This mechanism is very dangerous since delinquency rates increase exponentially with higher loan principals and, in Spain given that loans are with full recourse, households defaulting on loans will obtain lower prices than the appraisals ones (even without a burst of real estate prices).
The estimated additional $11,000 a year in income to women would save some houses from foreclosure, as 1 in 45 households defaulted on a mortgage in 2010.
If banks believe that the rate of employment will be low, so household default risk is high, banks require high face-values of debt to offset this risk.
In contrast, if banks believe that employment will be high, so household default risk is low, banks require low face-values of debt, and employment is indeed high.
For example, monetary easing in economies in which mortgages typically have variable interest rates, as in the Scandinavian countries, can quickly reduce mortgage payments and avert household defaults.
"However, the current increase in consumer debt combined with interest rate rises over the years ahead will lead to rising debt defaults as we enter the next phase of the credit cycle: we forecast a 17% rise in households in default by 2020".
Without policy changes, several million households will default on their mortgages over the next few years.
With many mortgage loans underwater, continuing job losses are pushing ever more households into default.
Ministers have promised to protect 11 million households on default tariffs with a cap by the end of 2018.
A wider price cap for millions more households on default tariffs is due to take effect by the end of the year.
