Report: Why Default Rates Were Lower in Europe Compared to the U.S.

Even though both the United States and Europe experienced price declines starting in 2007, the increase in mortgages default rates over time was much more severe in the United States compared to Europe.

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For example, in the United States, prices fell 7.7 percent from 2007 to 2008, and default rates spiked 93.2 percent, according to a report from the ""Federal Reserve Bank of St. Louis"":http://www.stlouisfed.org/. In Europe, prices fell 6.8 percent from 2008 to 2009, yet mortgage defaults increased by 11 percent.

The report authors, Juan Carlos Hatchondo, Leonardo Martinez and Juan M. Sánchez, attributed the difference

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to two specific regulations used in Europe to prevent mortgage defaults.

The first regulation in Europe holds borrowers accountable for paying the deficiency judgment, or different between the loan balance the home's value, which makes defaulting less attractive. This makes mortgages in Europe ""recourse loans"" since borrowers are responsible for the remaining balance.

On the other hand, in most of the United States, mortgages are considered nonrecourse, but even when recourse is allowed, the deficiency judgment could be discharged in bankruptcy, according to the report.

Secondly, Europe enforces a policy that limits how much homeowners can borrow when using their home as collateral, with some countries placing limits on the loan-to-value (LTV) ratio. When comparing European countries with LTV-limits, the report showed the mortgage default rate was much lower on average, at 3.5 percent from 2007 to 2009 compared to 14.4 percent for European countries with no LTV limit.

""As a result of this policy, households have more home equity. More equity means that fewer mortgages end up underwater when house prices drop. As a result, the default rate is lower in Europe. In the U.S., LTV policies are much less restrictive,"" the report stated.