When Borrowers Don't Pay, Should The Bank Take Everything? : Planet Money Europeans are more likely than Americans to keep paying their mortgage because they fear their banks.
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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?

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

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

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

FREDERIQUE LETIENNE: At the beginning, I couldn't believe it. They were speaking about the crisis on the TV but things were OK.

JOFFE: Things were OK for her. Frederique translates technical documents from Spanish to French. She's 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.

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: 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.

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: 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.

LETIENNE: That's it. I mean for the rest of my life, I know it. But I can't do anything about it.

JOFFE: 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.

JAVIER ANDRES: Well, perhaps it's not very popular to say this, but I don't think it's a bad thing.

JOFFE: 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.

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

JOFFE: 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, that's bad thing.

ATIF MIAN: 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 children's education, or their health and so on. And so you need to be lenient towards such individuals.

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

LETIENNE: I knew that if you take a loan and you don't pay it, the bank will go after you. It's normal, of course.

JOFFE: Chana Joffe-Walt, NPR News.

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