bookmark_borderBoth solutions are wrong

On the bus to work this morning, I read a letter to the editor by Mr. G. C. King in The Herald suggesting a solution to the rising number of repossessions: “The UK government can promptly pass a law that says any lender repossessing a house must accept the proceeds of sale in full settlement of the outstanding debt. If the outstanding loan is £100k and a forced sale releases only £60k, the bank cannot pursue the borrower for the balance.”

On the bus back home this evening, I then read an article in The Economist suggesting that a big problem with the housing market in the US is that this is the case, because it gives people an incentive to run away from their home and their mortgage as soon as they go into negative equity. They just send the keys to the mortgage lender, and they’re free again. This means that they’re not motivated to find alternative ways to pay their mortgage, and more homes than necessary end up being repossessed.

So what is the solution? Clearly the British system is bad because it gives the lender an incentive to repossess early rather than giving borrowers payment holidays or the like, and the American system is just as flawed, just in the opposite way.

It seems a system should be found whereby both parties share the pain. For instance, if a house is repossessed and doesn’t bring in enough money to pay off the remainder of the mortgage, the resulting debt should be split equally between the lender and the borrower. Would this work?