I hear that price of a house affects the mortgage on the house. For example if the price of the house goes lower than what is owed, debtors will have a risk to deal with.

I am not sure why this is the case. Is this related to call provisions?

  • What responsibility the debtor have in this circumstance?
  • Will the bank take any actions?
  • 1
    I think what you are asking is what happens when a home is worth less than the amount the owner owes on the mortgage? – enderland Jun 11 '13 at 15:08
  • @enderland yes. – accounting Jun 12 '13 at 2:08
  • I took a stab at cleaning up the question. Feel free to expand on it or change it if I have missed the point of your question. Also, a location tag is very important as the laws can vary country by country. – MrChrister Jun 13 '13 at 16:57

If the amount owed to the bank is greater than the amount that the house can sell for, that is called being upside down, underwater, or in negative equity.

The risk is that if the owner sees the situation as hopeless they may walk away. The house can be seized by the lender to try and reduce the lenders loss. Some owners will stop making payments so that the bank will seize the house. Others will stop making payments due to job loss, or medical issues.

During the most recent recession as home prices dropped across the country more people were underwater. That meant that if the did have to sell they lost money or the bank lost money or both. In some cases the situation was made worse because a owner needed to move to another city to find a job, but couldn't sell their house.

It is rare for there to be a "call provision" unless the owner is already in default. Some feel a pressure to sell to escape their location, or to get a better job, or because of a job transfer; but that isn't because the lender is calling the mortgage.

  • Any suggestions for the question? Lets fix it up. I made some edits based on your answer. – MrChrister Jun 13 '13 at 16:59

OK, lets start with the basics. When you buy a house, you normally take out a mortgage for a fraction of the price. So let's say you buy your house for $250,000, and you pay $50,000 of your own money and borrow $200,000. If you sell your house for $250,000 you pay $200,000 to the bank (less any amount of the mortgage you have paid already) and keep $50,000 for yourself. If the price is more than $250,000 you keep the difference yourself.

If you sell the house for $150,000 then you still owe the bank $200,000. You have to pay the bank $200,000, which you don't get from the sale. You have to find $50,000 from somewhere else. You've also lost the $50,000 you had before. Now as long as you don't sell the house you are OK - you keep making the mortgage payments and hope the price of the house goes up again. But if you have to sell, because you can't afford the payments any more, or you have to move for work, then you are going to be in real trouble. You owe much more than you can pay, and might have to declare bankruptcy. Even in the best cases people suddenly find they can't spend money because they have to put all of it into paying down their mortgage to get it to be less than the house price.

  • Any suggestions for the question? Lets fix it up. I made some edits based on your answer. – MrChrister Jun 13 '13 at 16:59

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