I find it difficult to understand how it will be struggle for families who property enters negative equity and their other financial circumstances havenât changed.
In Australia, if for example they are on a fixed term loan and the term expires, if the mortgagee has trouble refinancing the loan through another financial institution, they still have the option to negotiate and refinance through their existing institution. I expect that this will be highly possible as it is in the interests of both the lender and the mortgagee to have a loan package which is affordable. I donât think a lender will screw down hard with a negative equity mortgagee as it isnât in the interests of the lender to have this mortgage in default or for the property to be taken over by the financial institutionâŠwhere the bank would then be responsible for the loss of equity on its sale.
The survival of the institution is very much dependent on the mortgage staying afloat.
There are always property which go into negative equity for a number of reasons, it could be due to housing price correction (like that which Australia is currently experiencing and has experienced in the past) due to changes in local environment (e.g. a new freeway project over the back fence), local employment conditions (such and the âboomâ and âbustâ nature of the mining industry and the supporting regional centres) etc.
The challenge with a negative mortgage type insurance cover is who will know when purchasing a property if their property will have a reduction in value and enter negative equity territory. I expect that most at the time of purchase wouldnât be buying anticipating that this will be the case as most would not make the property purchase if this is known (why would one buy say a $500K house today then next year it would be $350K). One is more likely to rent and wait until $350K market arrives.
So based on this, the only time one would likely take out negative equity type insurance is when a property has entered a period of negative equityâŠand in the event that the house would need to be sold (either by the mortgagee or the financial institution in the case of a default and repossession).
The risks to the insurer would be enormous as the insurer would not be able to spread the risk and costs across consumers who are both in positive and negative equity, as it will be those in negative equity only taking cover. Such would result in very high premiums which would add additional burden to the negative equity mortgagee and increase the likely risk of mortgage stress/not meeting repayments due to extended financial costs of servicing the loan.
The only way to overcome the bias of negative equity mortgagees taking out cover and to spread the risk across the whole of the mortgagee community, would be to legislate that every mortgage needs to take out such insurance. Doing such would be a very slippery slope politically and many like myself wuld not want to pay a premium to cover those who find themselves in a negative equity position.
Historically in Australia, negative equity positions usually are highly temporal and invariably overt time the property returns to a positive equity position. This chart shows the average house prices since 1880s:
There has been a number of times when there has been periods of capital value decline of properties, particular in modern economic times.
The issue I have with negative equity insurance type cover is that it transfers the risks associated with making a significant financial commitment like a principal place od residence, to another party. I believe in the long term this will increase speculation within the property market as one would know that it is possible to transfer ones risks and be covered by another party. Such is not a good economic principle and would encourage the wrong behaviour of many (either intentionally or unintentionally).
As outlined in another post, education on what negative equity means would be far better solution and allow an individual to take responsibility for the risks one accepts. If one for examples knows the risks of negative equity position and choses to sell ones house, then this is something they need to manage (defer selling, rent another place and rent their principle place of residence etc).
If one canât afford the financial commitment of servicing a property in negative equity, it is also likely that they wonât be able to afford any insurance premiums and/or servicing the mortgage in the longer term. While this may be unfortunate, maybe it may be a hard lesson for the same individuals to take through the rest of their lives.
The final comment due to unfortunate circumstances oneâs financial risks donât pay, Australia has a generous social security system which one can rely on to provide a basic standard of living. Such is not possible in many countries such as the US.