Writing off mortgage debt

Monty Burnz

balducci wrote: »

Debt for equity swap is the most realistic solution as the mortgage holder loses equity for what they can't repay

The problem with this is that people in negative equity by definition have no equity to give away.

balducci wrote: »

The reality is, that regardless of the moral argument for and against helping people with mortgage issues out, is that these people are not spending money in their local economy and elsewhere. Without this spending businesses are struggling to survive and employment is not going to come back. Are we going to leave a sizeable segment of our society economically impotent and slaves to the institutions that have put us in this mess?

Taxing money from people in category A (those not heavily indebted) to give it to people in category B (the heavily indebted) is not going to increase aggregate demand. In fact, it might well decrease it as people in category B - if they have any sense - will throw any extra money they get at their debts. People in category A are more likely to spend it in the restaurant.

golden lane

what an awful mess a lot of people are in at the present time...........why on earth did people think that a boom can go on forever.......

maybe this is the lesson everybody needed, but very sad for the victims..........

living on borrowed money....is a risk that should only be taken wisely.........it was not, and the result is obvious.....

the country as a whole is to blame, and the country as a whole need to put it right......

balducci

Monty Burnz wrote: »

The problem with this is that people in negative equity by definition have no equity to give away.

If you can only afford to pay half your mortgage then you will only ever own half your house.

Taxing money from people in category A (those not heavily indebted) to give it to people in category B (the heavily indebted) is not going to increase aggregate demand. In fact, it might well decrease it as people in category B - if they have any sense - will throw any extra money they get at their debts. People in category A are more likely to spend it in the restaurant.

Who's being taxed? The banks have already been given enough liquidity to deal with the mortgage issue (apparently) The bank rebalances it's sheets by no longer having a liability/defaulter on their books and instead have a mortgage, albeit smaller one, being repaid and an equity stake/asset on their books

daltonmd

balducci wrote: »

Debt for equity swap is the most realistic solution as the mortgage holder loses equity for what they can't repay - it limits moral hazard when it comes to those who won't pay as opposed to those who can't pay. As for the money, it's already in the banks. A person who is falling behind or not paying their mortgage is a liability, after debt for equity swap, the bank has a functioning mortgage(asset) and equity in a property(another asset). It avoids an accumulation of more properties for sale on the banks books and messy repossessions/relocation to council housing etc..

It would certainly sort the "can't pay" and "won't pay" brigade if the "won't pay" know it's not a handout.

balducci wrote: »

The reality is, that regardless of the moral argument for and against helping people with mortgage issues out, is that these people are not spending money in their local economy and elsewhere. Without this spending businesses are struggling to survive and employment is not going to come back. Are we going to leave a sizeable segment of our society economically impotent and slaves to the institutions that have put us in this mess?

Many would argue here that they put themselves in that mess and while that may be true for some, the results in the economy are the same.

Couple of things though - one worry that the banks/gov have is that IF there is some kind of deal done, such as the one above, how could we/they be sure that instead of spending it in the economy that people won't:
A) Pay down unsecured debt.
Not stick it into non Irish banks.

balducci

daltonmd wrote: »

A) Pay down unsecured debt.
Not stick it into non Irish banks.

That would/should be visible income to the banks that would allow them to swap back equity for debt.

Monty Burnz

balducci wrote: »

Who's being taxed? The banks have already been given enough liquidity to deal with the mortgage issue (apparently) The bank rebalances it's sheets by no longer having a liability/defaulter on their books and instead have a mortgage, albeit smaller one, being repaid and an equity stake/asset on their books

The capital that has been put into the banks (well, not so much in the case of BOI now, but anyway) is the Irish taxpayers' money, and until it is burnt in debt sharing or defaults, it still exists. Every cent of it that the banks preserve is money that can be returned to the shareholders (read: the taxpayer).

daltonmd

balducci wrote: »

That would/should be visible income to the banks that would allow them to swap back equity for debt.

You mean they'll account for it?

balducci

Monty Burnz wrote: »

The capital that has been put into the banks (well, not so much in the case of BOI now, but anyway) is the Irish taxpayers' money, and until it is burnt in debt sharing or defaults, it still exists. Every cent of it that the banks preserve is money that can be returned to the shareholders (read: the taxpayer).

A functioning mortgage plus equity in a property is more lucrative for the bank, ergo the shareholder, than mortgage forgiveness or repossession.

daltonmd

Monty Burnz wrote: »

The capital that has been put into the banks (well, not so much in the case of BOI now, but anyway) is the Irish taxpayers' money, and until it is burnt in debt sharing or defaults, it still exists. Every cent of it that the banks preserve is money that can be returned to the shareholders (read: the taxpayer).

Yes but will it?

balducci

daltonmd wrote: »

You mean they'll account for it?

Exactly. How, is where some difficulty would lie. Banks being able to access your revenue records for example.

Monty Burnz

daltonmd wrote: »

Yes but will it?

That's up to the shareholders - principally the MOF. Alternately, the money should provide capital for viable wealth-creating Irish businesses (not property related) that they are currently starved of, rather than being torn into confetti to relieve people of their bad decisions.

Monty Burnz

balducci wrote: »

A functioning mortgage plus equity in a property is more lucrative for the bank, ergo the shareholder, than mortgage forgiveness or repossession.

But the mortgagors don't have any equity - they are in negative equity (presumably).

daltonmd

Monty Burnz wrote: »

But the mortgagors don't have any equity - they are in negative equity (presumably).

But hang on - you yourself said that the asset was the loan, not the property.

Monty Burnz

daltonmd wrote: »

But hang on - you yourself said that the asset was the loan, not the property.

Oh lord. So you are suggesting the mortgagor gives the bank an equity share in the loan that they already own 100% of?

balducci

Monty Burnz wrote: »

the money should provide capital for viable wealth-creating Irish businesses (not property related) that they are currently starved of.

This is the underlying point of what I'm saying, I seem to be taking a slightly different path though. The fact is that banks are investing in government bonds and safe investments with money they are meant to be handing to small businesses/risky investments. Debt for equity gets that money back into the economy via consumption instead of via (non-existent) investment from the banks.

Monty Burnz

balducci wrote: »

Debt for equity gets that money back into the economy via consumption instead of via (non-existent) investment from the banks.

I see where you are coming from, but don't you see that those in NE have, by definition, no equity to give back to the bank?

daltonmd

Monty Burnz wrote: »

Oh lord. So you are suggesting the mortgagor gives the bank an equity share in the loan that they already own 100% of?

How you came to that conclusion I do not know.

The equity that is not there will be there in the future, the bank own that future equity but the asset, the loan is protected on the banks books.

balducci

Monty Burnz wrote: »

But the mortgagors don't have any equity - they are in negative equity (presumably).

That only becomes an issue if they want to sell the house, which they won't be able to do for a long time anyway. At which point, the equity will have (hopefully) returned. What you are creating is viable mortgage repayments based on what the mortgage holder can afford to pay. The shortfall is made up by the bank having a permanent stake in the property. Negative equity isn't most people's issue, it's the ability to pay their mortgages.

I gotta go work back later though

Monty Burnz

daltonmd wrote: »

How you came to that conclusion I do not know.

Because for some reason you mentioned the loans that are the banks' assets?

daltonmd wrote: »

The equity that is not there will be there in the future, the bank own that future equity but the asset, the loan is protected on the banks books.

Future equity? So, something that doesn't exist and may never exist?

Unrealistic

Monty Burnz wrote: »

The problem with this is that people in negative equity by definition have no equity to give away.

That isn't a necessarily a barrier. If you have a €300k mortgage on a €200k home you are in negative equity. But if you can still fund a €200k mortgage you could give half of the equity in the house to the bank for a €100k writedown and then continue to pay down a €200k mortgage although you'll only own half a house at the end.

Monty Burnz

balducci wrote: »

That only becomes an issue if they want to sell the house, which they won't be able to do for a long time anyway. At which point, the equity will have (hopefully) returned. What you are creating is viable mortgage repayments based on what the mortgage holder can afford to pay. The shortfall is made up by the bank having a permanent stake in the property. Negative equity isn't most people's issue, it's the ability to pay their mortgages.

I gotta go work back later though

It's not an ideal solution, but it certainly isn't the worst.

golden lane

Unrealistic wrote: »

That isn't a necessarily a barrier. If you have a €300k mortgage on a €200k home you are in negative equity. But if you can still fund a €200k mortgage you could give half of the equity in the house to the bank for a €100k writedown and then continue to pay down a €200k mortgage although you'll only own half a house at the end.

why would the ban want to own half the house.......that is not what banks are about.....there would be no interest coming back on their investment....banks survive on interest......

Unrealistic

golden lane wrote: »

why would the ban want to own half the house.......that is not what banks are about.....there would be no interest coming back on their investment....banks survive on interest......

There would presumably have to be some rental component involved as well and an option for the homeowner to buy back that equity if/when his circumstances improved.

daltonmd

Monty Burnz wrote: »

Because for some reason you mentioned the loans that are the banks' assets?

Future equity? So, something that doesn't exist and may never exist?

Yes but I was quoting you, the property has fallen in value but the loan hasn't, so this is the "asset", if the banks protect this asset then it looks better on their loan books, a performing asset looks better than a non performing one.

Future Equity - I am pretty pessimistic but I do see a time (around 2050 ) when house prices may recover a little. This is a long term solution Monty, because that is how long it will take to unravel this mess.

Farmer Pudsey

All this all go'es back to what happened in England in the late 80's early 90's the banks knew that if they repossed the properties that they had to secure and maintain the properties. After as little as 6 months houses that are empty become unhabitable if someone is not watching them
The banks left the owners in them paying as much of the mortgage as possible when the property prices recovered in the mid 90's the banks repossessed the houses turfed the owners and sold on the houses

Are Irish banks carrying on with the same game waiting for property prices to recover in 2-5 years and then will they begin to evict and recover as much money as possible

If they evicted now they would have to sell straight away in a poor market where prices would collapse so now they can wait and sell in the medium term. All that people that cannot pay there mortgage's in full are doing is looking after the banks property

Monty Burnz

Farmer Pudsey wrote: »

All this all go'es back to what happened in England in the late 80's early 90's the banks knew that if they repossed the properties that they had to secure and maintain the properties. After as little as 6 months houses that are empty become unhabitable if someone is not watching them
The banks left the owners in them paying as much of the mortgage as possible when the property prices recovered in the mid 90's the banks repossessed the houses turfed the owners and sold on the houses

FP, do you have any references to that practice that you might link to? I'm curious to read about it if you do.

Tigerandahalf

Interesting reading the last few pages. I was trying to read up a bit about the property bubble in the 80s. Btw I know a lad who was in London then. He left the keys in the letterbox and went to America. That is the worst case scenario for the banks. No mortgage being paid plus a property that is not secure and not being maintained. We have all seen what has happened to some of the unoccupied apartments and houses around the country. Copper tanks and piping and fitted kitchens ripped out of the properties. An unoccupied house would cost twice as much to insure if even. Also a house left unoccupied over the winter with no heating on would result in mould forming on walls etc. Squatters could take it over. Youths drinking in it and perhaps set it on fire. A real disaster from the banks point of view.

Some sort of scheme will have to be arranged to ensure people pay a fair amount of the mortgage but still leave people with a certain amount to spend in the local economy. Taking an equity in the house would help to prevent people from not paying their way. The writeoff would have to be taken off the banks' hands. It would be no good to the bank. It could be put with a gov body. This would also stop the bank from repossessing in the future when prices would improve. Their only concern would be the new revised mortgage. Thus they would be clean to lend. However, this would only be possible to start until you could be sure that no more paycuts would follow for workers. No point in arranging a writedown/new mortgage if a year later a lot of workers have their pay cut again.

Monty Burnz

Tigerandahalf wrote: »

Thus they would be clean to lend. However, this would only be possible to start until you could be sure that no more paycuts would follow for workers. No point in arranging a writedown/new mortgage if a year later a lot of workers have their pay cut again.

One question: what are they going to lend? It seems that Irish mortgages are more or less unsecured loans, so how are they going to securitise them?

Tigerandahalf

Well again everybody is waiting/hoping that the economy settles. Otherwise nothing much will happen. The real problem at the moment is the domestic economy. People don't have confidence/ability to spend in fear of more charges/taxes.
However, if the banks loan books are tidied up they are more likely to receive investment. This would provide money to lend. Again though you need the economy to stabilise for investors to come in. Given the improving Chinese/Irish connections Chinese investors may be encouraged to invest.

Monty Burnz

Tigerandahalf wrote: »

However, if the banks loan books are tidied up they are more likely to receive investment. This would provide money to lend..

But this is my point - who would invest in Ireland to lend against property where you can't enforce the 'security' on your loan?

Irish Bank: "Well Chinese businessman - here's how it works: we lend them hundreds of thousands to buy a place, and if they don't feel like paying it back, we let them stay in the house and give us half as much money back as they were supposed to. Are you in?"

Sum Ting Wong: "Uh...no thanks."