this post was submitted on 11 May 2026
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me_irl
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So the bank gets the money they are owed?
Not necessarily. There is no guarantee that the house will well for enough. Normally this works fine, but sometimes a loan can be underwater, and have a larger balance than the house is worth; or it could not have enough equity to cover the cost of foreclosure and flipping. This is why the US requires mortgage insurance for mortgages with less than 20% equity.
You could imagine a scenerio where banks find a loophole to skirt the PMI requirements causing a real estate bubble to drive up the purchase price of houses. Them a recession causes widespread defaults, further triggering a collapse of home prices, forcing financial institutions to be unable to recoup the cost of loans. Loans which, incidentally, were rated as very unlikely to default due to other financial schenenagans. We call this scenerio 2008