Negative Equity - Solutions ?

SC

Given the developments in ILP and the stress test results being linked to property prices. I would like to know if anyone out there has a solution or take on how, or if, there is a solution to the negative equity question.

I am doing a bit of work on this myself; and have been looking at the idea of ( govt) supporting the development of a futures market for res property.

Any Thoughts ??

RichardAnd

Thousands of people are sitting ontop of mortgages that are going to take the lions share of their life time to pay back. Many more will never be able to pay back their debts. The level of personal debt in this country is staggering when one thinks upon it and is an elephant in the room (although at this stage, it can join the herd ).

The only real solution might be to let the natural process of things take its course. If the bankruptcy laws here were relaxed to the laws in the US then people could default. They'd be left with nothing and would likely have a 5-10 year span of poverty to deal with but they'd have a clean slate.

But that's about the limit of what I can come up with as I'm not to astute on the matter. One way or the other, I don't think there's a clean solution to any of this.

seamus

SC wrote: »

I would like to know if anyone out there has a solution or take on how, or if, there is a solution to the negative equity question.

That depends on what the question is.

Negative equity is only an issue in two cases:

1. You want to move
2. You can't afford your mortgage and you need to sell up

For everyone who is in a home which is adequate for their needs, but happens to be in negative equity, then there's not really any problem there to be solved. They will complete their mortgages in time and that's that.

In the case of people in scenario 2, we need to amend our bankruptcy laws and have needed to do so for a long time.

I would look at a ten-year rule;
You declare bankruptcy (i.e. debts way outstripping assets and an inability to service those debts on an ongoing basis). The bank obviously assesses the declaration to determine if it's real. If the declaration is accepted, the major assets are liquidated (car, house, etc) and the money given to your creditors, but then that's it, you owe no more.
The kicker though is that it should then be an offence for any institution to provide you with a credit facility for ten years, be that credit card, mortgage, overdraft, etc.

People in scenario 1 may possibly be something of a social issue in years to come as we have families stuck in accomodation which is inadequate for their needs. Though I suspect this will somewhat balance itself and they will rent houses while renting out their mortgaged property to someone else. We'll have an odd situation in this country for a while where lots of people rent their home, while having a mortgage on another property which is rented out.

Remember though that it's a passing problem. In twenty years time, the bulk of people in negative equity will be back in equity again and the problem is gone away.

DonkyDonk

RichardAnd wrote: »

Thousands of people are sitting ontop of mortgages that are going to take the lions share of their life time to pay back. Many more will never be able to pay back their debts. The level of personal debt in this country is staggering when one thinks upon it and is an elephant in the room (although at this stage, it can join the herd ).

The only real solution might be to let the natural process of things take its course. If the bankruptcy laws here were relaxed to the laws in the US then people could default. They'd be left with nothing and would likely have a 5-10 year span of poverty to deal with but they'd have a clean slate.

But that's about the limit of what I can come up with as I'm not to astute on the matter. One way or the other, I don't think there's a clean solution to any of this.

It's a tough one alright. I can only see three possible solutions, though I should point out that I'm only speculating and am in no way qualified in economics!

1. Do nothing. They bought their houses at a time when property prices were ever increasing with no sign of stopping. Tough Luck. Buyer beware & all that. This seems to be what's going on at the minute while the powers-that-be try to figure something out. Like you said, people will be most of their lives paying off money that they will most likely never get back. Plus, as interest rates rise sharply in the coming years, many of these people may be forced to default as their payments keep increasing. Very harsh.

2. Let them default. Like the quote above, if we have more forgiving bankruptcy laws, people could just walk away and start again in a few years, no harm no foul. Seems fair to everyone, except for one problem: The banks will have to write off all the bad debts, which means that the banks can't pay their own debts as they will have lost so many mortgage payments and will be left with thousands of properties that are no longer worth what they loaned for them in the first place. This means that the banks will be forced to take another bailout that will probably be in the tens of billions again. A nasty domino effect.

3. Debt amnesty. This has been mooted by a few pundits over the last year or so: Let them off the hook by revaluing their property to today's perceived market value and adjust their debt accordingly. Three problems: Difficult to determine what their property is worth now (prices are still very volatile) and point 2 above still applies: the adjustment of debt creates a domino effect that renders the banks broke. Again. And finally, what about those of us who didn't buy an overpriced house? Should we be punished for other peoples mistakes? It doesn't sound very fair that you can just change your debt when it no longer suits.


While your U.S. bankruptcy solution makes tons of sense and strikes me as the "fairest" option, but we are unlikely to see it for a while because of the risk of a second bailout and another major loss of face for Ireland.

That's my take on it anyway. Like I said I'm no economist, it's just my opinion.

danbohan

seamus wrote: »

That depends on what the question is.

Negative equity is only an issue in two cases:

1. You want to move
2. You can't afford your mortgage and you need to sell up

For everyone who is in a home which is adequate for their needs, but happens to be in negative equity, then there's not really any problem there to be solved. They will complete their mortgages in time and that's that.

In the case of people in scenario 2, we need to amend our bankruptcy laws and have needed to do so for a long time.

I would look at a ten-year rule;
You declare bankruptcy (i.e. debts way outstripping assets and an inability to service those debts on an ongoing basis). The bank obviously assesses the declaration to determine if it's real. If the declaration is accepted, the major assets are liquidated (car, house, etc) and the money given to your creditors, but then that's it, you owe no more.
The kicker though is that it should then be an offence for any institution to provide you with a credit facility for ten years, be that credit card, mortgage, overdraft, etc.

People in scenario 1 may possibly be something of a social issue in years to come as we have families stuck in accomodation which is inadequate for their needs. Though I suspect this will somewhat balance itself and they will rent houses while renting out their mortgaged property to someone else. We'll have an odd situation in this country for a while where lots of people rent their home, while having a mortgage on another property which is rented out.

Remember though that it's a passing problem. In twenty years time, the bulk of people in negative equity will be back in equity again and the problem is gone away.

negative equity is a bigger problem than just not been able to move or sell if you are in financial need to do so . it will have long term effects on the owner in relation to their home they are paying for maybe the rest of their life, on a house that may never be worth what they paid for it , they will not have the sense of home ownership and home pride associated with it , they will see the house as a burden and be reluctant to spend on improvements etc result will be less work in years to come for builders gardeners etc . it will also create a generation of savers who having been very badly burned on the biggest investment most people ever make will be reluctant to spend as they might have previously . while saving is a v good thing in itself is not what a flagging economy like ours needs right now

hmmm

SC wrote: »

I would like to know if anyone out there has a solution or take on how, or if, there is a solution to the negative equity question.

Yes, pay the mortgage they signed up to. Every other "solution" involves someone else paying their mortgage.

Gumbo

hmmm wrote: »

Yes, pay the mortgage they signed up to. Every other "solution" involves someone else paying their mortgage.

tell that to Simon Kelly...............................

kinda hurts the average person struggling to meet their bills week in week out and they they see this....

http://thepressnet.com/2011/02/03/14224/

http://www.politics.ie/current-affairs/63799-paddy-kelly-developer-court-no-show.html

http://www.thepropertypin.com/viewtopic.php?f=4&t=21201&start=45

http://www.irishtimes.com/newspaper/breaking/2010/0427/breaking67.html

http://www.independent.ie/national-news/courts/developers-son-offers-to-pay-off-euro100-a-month-on-euro17m-debt-2523006.html

Tipp Man

I find it interesting that people say we need to change our bankruptcy laws, not just on here but in the general media also

I want to know how that is going to make people smarter borrowers? Currently if i take out a mortage i know the huge responsibility that goes with it for many years so i am more likely to borrow what i can afford. If we relax the laws then i will think to myself I'll borrow more and if it goes pear shaped i can always declare bankruptcy. Sur i can get going again in 10 years. For me this kind of law promotes bad borrowing and god knows we have enough of that already in the country.

also when somebody declares bankruptcy it's not a "free" situation. Somebody is losing money and somebody is paying for it. If we relax the laws then the cost of borrowing will increase (by quite a bit i would imagine) as lenders factor in that bankruptcy and non repayment is a much greater possibility. So good borrowers are paying the cost of bad borrowers

For me a relaxation of the borrowing laws stinks of people unwilling to accept responsibility for their own decisions and choices which is typical of this country really. Always looking for the easy out option. Always willing to give the people who make bad/stupid decisions an easy time over those who act rationally/smart

Here's a solution for you. You pay the mortage till its paid - if its not paid by death then your estate pays it until its paid

Tim Robbins

What we are seeing is a huge amount of capital been hoovered out of the middle classes. The banks are too big too fail but people aren't.

I think they should have to pay off all their debts or we will never learn lessons and may as well just print money. The best thing the government can do is make it as easy as possible to pay them off by getting back to economic growth and allowing people to extend terms and take morgage holidays.

seamus

danbohan wrote: »

negative equity is a bigger problem than just not been able to move or sell if you are in financial need to do so . it will have long term effects on the owner in relation to their home they are paying for maybe the rest of their life, on a house that may never be worth what they paid for it , they will not have the sense of home ownership and home pride associated with it , they will see the house as a burden and be reluctant to spend on improvements etc result will be less work in years to come for builders gardeners etc .

That's kind of a fuzzy and presumptuous way to look at it.

I'm someone in negative equity, and to be frank I'm more likely to have pride in my home and spend money on improvement because I know that I don't have any other options in the medium-term so I may as well make the best of what I have.

You reckon that people will allow their houses to fall into disrepair around them because they're sulking? I really don't think so.

it will also create a generation of savers who having been very badly burned on the biggest investment most people ever make will be reluctant to spend as they might have previously . while saving is a v good thing in itself is not what a flagging economy like ours needs right now

If anything, it's those who aren't in negative equity who are currently doing the most saving because they have the money to save. We have a massive sum of cash in savings (hundreds of billions) in this country, I would hazard a guess most of whom have little or no mortgage.

Yes, people are now more likely to save than spend, but that's a symptom of an economic crash, not something caused by negative equity. Even if we were to clear everyone's negative equity tomorrow, it's not going to encourage people to suddenly start emptying their bank accounts in the shops.

Tim Robbins

Tipp Man wrote: »

I find it interesting that people say we need to change our bankruptcy laws, not just on here but in the general media also

I want to know how that is going to make people smarter borrowers? Currently if i take out a mortage i know the huge responsibility that goes with it for many years so i am more likely to borrow what i can afford. If we relax the laws then i will think to myself I'll borrow more and if it goes pear shaped i can always declare bankruptcy. Sur i can get going again in 10 years. For me this kind of law promotes bad borrowing and god knows we have enough of that already in the country.

Exactly. The one deterrant to reckless borrowing was our bankrupcy laws. Remove them and the next bubble will be even worse.

seamus

Tim Robbins wrote: »

The one deterrant to reckless borrowing was our bankrupcy laws.

They really worked well over the last ten years didn't they?

If anything our bankruptcy laws encourage reckless lending because the borrower is more likely to break their back repaying their loans rather than declare bankruptcy. In the event that bankruptcy is declared, the lender doesn't necessarily come off badly.

However, if you make the potential risks for the lender much larger and the ability to declare bankruptcy easier, then that requires the lender to be more strict and frugal in their policies. In this regard, the public at large needs to be viewed as a pack of hungry pigs and the banks have control of the trough. The pigs will eat from the trough until it's empty, no matter how big or small the trough is.

Expecting borrowers to manage their own borrowing is folly. You can't legislate for idiots. Instead you have to expect lenders to control their lending.

20Cent

Besides being in negative equity there is the extra kick in the teeth that the homeowner is also bailing out pretty much everyone else except themselves. Levies more taxes etc to pay for the bank that is now increaseing interest rates on them!
Developers, speculators etc are getting help from the taxpayer but the guy stuck with the bill gets nothing. With stories coming out on a weekly basis of corruption and scandals there will be a generation totally disenfrachised from society. Not to mention trying to bring up a family in small appatments which they cannot move from. The social devestation caused by this will equal the economic.

Euroland

We should relax personal bankruptcy laws up to the US or UK levels, allowing people to easily bankrupt themselves and have only 1 year clearance period.

Tipp Man

seamus wrote: »

They really worked well over the last ten years didn't they?

If anything our bankruptcy laws encourage reckless lending because the borrower is more likely to break their back repaying their loans rather than declare bankruptcy. In the event that bankruptcy is declared, the lender doesn't necessarily come off badly.

However, if you make the potential risks for the lender much larger and the ability to declare bankruptcy easier, then that requires the lender to be more strict and frugal in their policies. In this regard, the public at large needs to be viewed as a pack of hungry pigs and the banks have control of the trough. The pigs will eat from the trough until it's empty, no matter how big or small the trough is.

Expecting borrowers to manage their own borrowing is folly. You can't legislate for idiots. Instead you have to expect lenders to control their lending.

the line in bold - are you serious??? You think that people have no responsibility for their actions at all??

Tipp Man

Euroland wrote: »

We should relax personal bankruptcy laws up to the US or UK levels, allowing people to easily bankrupt themselves and have only 1 year clearance period.

Yeah real smart idea

So i borrow 10k, declare myself bankrupt and go on a round the world trip on the money. Come back in a year and its like nothing happened??

Seriously get a grip

seamus

Tipp Man wrote: »

the line in bold - are you serious??? You think that people have no responsibility for their actions at all??

No of course not. But the current situation as Tim points out where the onus is almost entirely on the borrower to borrow "smart" is unbalanced and fails to take account of the public's inherent inability to manage their finances correctly.

As I pointed out in an earlier post, it should certainly not be a situation where the borrower can simply walk away from their debt without consequence.

Euroland

Tipp Man wrote: »

Yeah real smart idea

So i borrow 10k, declare myself bankrupt and go on a round the world trip on the money. Come back in a year and its like nothing happened??

Seriously get a grip

If it perfectly works there why it shouldn't work here?

Tipp Man

Euroland wrote: »

If it perfectly works there why it shouldn't work here?

I believe its 15 years in the states and 10 in UK - why on earth would you say 1 year

bamboozle

what is most worrying about negative equity is that with ECB rates due to rise mortgages are going to start creeping up significantly, more home owners will be unable to pay their mortgages and we'll see both mortgage areers increasing and more negative equity as there will be lots of homes up for sale as people will be unable to pay their mortgages.

back in the '80's govt were able to step in and offer full mortgage interst relief but as all state money is caught up in the banks i cant see that happening.

Inquitus

seamus wrote: »

People in scenario 1 may possibly be something of a social issue in years to come as we have families stuck in accomodation which is inadequate for their needs. Though I suspect this will somewhat balance itself and they will rent houses while renting out their mortgaged property to someone else. We'll have an odd situation in this country for a while where lots of people rent their home, while having a mortgage on another property which is rented out.

Thats not actually as good as it sounds, only 75% of your Mortgage Interest can be offset against your rental income for tax purposes, and also none of the principal can be. You do have taxable allowances for wear and tear and letting fees, but again you must pay these yourself.

The fact of the matter is it will remain impossible for most people in negative equity to rent their house for anything near enough to cover their mortgage repayments for years and years to come. Effectively meaning they have no option to move at all, unless Banks allow negative equity to be moved from home to home at some stage.

Euroland

Tipp Man wrote: »

I believe its 15 years in the states and 10 in UK - why on earth would you say 1 year

UK:

Personal Bankruptcy

What are the advantages of going bankrupt?

• Often the fastest and cheapest way of becoming debt free.
• If you have no assets, then losing them is not exactly a hardship. i.e losing ownership of your home is not exactly a worry if you live in rented accommodation!
• Removes some of the pressure on you because you’ll not have to negotiate individually with a number of creditors.
• The problems and harassment caused by creditors or bailiffs end once the order is created.
• Bankruptcy helps you make a fresh start. The moment the bankruptcy order is made, you’ll achieve relief from pressing creditors. Depending on your circumstances, you can be automatically discharged from bankruptcy after 12 months, which may be a shorter time than it would take to come to other agreements with creditors.
• The majority of assets that people believe they will lose in bankruptcy, they can actually keep in most cases. I.e low value cars, cars on HP, their television etc.

Misconceptions

It is a generally held misconception that personal bankruptcy is punitive and that bailiffs will seize your goods and chattels leaving you nothing but a change of clothes. This is false. You enter the protection of a Bankruptcy Order to do exactly that; to protect yourself from creditors and to allow you to wipe the slate clean and get a fresh start. Under Section 283(2) of the Insolvency Act you are allowed to keep the tools of your trade, all clothing, bedding, furniture and even your car (provided it’s not too expensive and subject to certain conditions) the general principle is that your goods and chattels are safe.
The law changed in 2004 and the mandatory period required to serve under the Bankruptcy Order was reduced from 3 years to 1 year even if you have been adjudged bankrupt before. Bankruptcy is no longer a punitive action and is there to allow discharged Bankrupts the opportunity of rebuilding their lives. In some cases, bankrupts can be discharged from bankruptcy in as little as 3 months at the Official Receiver’s discretion. An early discharge is possible provided no creditors object. For those granted an early discharge, the average discharge period is around 7 months.
Your name no longer appears in the local paper when you enter yourself into the protection of bankruptcy. This stopped in April of 2009. There are some restrictions to this however for example your name will still appear if you owned a business that had complaints made against it in the local community.


To find out more about common misconceptions in bankruptcy and to get further information on making the right choice we heavily recommend reading our frequently asked questions page, or contacting an advisor.
Assets you can keep!

You can keep the following items of property unless the individual value of each is more than the cost of a reasonable replacement:
Tools, books, vehicles, and other items of equipment necessary to your personal use in your employment, business or vocation; and clothing, bedding, furniture, household equipment (for example, a cooker) and possessions necessary for satisfying your basic domestic needs of you and your family.
Most household items will not be sold. You will usually be allowed to keep furniture, a television and similar items. However, items which go beyond satisfying basic domestic needs, for example, antiques, expensive jewellery, a good quality new hi-fi system or a new DVD player, may be sold.
A car will usually not be sold unless it is valued over £1,500. However, the value of the car can influence the decision made about its sale.
Inland Revenue approved pensions are excluded from being taken into account as an asset in bankruptcy.
You can apply to court if you believe that the trustee is acting unreasonably when taking or selling goods. Also, if an exempt item is sold, then you may be provided with a reasonable cheaper replacement, if your circumstances require it, by the trustee. For example, if you need a car for your job, a cheaper replacement vehicle may be supplied.
If you have items of value, the trustee may take possession and sell them. They may instruct an agent or auctioneer to value such items. You may dispute the value of the property by obtaining an independent valuation. Bankruptcy has the benefit of writing off all unsecured debt with the exception of court fines and maintenance payments directed by Court Order and student loans.

http://www.bankruptcy.co.uk/personal-bankruptcy.php

JJJJNR

kceire wrote: »

tell that to Simon Kelly...............................

kinda hurts the average person struggling to meet their bills week in week out and they they see this....

http://thepressnet.com/2011/02/03/14224/

http://www.politics.ie/current-affairs/63799-paddy-kelly-developer-court-no-show.html

http://www.thepropertypin.com/viewtopic.php?f=4&t=21201&start=45

http://www.irishtimes.com/newspaper/breaking/2010/0427/breaking67.html

http://www.independent.ie/national-news/courts/developers-son-offers-to-pay-off-euro100-a-month-on-euro17m-debt-2523006.html

That really is unreal reading, seems the more you owe the less you pay! I hate to quote they are sending people to prison for not paying their TV fees! but that case is just unreal in this day and climate..

ei.sdraob

danbohan wrote: »

negative equity is a bigger problem than just not been able to move or sell if you are in financial need to do so . it will have long term effects on the owner in relation to their home they are paying for maybe the rest of their life, on a house that may never be worth what they paid for it , they will not have the sense of home ownership and home pride associated with it , they will see the house as a burden and be reluctant to spend on improvements etc result will be less work in years to come for builders gardeners etc

IMHO That is a rather silly argument, plenty of (often same) people have no issues bying new cars on credit which deprecite quite quickly the moment number plate goes on and in first few years. Instant negative equity right there yet is widely accepted.

20Cent

ei.sdraob wrote: »

IMHO That is a rather silly argument, plenty of (often same) people have no issues bying new cars on credit which deprecite quite quickly the moment number plate goes on and in first few years. Instant negative equity right there yet is widely accepted.

You can't seriously compare buying a car to a home.

SC

An interesting discussion so far. But seems to be getting fixed on the issue of bankruptcy. While this is part of the arrears question. I intended my question on negative equity solutions , as one that was looking at the 'trapped' generation. And the costs of having an immobile labour force.
What would increase the mobility of this labour, without costing the taxpayer so no moral hazard.
If at this point houses could be shorted, there is still a gain of 40 to 50 % to be made i.e. protection/hedge, going on the basis of NAMA and CBI projections.

ei.sdraob

20Cent wrote: »

You can't seriously compare buying a car to a home.

Its the next biggest asset people purchase in their lives, often 1/10th of price of a home.

This belief that a home is something "special" and excluded from basic common sense is a relic of celtic tiger era, homes are assets that also depreciate and require maintenance, there is no law that states that house prices only ever go up (above inflation).

20Cent

ei.sdraob wrote: »

Its the next biggest asset people purchase in their lives, often 1/10th of price of a home.

This belief that a home is something "special" and excluded from basic common sense is a relic of celtic tiger era, homes are assets that also depreciate and require maintenance, there is no law that states that house prices only ever go up.

You still can't seriously compare buying a car to a home.

Euroland

SC wrote: »

An interesting discussion so far. But seems to be getting fixed on the issue of bankruptcy. While this is part of the arrears question. I intended my question on negative equity solutions , as one that was looking at the 'trapped' generation. And the costs of having an immobile labour force.

No, this is not a part of the arrears question, it is a part of strategy for eleminating enormous personal debt (first of all mortgage debt).

ei.sdraob

20Cent wrote: »

You still can't seriously compare buying a car to a home.

Yes I can, since for average person its the next biggest asset they buy

And a home is an asset (once credit is paid off if bought if credit) not a magical piggy bank or home ATM

Maybe if more people stood back and thought rationaly before signing on the dotted line they wont be in situation they are today.

halkar

20Cent wrote: »

You still can't seriously compare buying a car to a home.

Why not? You get a car lets say for 30 grand. You borrow the money on 5 years loan and after 2 years you can no longer pay the loan and car only worth half of what you paid. What are the options here?

Sell the car and pay the rest of the loan as normal with reduced payments maybe.

Restructure yourself and keep the car continue paying.

Sell the car take the money and emigrate with two fingers to bank. Forget about Ireland for next foreseeable future.

Same as the mortgage, I don't see any other options except banks can take the car of you easier than they can take your house (if it is your main residence).