Explain what is likely to happen to the rate of mortgage loan default given the following: "For years home values across the country have increased on average 3 to 4% percent each year. Mortgage lenders have come to expect this to always be the case and so begin to offer mortgages with little to nothing down and not requiring PMI insurance. An economic slowdown occurs hitting a few areas of the country harder than others. Home values across the country begin to decrease with some areas seeing decreases of as much as 10%."
What will be an ideal response?
It is likely that mortgage default rates will increase substantially. Not only are more people likely out of work with the slowdown, but many people will find that their mortgage will actually carry negative principal balances. If they started with little or no net worth in the home, their networth will actually be negative. This will encourage many borrowers to simply "give" the house back to the lender.
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