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Comment by kindle-dev | Hacker News Reader

This only applies to non-recourse state, of which there are only 12.

Doesn't this only matter if the property is worth less than the mortgage? If the lender can foreclose and sell the property for enough to clear the outstanding mortgage, there's no additional loss beyond the down payment (and any equity paid in since then).

But you're still out the downpayment? Your loss is still 20x.

If the down payment was x, how are you out 20x? Let's use real numbers:

House cost: $200,000

Down Payment: $10,000 (5%)

(Time passes...)

Value at foreclosure: $200,000 (no price change)

EDIT: I changed the math on this a few times, updating to reflect that you indeed get your downpayment back (minus fees).

The bank sells the house for $200,000. You get your $10,000 back after paying the $190,000 mortgage balance. But you're not on the hook for anything. You walk away with only a hit to your credit. You went from owing the bank $190,000 to owing $0 and having $10,000 in your pocket.

Also (for non-recourse state):

House cost: $200,000

Down Payment: $10,000 (5%)

(Time passes...)

Value at foreclosure: $100,000 (massive change)

The bank sells the house for $100,000. You don't get your $10,000 back. But you're not on the hook for anything. You walk away minus $10,000 (i.e. 1x) and a hit to your credit. You went from owing the bank $190,000 to owing $0.

Exactly this. If the property goes up $100k, you earn a 10x return on your $10k. If it goes down $100k, you only lose your $10k (in non-recourse states). It's asymmetric leverage.

In your example, you get your deposit back, as 190k covers the debt, extra 10k goes back to owner. (e.g. if 195k was sale price would recieve back 5k etc)

>If the down payment was x, how are you out 20x?

right but in this case the house value never changed, so there was never any loss. Suppose the house value went down 5%, then you'd be totally wiped out (ie. you lose your entire deposit).

Correct. You are on the hook for 1x, not 20x, your down payment. This is asymmetric leverage in favor of the buyer.

It is a fair point that for small negative changes you are getting a leverage effect (i.e. for a 1% down move in asset value you do have a 20% loss on your capital).

There is however a floor so the payout profile is a lot more like an option.

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