Negative Equity - Solutions ?

Unrealistic

erictheviking1 wrote: »

If people can't afford to pay they should be allowed to walk. I think a cut in peoples mortgage debt with a deal struck with banks so that the banks take the profit from a future sale.
Whats with all the comments of "why should I bail out homeowners when I rented?"
All I can say to that is that there are plenty of people with no savings. Why should they guarantee deposits of people who have savings.
Its a society first and an economy second. The "I'm all right Jack" attitude on these boards is very disappointing. It would not have happened 20 or 30 years ago. It was in peoples nature to help each other out.
I think until the attitude changes the country will stay in the ****!

The deposit guarantee is different because it is protecting an asset that citizens already own. Cash that they have earned and paid for with their hard work. If you want to draw a parallel with the deposit guarantee scheme in relation to housing then a much better example would be property laws which guarantee that, when you own a house, fully paid for, no one can take it away from you.

The deposit guarantee serves too main purposes which benefit society as a whole.
1) It limits the incentive to keep cash under the mattress so thereby reducing crime levels.
2) It brings savings back into the productive economy (when the banking system is actually working as it should).

"Bailing out home-owners" on the other hand is giving people something for nothing, not protecting something they already own and paid for. And it is given that something selectively to people who, through either bad luck or recklessness, borrowed more than they could afford. And what really gets people upset is, I think, not helping the people who have genuinely fallen on hard times but making the prudent pay for the reckless to be able to keep the fruits of their recklessness.

Unrealistic

20Cent wrote: »

10's of thousands of defaults will be everyones problem.

That is by no means clear. If a default just means crystallsing the losses that have already been recognised by the bank and they actually get a cash injection from the sale of the mortgaged property then it is actually a positive result for the bank (and therefore the tax payer). And if tens of thousands of defaults frees up the property market such that people can buy homes again at long-term sustainable prices then that is a good building block for recovery to a healthy economy.

whiteonion

Look Euroland, should people who took a car loan be able to walk away from loan after three years because they will be paying more for the car then what it's currently worth?

Cars lose value over the years due to wear and tear etc, why should houses be any different? What is so "magic" about houses that it should be normal to expect them to increase in value every year?

Unrealistic

Inquitus wrote: »

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.

Whether the rent actually covers the mortgage payment is only of secondary importance and it wouldn't necessarily prevent people from moving out of the home they are paying the mortgage on in order to rent something bigger or more conveniently located. The critical factor is whether they can afford to cover the difference between the two rents.

If I'm paying a mortgage of €1000 on a three bedroom house and I could rent out the house for €800 while I pay €950 rent for a four bedroom house then the only number that matters is the €150 difference between the rent I receive and the rent I pay. I'm paying the mortgage either way so it all boils down to whether I can afford to pay the extra €150 in net rent each month to live in a house with an extra bedroom.

Mr. Loverman

whiteonion wrote: »

Look Euroland, should people who took a car loan be able to walk away from loan after three years because they will be paying more for the car then what it's currently worth?

Cars lose value over the years due to wear and tear etc, why should houses be any different? What is so "magic" about houses that it should be normal to expect them to increase in value every year?

Stop using your brain. Humans aren't supposed to think. Just do what the government tell you.

danbohan

hmmm wrote: »

Unfortunately the taxpayer owns most of the banks, anything you take off the banks comes out of the taxpayer's pocket.

There is no solution that involves free money. All "solutions" involve taking money off one group of people and giving it to mortgagees. Any argument that this will benefit the economy forgets that someone else is going to have less to spend as a consequence.

The solution as far as I am concerned is a reform of bankruptcy laws. However, if it becomes easier for people to go bankrupt with fewer consequences, the flipside is that many people will be unable to get loans or mortgages in the future as the banks will not be as willing to lend. That should be borne in mind when in 10 years time we hear complaints about people being unable to borrow to buy their "dream house".

banks will not be as willing to lend. That should be borne in mind when in 10 years time we hear complaints about people being unable to borrow to buy their "dream house".

which considering we have at least 100,000 people not able to make their mortgage payments fully now in an era of historically low interest rates might be no bad thing

the one saving grace in the sh1111t that was 80s ireland was that banks were exactly as you said, reluctant to lend and anybody looking for over 70% was treated like a robber but it meant people were not loaded with personal debt and could struggle through , today i am more an more convinced that morgan kelly is right and the result will be .............?

Inquitus

Unrealistic wrote: »

Whether the rent actually covers the mortgage payment is only of secondary importance and it wouldn't necessarily prevent people from moving out of the home they are paying the mortgage on in order to rent something bigger or more conveniently located. The critical factor is whether they can afford to cover the difference between the two rents.

If I'm paying a mortgage of €1000 on a three bedroom house and I could rent out the house for €800 while I pay €950 rent for a four bedroom house then the only number that matters is the €150 difference between the rent I receive and the rent I pay. I'm paying the mortgage either way so it all boils down to whether I can afford to pay the extra €150 in net rent each month to live in a house with an extra bedroom.

Unfortunately it doesnt work like that.

You rent your house for 1000 euros = 12,000 per annum
Your mortgage is for 1000 euros = 12,000 per annum
Your principal repayment is 250 of the 1,000 euro = 3,000 per annum
Your Interest repayment is 750 of 1,000 euro = 9,000 per annum
Only 75% of your interest can be offset against your rental income = 6,750 per annum
Your Letting fees are 6% = 720 per annum
Your costs of repairs, equipment depreciation etc. = 500 per annum

Rental income = 12,000
Claimable Interest = 6,750
Claimable letting fees = 720
Claimable Deprc'n etc. = 500

Rental Income liable for tax = 4,030
Tax @ 40% on rental Income = 1,612

So your loss on renting your home for the same amount as your mortgage is as follows:

Rental income = 12,000
Mortgage Repayments = 12,000
letting fees = 720
Claimable Deprc'n etc. = 500
Tax due on rental income: 1,612

Loss = 2,832 per annum

And that on the proviso you can actually rent your house for the same value as your mortgage, which imo is highly doubtful if you purchased at the worst excesses of the market.

seamus

Inquitus wrote: »

Loss = 2,832 per annum

Which is €250/month.

When you consider that in general people's salaries will rise as they progress through their careers, then it stands to reason that a 20/30-something couple currently living in an apartment and paying a mortgage, will likely be better funded in ten years time to the point that they would be capable of securing a larger mortgage, but will be unable to do so with the negative equity millstone around their necks.

This is where the shortfall is made up - they can afford to take the hit and pay an extra 300-500 per month if necessary to rent a larger home.

Your figures do work out right now, but you need to consider it long-term. Most people in negative equity at the moment are people in their 20's and 30's and ten years is a long time in economics. Their salaries will rise over time and their interest repayments will fall.

Inquitus

seamus wrote: »

Which is €250/month.

When you consider that in general people's salaries will rise as they progress through their careers, then it stands to reason that a 20/30-something couple currently living in an apartment and paying a mortgage, will likely be better funded in ten years time to the point that they would be capable of securing a larger mortgage, but will be unable to do so with the negative equity millstone around their necks.

This is where the shortfall is made up - they can afford to take the hit and pay an extra 300-500 per month if necessary to rent a larger home.

Your figures do work out right now, but you need to consider it long-term. Most people in negative equity at the moment are people in their 20's and 30's and ten years is a long time in economics. Their salaries will rise over time and their interest repayments will fall.

Yes, but as people progress through their mortgage they pay more prinicpal and less interest, so as time passes the interest claimable will be lower and lower bringing the annual cost up to 12,000.

Also Factor in that if you are in negative equity atm you would be lucky to rent your house for 60% of your mortgage. This would bring your losses up to near 6k per annum. You also run the added risk in a renters market or having your property go vacant for periods, again adding to the loss.

Must people in negative equity overreached and aren't able to absorb Mortgage Interest rate Increases, Losses on rental property, exposure to that property being vacant, while they go and rent in a nicer area.

Ofc some families will be able to do this, but for now that's the exception rather than than the rule.

Imho as things stand now, with the banks needing another 30bn, Interest rate hikes on the way, you'd be crazy to expose yourself to the vagaries of the rental market and the potential damage of having your home lie vacant while you must continue to repay the mortgage.

dan_d

Unrealistic wrote: »

There is an awful lot of noise made about this situation, and it must be terrible for people who actually find themselves unable to pay and unable to walk away, but I think you'll find there are actually relatively few people in this situation. At a rough estimate only 2-3% of all mortgages..

Funnily enough, that's part of the reason that I would break homeowners into various groups. While we do need to find a "blanket" solution so to speak, we also need to acknowledge that not every homeowner is in the same position. Therefore all the various solutions would only apply to a percentage of homeowners. And at that, the solutions could be broken down to be aimed at the groups that I listed, so that the whole solution isn't available to every single person that bought a house. Which should (hopefully) lessen the effects of whatever the solution might be,if that makes sense. It's different to offer a blanket bailout to 2-3% of mortgage holders, with other options available (not including a bailout) to those in different situations, than to offer it to every single person out there who is in NE.

Unrealistic wrote: »

I don't find it so easy to have sympathy for those in groups (5) and (6). If someone is struggling to make their mortgage it implies that they are still in employment but had over-borrowed to the extent that they were already close to the edge and it just took a pay cut and/or a couple of points increase in interest rates to tip them over the edge. Being more prudent about the amount they borrowed would have been enough to keep them out of this mess. In that case I think any assistance from the state has to involve giving up ownership of the home; either partially by handing over equity to the state to be realised on sale or bought back at future market rates, or outright by trading down to something they can afford to meet payments on.

Groups (7) and (8) are easier to have sympathy for. If you have been genuinely unemployed for an extended period then you are screwed no matter how prudent you were when you originally borrowed.

Sympathy is probably a bad word. Truth be told, I've little sympathy for any of them (and I'd imagine I fit into group 3 I think). As I said before, as an exercise to come up with the solution, I think we need to break homeowners into various different groups - acknowledge that we can't/won't provide a complete bailout for every single person out there who took out a mortgage that was far too big, but that there are certain groups that will have to be prioritised and helped. I wouldn't suggest bailouts for groups 5 & 6, but alternate solutions, something like what you've suggested. Groups 7 & 8, at this exact point in time, could probably be considered the highest priority. It's groups like this that the bank stress tests are accounting for, and extrapolating from their current numbers, are coming up with the possible scenario of how many defaults there MIGHT be. In other words, they're predicting how many of those in groups 5 & 6 will move to groups 7 & 8 in the near future.

Unrealistic

danbohan wrote: »

which considering we have at least 100,000 people not able to make their mortgage payments fully now in an era of historically low interest rates might be no bad thing

That is not quite accurate. We have 90k+ mortgages in trouble but that is not the same as 90k+ families being unable to make the payments on the family home (which is the only category we should really be concerned about). Many of those mortgages in trouble (no one has given a breakdown but, extrapolating from other statistics, it is reasonable to assume it is more than 50%) are on buy to lets and second homes. Indeed many of those in trouble hold multiple mortgages within that 90k+ figure. But the real number of family home mortgages in trouble is probably quite a bit less than 40k.

Unrealistic

Inquitus wrote: »

Unfortunately it doesnt work like that.

You rent your house for 1000 euros = 12,000 per annum
Your mortgage is for 1000 euros = 12,000 per annum
Your principal repayment is 250 of the 1,000 euro = 3,000 per annum
Your Interest repayment is 750 of 1,000 euro = 9,000 per annum
Only 75% of your interest can be offset against your rental income = 6,750 per annum
Your Letting fees are 6% = 720 per annum
Your costs of repairs, equipment depreciation etc. = 500 per annum

Rental income = 12,000
Claimable Interest = 6,750
Claimable letting fees = 720
Claimable Deprc'n etc. = 500

Rental Income liable for tax = 4,030
Tax @ 40% on rental Income = 1,612

So your loss on renting your home for the same amount as your mortgage is as follows:

Rental income = 12,000
Mortgage Repayments = 12,000
letting fees = 720
Claimable Deprc'n etc. = 500
Tax due on rental income: 1,612

Loss = 2,832 per annum

And that on the proviso you can actually rent your house for the same value as your mortgage, which imo is highly doubtful if you purchased at the worst excesses of the market.

Acknowledged, I simplified it by excluding the impact of tax. But the point still stands, that you do not need to have the incoming rent exceed the mortgage in order to be able to rent out a smaller place you are still paying a mortgage on so you can live in a larger property on which you pay rent. You just need to be able to cover the incremental cost which does, as you point out, include a tax bill.

Indeed, if as promised the rent allowances are scaled back and that brings down rental rates across the board you might not have a hope of having the rent cover the mortgage but still only have a relatively small incremental cost from renting a larger place to live in.

danbohan

Unrealistic wrote: »

That is not quite accurate. We have 90k+ mortgages in trouble but that is not the same as 90k+ families being unable to make the payments on the family home (which is the only category we should really be concerned about). Many of those mortgages in trouble (no one has given a breakdown but, extrapolating from other statistics, it is reasonable to assume it is more than 50%) are on buy to lets and second homes. Indeed many of those in trouble hold multiple mortgages within that 90k+ figure. But the real number of family home mortgages in trouble is probably quite a bit less than 40k.

But the real number of family home mortgages in trouble is probably quite a bit less than 40k.

real figures would be interesting but i dont think our banks or politicians would like us to know them
with interest rates set to rice from next week how long before people on trackers are added to the mess

Euroland

Mr. Loverman wrote: »

Germany is a ridiculously stable and wealthy country compared to Ireland.

Who told you that? Apparently this is why most of the Germans get born, grow, live and die in rented accommodation?

danbohan

Euroland wrote: »

Who told you that?

the German that was filling the atm down at the local bank with cash , was he lying ?

Euroland

Amhran Nua wrote: »

Trying to stimulate or operate a small economy that imports as much as ours on domestic demand alone is an exercise in futility anyway. The primary focus should be on creating or bringing in well paying jobs which export goods or services, getting money into the country from abroad, which also solves the mortgage repayment issue quite nicely.

Apparently you don’t know that Ireland has one of the highest trade surpluses per capita in the world?

Euroland

danbohan wrote: »

the German that was filling the atm down at the local bank with cash , was he lying ?

I often pass by the ATMs but have never seen the Germans filling our ATMs with cash. Can you advise me the whereabouts?

Ulysses Gaze

The other solution is extending mortgage repayment periods thus cutting the monthly repayment costs for those struggling with repayments.

So if someone signed up to a 35 year mortgage, extend the terms to 50 years. If it were 40 extend to 60 and so on.

Means more interest will be paid, but would cut repayments down on a monthly basis and make the mortgage more manageable. When things get better economically then allow a renegotiation of payment terms.

Multi-gen mortgages and not ideal but hey...

Ulysses Gaze

Originally Posted by Euroland View Post
Our task is not to make them more responsible, but rather help them find solution for negative equity situation. Or maybe you believe that now all these people have to struggle for another 15-30 years repaying the debt on devalued property and benefiting the bankers? I believe that those who want should have the open door which would allow them to escape from the negative equity situation, leaving the problem for the banks.

With all due respect Euroland your post makes little economic sense.

If we try and 'burn' the banks on this, they'll just up their charges or pass any levies on to the consumer. So we're screwed anyway.

Remember St Lenihan has a proviso in NAMA that states that if NAMA doesn't turn a profit, a levy will be charged on the banks to recover the difference. You really think the banks won't pass this on to the consumer if it comes to pass?

Plus, Irish people NEED to learn that with rights comes responsibility. What we've learned about economics and finance over the last 3/5 years should be the wake-up call the Irish people need. When taking out a vast sum of money to procure something, do your fcking homework!

Euroland

Ulysses Gaze wrote: »

With all due respect Euroland your post makes little economic sense.

If we try and 'burn' the banks on this, they'll just up their charges or pass any levies on to the consumer. So we're screwed anyway.

Remember St Lenihan has a proviso in NAMA that states that if NAMA doesn't turn a profit, a levy will be charged on the banks to recover the difference. You really think the banks won't pass this on to the consumer if it comes to pass?

Plus, Irish people NEED to learn that with rights comes responsibility. What we've learned about economics and finance over the last 3/5 years should be the wake-up call the Irish people need. When taking out a vast sum of money to procure something, do your fcking homework!

No, for me you position looks differently, you want to socialize the bank debt and pass bank responsibilities to the people. I prefer banks absorb the losses and pass them to the bondholders.

Either all negative equity should be directly scraped (property revaluation and mortgage adjustment) and losses passed to the bondholders or people should be allowed to go trough a simplified bankruptcy process.

Unrealistic

Euroland wrote: »

No, for me you position looks differently, you want to socialize the bank debt and pass bank responsibilities to the people. I prefer banks absorb the losses and pass them to the bondholders.

Either all negative equity should be directly scraped (property revaluation and mortgage adjustment) and losses passed to the bondholders or people should be allowed to go trough a simplified bankruptcy process.

You should try doing some simple arithmetic before floating proposals like this. Even if all the bonds currently outstanding; guaranteed, unguaranteed, senior or subordinate; were defaulted on 100% it wouldn't even come close to covering the losses from bad loans. Are you really suggesting we go to the bondholders and say "we're not giving you your money back and we want you to give us some more money to cover our losses"?

I don't know of anyone who wants to socialise the bank debts. But it seems that there are plenty people out there who don't understand that this has already happened. Anyone who is still saying "make the banks pay" is ignoring our current reality.

Euroland

Unrealistic wrote: »

1) You should try doing some simple arithmetic before floating proposals like this. Even if all the bonds currently outstanding; guaranteed, unguaranteed, senior or subordinate; were defaulted on 100% it wouldn't even come close to covering the losses from bad loans.

2) Are you really suggesting we go to the bondholders and say "we're not giving you your money back and we want you to give us some more money to cover our losses"?

3) I don't know of anyone who wants to socialise the bank debts. But it seems that there are plenty people out there who don't understand that this has already happened. Anyone who is still saying "make the banks pay" is ignoring our current reality.

1) It would be not faraway

2) Yes, it is a common practice in the corporate world to re-structure the debt. Current bank debt bondholders and the new lenders should be deferent entities.

3) Not everything, a lot (billions) still could be saved

Unrealistic

Euroland wrote: »

Unrealistic wrote: »

You should try doing some simple arithmetic before floating proposals like this. Even if all the bonds currently outstanding; guaranteed, unguaranteed, senior or subordinate; were defaulted on 100% it wouldn't even come close to covering the losses from bad loans.

1) It would be not faraway

€30 billion of bonds outstanding vs. €70 billion of acknowledged losses to bedirectly funded by the state and €180 billion of additional financing from the Irish Central Bank, NAMA and the ECB all underwritten by the state. That's "not faraway"?!?!

Euroland wrote: »

Unrealistic wrote: »

Are you really suggesting we go to the bondholders and say "we're not giving you your money back and we want you to give us some more money to cover our losses"?

2) Yes, it is a common practice in the corporate world to re-structure the debt. Current bank debt bondholders and the new lenders should be deferent entities.

We have already restructured much of the bond holdings, and we should certainly be aggressive about restructuring what remains, but that will only be a drop in the ocean. So how do we plug the rest. We can't pin it on the bondholders. They are not going to give us new free money to cover the losses. Although it's hard to understand whether you actually believe that is a real possibility or not. You first respond 'yes' but then refer to bondholders and new lenders being different entities. Maybe you would care to enlighten us as to who you think will lend to our banks in the short or medium turn?

Euroland wrote: »

Unrealistic wrote: »

I don't know of anyone who wants to socialise the bank debts. But it seems that there are plenty people out there who don't understand that this has already happened. Anyone who is still saying "make the banks pay" is ignoring our current reality.

3) Not everything, a lot (billions) still could be saved

Amhran Nua

Euroland wrote: »

Apparently you don’t know that Ireland has one of the highest trade surpluses per capita in the world?

That's not Ireland's trade surplus, that's the trade surplus of the MNCs that base themselves in Ireland. Most of the profit goes elsewhere.

Mike 1972

one factor the posters mentioning the possibility of renting out ones home neglected to mention was occupancy rate.

Anyone renting out a home is going to experience periods where tenants move out and the place sits empty for weeks or months at a time. and this (at best) could give rise to serious cashflow issues.

Talk of 60 year mortgages is nonsense. Thats far more than most peoples working lives.

As for discussions regarding who deserves "sympathy" surely consideration must be given to whether the property in question is a modest dwelling reasonable for the persons needs or a "plastic palace"

seamus wrote: »

When you consider that in general people's salaries will rise as they progress through their career.

As time goes on we are seeing more and more instances where this is not the case.

HelloJellyFish

Has anybody ever read this persons views, he covers more than just negative equity??

http://site.atmptm.com/Negative_Equity.php

orchidsrpretty

Some great points made across the thread and some flawed ones also;


As some have stated before me Negative Equity in itself is not necessarily a 'bad' thing per se but only if problems arise with regards to mortage repayments leading to a repossesion of the property and left with a huge debt onto of that.

I don't think the situation arose from reckless borrowering as so much as reckless lending, and yet due to the banks greed and possible corruption it's you and me who have to pay. People who jumped onto the band wagon of investing in property in the view to make a return from rents had money thrown at them by the banks, and as the saying goes dont put all your eggs into the one basket the exact opposite happened, when the downturn struck property prices plummeted and alot of people were royaly screwed. Life savings lost it is a real shame. But ideally alot of the people who had huge loans from the banks should never have qualified, in my opinion if the banks didnt wrecklessly lend money the way the did house prices would never have rose so much and alot of people wouldn't have been burned so badly, maybe not at all, who knows...

Tipp Man wrote: »

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

whatever your views on bankruptcy is one thing but you act like 10yrs is a small time frame when in fact its about 1/8 of an Irish persons life expectancy,

Couple things to change/introduce are bankruptcy laws, merge they banks they are bailing out, also I believe that if the tax payer is going to be ultimately bailing out the banks they the people of Ireland should have a stakehold in those banks and as such get better rates etc. and dividends too!

Unrealistic

HelloJellyFish wrote: »

Has anybody ever read this persons views, he covers more than just negative equity??

http://site.atmptm.com/Negative_Equity.php

Sounds like he is just another whiner looking for something for nothing. Calling for a blanket write down of negative equity, even for those comfortably paying their mortgages, when there is no equitable basis for doing this. If property prices had risen would he be volunteering to surrender the nominal gain to the bank?

And then there is this meaningless twaddle.

Banks, developers' assets, unburdened property and state collateral have all been written down and revalued on account of the global recession, generated by an international failure of banking systems. Why not write down the real assets of a first home to levels of negotiable reality. The institutions must re-align values.

The equation is simple. He decided to buy a house, he agreed a price, he received the house, and he should pay the amount agreed. If he can't pay then that needs to be addressed, and most likely in a way that involves him losing at least a part of the equity in his home. But if he can pay then he should just keep paying and stop whining.

Unrealistic

orchidsrpretty wrote: »

I believe that if the tax payer is going to be ultimately bailing out the banks they the people of Ireland should have a stakehold in those banks and as such get better rates etc. and dividends too!

But surely that's robbing Peter to pay Paul. The state is going to be the majority shareholder in all the banks. The only open question is what percentage of BOI (how close to 100%) it will eventually own. As such, if there are dividends, the state will get the dividends. But dividends can only be paid from profits and there won't be any of those in the foreseeable future. And there especially won't be any if we force the banks to lend money at lower than their own cost of borrowing. I think the best we can hope for is that when the banks are stablilised they will be sold off and we get at least part of our money back, but even that will only be a small fraction of the billions we have put in.

ei.sdraob

Unrealistic wrote: »

. But dividends can only be paid from profits and there won't be any of those in the foreseeable future.

There is also little incentive for state companies to be profitable, or not to make losses for that matter.