Wall said savedbypigs. The lender can protect themselves in multiple ways: they can chop the appraisal, they can go back to demanding 20% down, they can charge a higher interest rate, etc, etc.
I think it is naive to think the housing bubble wouldn’t have happened if loans were recourse. Most homebuyers have no idea what is in the mortgage contract. They just want to buy the most expensive house that the lender will let them buy. It’s the lender’s responsiblity to make sure that the lender is protected.
Mish had a great article on what really enabled the housing bubble the other day. Basically, until sometime in the 1970s, the rating agencies worked for the buyers of loans. Then, the federal government passed some law giving a few rating agencies a monopoly and requiring the seller of the loan to pay them. Well, it took a while, but eventually the rating agenices totally sold out to the folks that were paying them (loan sellers). If they were paid enough, the rating agencies would put a AAA rating on anything.
Several bond funds, pension funds, etc are restricted in what they can buy based on ratings. Because the rating agencies sold out and rated every POS they could get their hands on AAA, the market for this crap balooned. If the ratings agences were still working for the funds, it is unlikely that the MBS market would have supported a housing bubble.
Another change I would like to see is the GSEs only guaranteeing loans where the home buyer puts 20% down. 0-down loans were another “innovation” that helped create the housing bubble.
If the ratings agencies went back to working for the loan buyers and 20%-down loans came back in vogue, we wouldn’t be seeing any housing bubbles for a long, long time.
