automatically designated as non-recourse loans, this would serve two purposes:

1. Encourage lenders to be more wary of continually bidding up the housing and property markets. And so help stability.

2. Redress a little the balance between borrower and lender. In contrast to the current position, lenders would have the awareness that if they over lend then they are just as likely to suffer as the mortgagor.

There is no time like the present for this sort of measure – the housing market is barely rising and so lenders are unlikely to consider lending 100% or more of the purchase price to borrowers (which was not unknown in times of boom) and ‘Help to Buy’ is still in place, so this measure could be a small quid pro quo.

And it would be much better than tinkering with stamp duty.

Comments

  1. Peter Dawe -

    The housing market problem is caused by supply and demand. Finance has little to do with it. While we restrict supply and keep increasing demand the price will continue to go up. Housing is an essential service!

    Hitting houses that are rarely or under occupied is a quick win. e.g second homes. (The “Bedroom tax” does a good job on this count, but why restrict it to social tenants?)

    An idea on supply, Give the homeless planning permission “permits” where they can demand permission to build accomodation on any land they can get legal access to. This could shift the planning gain away from the landowner towards the homeless and ensure the permission isn’t “banked” and not used.

    1. Peter May -

      I beg to differ – there are quanities of unoccupied housing in all regions of England and Wales – it is actually in large measure the finance sector bidding up the prices. See here.

  2. Ian Stevenson -

    I also dissent. When I bought my first house, my loan was limited to two and a half times our income. I paid abut five thousand and sold it four year later for ten thousand. This was the time Heath introduced the Competition and Credit Creation Act and that encouraged inflation. Thatcher took off many of the controls on banks and we know they lent recklessly.
    Now the average house is six to eight times the average income.

  3. Tim Worstall -

    Making loans non-recourse is entirely possible as you note. It will also make mortgages generally more expensive. Because you’ve just limited the security the lender has from the general assets of the borrower to the more limited one of just the house. It’s analagous to the difference between a specific charge on a corporate asset and a floating charge against all of them. That second is usually cheaper finance.

    The question is whether that extra cost to all borrowers is worth it?

  4. Peter May -

    If ALL property loans are legally non recourse then I cannot see why they should be any more expensive provided the lender is confident they are not bidding up the property price and there is a competitive mortgage market. Clearly if some loans were recourse and some non recourse then it might be different.

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