Tossing The Keys

California Dreaming, Dave Rundle surfs the net | The Month April 2012

Like many South Africans, we woke on the 19th of February to witness some amazing hitting by Richard Levi when he smashed the Blackcaps to every corner of Hamilton’s Sneddon Park. In fact, the ground was not big enough for him and it was interesting to see the selectors send him back to SA to torment the local bowlers, rather than keep him to destroy New Zealand in the ODIs. What is so good about his batting is that he stands so still when hitting - he is the David Warner of South African cricket.

While watching, I surfed the internet for interesting reading and came across an article by Tim Read entitled: ‘The US Foreclosures Crisis, Beverly Hills style’.

There are some 180 houses in Beverly Hills, the storied Los Angeles enclave rich with Hollywood stars and
music moguls, which have apparently been foreclosed on by lenders, scheduled for auction, or served with a default notice. Apparently, this is the highest level since the 2008 financial crash.

As in the default-ravaged suburban subdivisions of Phoenix, Arizona, and Tampa Florida, it is plunging real estate prices that is the root of the problem in Beverly Hills. But the dynamics of residential real estate are very different in elite neighbourhoods such as this. The majority of the delinquent homeowners, who owe more than a million dollars, are walking away - not because they can’t pay, but because they feel it would be foolish to keep paying when the asset is falling in price.

These are called ‘strategic defaults’ and they are an especially appealing option in California, one of the primary states where mortgages made by banks are ‘non-recourse’ loans. This means the loan is secured solely by the property, and banks cannot go after a delinquent owner’s income, or other assets, if they default.

In South Africa, things are very different. If you default, the bank will take everything you own until they have recovered their asset. Obviously, this prevents the ‘Beverly Hills’ thing happening here, but I am sure there are a few people who, having bought a ‘dog’ property, have thought it would be a good idea to chuck in the keys at the bank.

This has a big influence on the price of property in SA and means that most banks are very careful about the amount they are prepared to lend. Maybe our system is tougher to live with but, at the moment, it is saving us.

If you have a financial question that you’d like Dave to answer in his column, please submit it to dave@rundle.co.za and he’ll gladly oblige

This article is solely intended to provide you with objective information about financial products and services and is not intended to constitute a recommendation, guidance or proposal with regard to the suitability of any product in respect of any financial need you may have.

Dave Rundle
Rundle Management Services