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When Borrowers Don't Pay, Should The Bank Take Everything?

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When Borrowers Don't Pay, Should The Bank Take Everything?

Crisis In The Housing Market

When Borrowers Don't Pay, Should The Bank Take Everything?

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  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
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For all the suffering of homeowners in America, you at least have a way out: You can walk away. Hand the bank the keys to the house and go. As many as nine percent of American homeowners stopped paying their mortgages last year.

In Europe, though, even in hard-hit countries like Ireland and Spain, most homeowners continue to find a way to make payments - troubled homeowners. Thats because they have no choice.

Here's Chana Joffe-Walt of NPR's Planet Money Team.

CHANA JOFFE-WALT: It turns out, Europeans - and most of the developed world, for that matter - are still paying their mortgages, even when their homes are worth less than what they owe, even when they lose their jobs - because Europeans are afraid of their banks.

Consider what happened to Frederique Letienne when the Spanish economy started to stall.

Ms. FREDERIQUE LETIENNE: At the beginning, I couldnt believe it. They were speaking about the crisis on the TV but things were OK.

JOFFE-WALT: Things were OK for her. Frederique translates technical documents from Spanish to French. Shes French, lives in Madrid. And it took a good two years of economic crisis before her work dried up. And when it did, it happened suddenly. And then, just as suddenly, she could no longer make mortgage payments to the bank.

Ms. LETIENNE: They called me every day. Telling me you have to put money, and if I had 100 Euros I used to put it in the mortgage but it was never enough.

JOFFE-WALT: Frederique panicked. She took jobs and did things she never would have considered before: filled in for secretaries on maternity leave, temped at a restaurant, asked her ex-husband for money.

Ms. LETIENNE: I had to sell my grandma's jewelry. You know, I had to go and sell it, just to pay. I had enough to pay two months.

JOFFE-WALT: Had Frederique lived in the U.S., it is quite possible she never would have sold her family heirlooms. She never would have called her ex. Because she would have had another option: to give up. If Frederique walked away from her mortgage in the U.S., her credit score would be ruined, shed lose her house. And then, most likely, itd be over. In Spain, if Frederique walked away from her mortgage, her credit score would be ruined, shed lose her house, and then the bank could pursue her for everything else that is hers: her car, her investments, in a few years, if and when she does get a job, her wages.

Most Spanish banks issue what are called recourse loans, meaning the bank can pursue and pursue beyond the house - until it gets its money back - in full.

Ms. LETIENNE: Thats it. I mean for the rest of my life, I know it. But I cant do anything about it.

JOFFE-WALT: So, one reason why around nine percent of Americans with mortgages stopped paying their payments last year and only around three percent of Spaniards did? Spaniards are afraid of their banks.

Mr. JAVIER ANDRES (Economist, University of Valencia): Well, perhaps its not very popular to say this, but I dont think its a bad thing.

JOFFE-WALT: This is Javier Andres, an economist at the University of Valencia. He says Spanish banks are suffering terribly from mortgage losses already. If people were not afraid of the banks when asking to borrow money, things would have gotten even worse.

Mr. ANDRES: I mean, if you have this kind of regulation, then people would think twice before asking for a very high mortgage.

JOFFE-WALT: In America, of course, the attitude is different, including, among many economists, Atif Mian at the University of California at Berkeley - says the problem is - if someone is afraid of the banks going after them, that person is less likely to buy a new refrigerator, to open new businesses. And in a recession, thats bad thing.

Mr. ATIF MIAN (Economist, University of California Berkeley): If you force that person to sell their other assets as well, then that individual may not have enough money to, for example, to pay for their childrens education, or their health and so on. And so you need to be lenient towards such individuals.

JOFFE-WALT: No one has been lenient to Frederique Letienne, at least not yet. She is fearful, but I should say, shes not actually angry that things work this way.

Ms. LETIENNE: I knew that if you take a loan and you dont pay it, the bank will go after you. Its normal, of course.

JOFFE-WALT: Chana Joffe-Walt, NPR News.

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