Solution for Mortgage Debt Crisis, replies very welcome

Jabber2

Current level of mortgage debt in Ireland stands at 120bn, this is spread across 790,000 mortgages with @45,000 in arrears and another 45,000 in restructuring plans (reduced payments, interest only etc)

Givens

IMF currently in Ireland to bail out the banks, this is happening no question.

The people who can’t afford to pay will default and fall back into state aid, state housing etc.



Plan

The government takes the IMF aid upfront, then use this to buy 60bn of the banks mortgage debt, this 60bn being the portion of mortgage with the most outstanding to give a figure say 200,00euro. Why this figure the current average house price in Ireland is 200,000euro if people with mortgages below this amount the bank can recover the majority of the loan thru sale of the property.

The 60bn of mortgage debt will be bought for 40bn (similar in principle to NAMA, as this is all it is probably worth today); this 40bn will be borrowed from the IMF at an interest rate of 5%.



Once the government has purchased the debt and secured the loan, a letter is sent to every one of the mortgage holders with a 1 time 2 offer deal and they are given a 30 day window to respond.

Option 1

Their mortgage and repayments to remain the same nothing changes except the government now hold the debt not the bank

Option 2

The government will reduce their mortgage by 1/3 (i.e. 300,000 mortgage becomes 200,000) the term will stay the same but their interest rate will be fixed for this term at 5% (same as borrowing rate from the IMF). Upon signing for the new mortgage they have to agree to produce annual tax returns showing all income (similar to self employed person) and they also have to agree to giving 1/3 of any future profits made from the sale of the property back to the government, up to the value of the 1/3 their mortgage has been reduced by. (Example person sells home in 10 years for 400,000 making profit of 100,000 then 33,333 is returned to the state), This agreement will run the life of their ownership of the property. If no profit is made no return is needed and debt dies with the sale if a loss is made the loss then 1/3 of the loss is written against their income for an agreed period until recovered. (Example loss of 10,000 this implies 3,333 are removed from their tax free allowance over X number of years until recovered). The assumption here is that people as they can’t now, will still be unable to sell their property at a huge loss e.g. 100,000.

This solution serves 4 purposes, firstly protect the second phase of the current crisis to happen due to fixed payments for the duration of the mortgage so no interest rate rises, secondly property is more realistically priced and the normal ebb and flow of the property market can return (this is vital for normal workings of a small economy like ours, construction is and always has been an important part of income tax). Thirdly with reduced mortgages people may become more willing to spend thus increasing productivity in the economy. Fourthly the banks have 60bn worth of debt removed from their books and have 40bn worth of liquidity added thus making cleaner working banks, also the banks take their share of the blame with 20bn written off their books.



The aim of the solution is that the government is repaid by mortgage holders at the same rate it is repaying the IMF, no net effect on the taxpayer (we are borrowing this money anyway). If no profit is ever made by house sales the government will still be paid back. This solution is for the banks issue only not the current expenditure versus income accounting, the austerity measures will still need to be implemented to fix this.



With regards people who are currently in arrears or who may get into arrears during the duration of their mortgage, they are now working with the government not commercial banks and monthly repayments plans can be made to match their ability until they can return to increased payments. Again repeat if they currently fail they will go into the state housing system and so the state will have a cost anyway. If a person never has the ability to repay the full amount the house will return to the state upon death of the individual or individuals it will effectively become a state (council) house, by making annual returns the state will know when and what they can afford to repay. This has the effect of reducing stress on 90,000 mortgage holders, saving money on court cases and allowing these people to continue to spend and reside in the state.



Points to note there is nothing new about the state being the biggest mortgage provider in the country