The ticking timebomb of strategic defaults

RATM

Was just having a think about this last night on the back of a friend of a friend who is currently strategically defaulting on a mortgage took out in 2006. I'm well aware of the consequences of his actions and don't agree with them one bit as we all end up paying in some form or other. But I'm looking to begin a discussion on the realities of this scenario rather than the morality of it.

So basically his mortgage was €500k, he had a 10% deposit. Now five years on the guys line of thinking is that he is better off to go to the UK for a year and claim bankruptcy. At first I thought of it as a stupid idea but having had it explained to me I can see how he is taking the single least worst option.

So I just want to tease this out because if it is as I think it is then this is probably going to be the single biggest factor that will push Ireland as a nation over an economic cliff edge.

So for example if someone took a mortgage in 2006 for 35 years then their term is until 2041. Lets say it was the €500k talked about earlier. So with interest payments the total repaid is going to be somewhere in the order of circa €900k-€1m. Putting €500k through a mortgage calculator with a 35yr term and 4% interest gives a repayment of €2,213 per month and a total repayment of €929,000 over the lifetime of the loan.

So five years into the loan period they have paid 60 months x €2213 = €133,000 plus their initial €50k deposit, so they've spent €183k in total. Now they look at the economic mess all around them and things have changed drastically. Depending on who you listen to house prices are down somewhere in the order of 50-60%. Morgan Kelly, who has been on the money so far, is on record as saying that they will level out at 80% of peak prices. He is obviously talking about the market as a whole so while houses sold in Ranelagh for €1m in 2006 are unlikely to drop to €200k that will be balanced out by houses in rural areas which were selling for €300k now being worth €30k, we've had a few in Donegal already and I think that ghost estate in Kerry went at auction for €13k per house so its not outside the bounds of possibility that many units will experience a 90-95% drop in value.

Our homeowner is now sitting down digesting all the negative news in the economy and they are acutely aware that they're in huge negative equity. Now negative equity during a loan period (in theory) shouldn't matter if at the end of the loan the house is worth more than you bought it for. But theory goes out the window in the current situation and the homeowner takes the view that his house, now worth €250k is likely to level out at 30% of initial purchase price. That's a midpoint between Morgan Kellys 80% drop and others who are calling a bottom or near bottom right now at 60% of peak. So lets say we bottom in 2015 and the original €500k house is worth €150k 9 years after purchase.

So our homeowner now has a stark and frightening situation in front of them. They have a loan of €939k on which they have repaid €133k, leaving them a liability of €806k. The asset on which the loan is secured on is soon going to be worth a sum total of €150k in 2015, leaving the fully paid asset worth €735k less than what has actually been repaid. Plus another €50k which went on the initial deposit. Pretty quickly the figures are looking extremely depressing.

But it could get even worse- the counter argument to negative equity is that (in theory) over the course of the next 30 years the value of the property should increase beyond the level of inflation, thus closing this gap. Its a proven economic counter weight of property crashes. But I am thinking that in itself it is premised on the original property being purchased within some range of actual value to its utility and potential income stream as a rentable commodity rather than a valuation informed by its potential future price as banking were doing here, especially since 2002 onwards.

So my logic is leading me to think that there is a double whammy contained within this crash and when those in the worst negative equity realise the second part of the the problem they will engage in strategic defaults, in huge numbers. The second part of the whammy occurs because of the folly of the banks for lending at the levels they did (12 times salary in some cases) and because lenders didn't question this then even the supposed safety net of current negative equity getting wiped by property increases over the next three decades looks like it might actually be unattainable.


In other words any hope the homeowner may have had in the long term could turn out to be useless and financially costly to think that way now and down the road (again just my opinion, open to correction here)

Because there was little 'normal' about lending practices and the prices paid from 1999-2008 but especially c.2003 and definitely 2005 onwards were not based on any kind of economic value system it stands to reason that that mistake must then have a severe knock on consequences for arriving back to the initial purchase price. The banks were not following established historical international norms of property being only ever worth a multiple of potential rental yield, despite acres of economic research being written on it and the witnessing of crashes in the UK, Finland, etc within the previous 15 years. Instead they ripped up of the rule book of lending on houses, the standard formula of lending 3-4 times salary went out the window. They lent you whatever the price of the house you wanted was and that itself was grossly inflated by bidding wars. No-one seemed to realise that bidding wars would go on forever if both bidders were being lent sums by banks not based on ability to repay but on some insane valuation of a piece of land and some bricks. It got to the point where freshly graduated students on €30k were getting loan approval for €300k. It meant that they were valuing houses that rented (even in the boom) for €15k per year at a price of €500k to purchase, something that would give a paltry gross yield of 0.75% a year. In hindsight when that lunacy was occurring it was no wonder that experienced institutional investors exited the Irish market, (including BOI who in 2005 sold all their branch properties and leased them right back) taking all the profits and running. (The BOI analysts seemed to know something was coming down the line, why else would you sell an asset that was going to continue to rise in value except if your predictive models and research told you otherwise. The Bank of Ireland decision is bizarre- on one hand someone in the bank took the view that 2005 was a great time to sell property and (wisely) sold up lock stock and barrel but on the other they continued to expose the entire bank further to the property market, especially in 2006 when prices rose 26% in under a year as the bubble gave its final push- its for another discussion but its interesting to note that BOI could have avoided the worst of the property crash if they'd followed the same strategy that they did believed in when selling their own branches and matched that with severely curtailing mortgage lending from '05 onwards)

The alternative was to stay in a property market that had now become one where profits were entirely dependent on the continuation of tax incentives to invest initially and then tax breaks on loan interest and also for capital gains tax to remain at a historic low of 20% from its usual level of 40%. The whole buy to let market was created out of thin air by of McCreevy and Cowen, a return on investment was dependent on three things that are far from reliable- having good tenants who always make the rent and don't wreck the place, for prices to continue to rise unsustainably and for tax policy to remain unchanged. They used agents to shore up the first as best as possible, hoped for the best on the second and lobbied Cowen and Bertie for the third. But as soon as any of those conditions changed then the BTL investor was going to be caught with their pants down, especially at a 100% exposure.

So in other words the market was far from normal, especially when viewed against global property prices over the previous 100 years in Western Societies. Consequently those who vastly overpaid for houses may not (I'm open to correction here) be saved by price increases over the next 30 years. I'm thinking this not only for the reason that they bought in an abnormal market but also because that when this recession begun in 2008 it looked (to me at least) like it might be a 5-6 year event. We're now four years in and the general feeling right now is that this crises is a minimum of a 12 year event, especially as the last 4 years of 'solutions' to the crises has been a complete and utter failure (both here and at EU level) and now things seem to be getting worse than they've ever been in the entire 4 year period. The EU has stagnated with 0% growth and here in Ireland soaking up a plethora of price increases on essential unavoidable services on an almost weekly basis, Bord Gais just a few weeks back, CIE back at the begging bowl soon, resulting in far less disposable income. Both sides are being hit, the level of income you've left after tax and then another whammy of increases in the price of goods you then want to spend your money on.Neither condition is exactly conducive to people being able to afford to pay higher house prices. Also as far as I remember there is a strong economic correlation between the level of unemployment and house prices- without unemployment going down it is an economical anomaly for house prices to rise, the report I read a few years back mentioned how a 10% unemployment rate typically has c25% of the a population genuinely scared for their job, their spending virtually seizes up as they save as much for a rainy day. It went on to say if 40% aren't spending in an economy then you'll house prices can't rise sustainably. There are lots of conditions conspiring against prices increases and little to inspire confidence they are going to arrive soon and also be sustainable for decades to come.


But lets get back on the topic of strategic defaults. Lets take €150k as the bottom value of the initial €500k purchased house, which is a total drop from peak of 70% (which is not an not an outlandish figure considering even the chief house price cheerleaders at the Irish Independent, who have remained permanently bullish about property, have reluctantly conceded that the current level of decline is 55% nationally)

So next we then assume (very generously I'd add) that the market immediately returns to being normal* in 2015
*by normal I'm referring to the following happening, all by 2015:- fresh lending begins with one or two foreign banks entering the Irish market, transaction volumes of house sales leave their current historic low, unemployment abates down to at least 9% (but 7% being more desirable), salaries rise and outstrip inflation, and the costs of living & transport reduce from current 2012 highs. These are all necessary conditions to deliver modest annual increases in house prices similar to historical price increases recorded long term in global markets


So the next assumption is that house prices increase from 2015 onwards and sustain their increases at 2% annually. (which lets assume is net of inflation of 1% for arguments sake, I'm being overly generous here) Assume that this 2% increase is after inflation is accounted for then continues to occur every single year for 30 years in a row. This would be seen by economist as a healthy & functioning property market,i.e. slow steady gains a la Germany. In fact if this did occur it would be a better performance than US house prices over the last 100 years of indexing real estate and adjusting it for inflation. So by US historical prices it is unlikely but I'm playing devils advocate here to illustrate how even a well performing market over the next 30 years may not be enough to save those in trouble right now.


So the 2012 house, bottoms to a value of €150k in 2015 but from then onwards has consistent increases of 2% annually compounded together for 30 straight years. Then that house that was valued at €500k in 2006 and €150k in 2015 is now worth a total of €271k in 2042, which is still far below the initial purchase price of €500k and a long way from the total €929k repayment. I'm using the compound interest calculator here to arrive at that figure of €271k
http://www.howtoretirestrong.com/default.aspx
The assumptions made are on the generous side given global historic data on real estate prices.

Now maybe I'm missing something here and someone will fill me in. But it appears that a homeowner in this situation is likely to come in for a large loss by paying their mortgage off between now and 2041. Of course I haven't allowed for mortgage interest relief which does reduce the total repaid, but only somewhat. I'm not familiar with how it works so it would be good if someone could adjust these figuers to reflect the discount. But I'm guessing its impact is less than €30-40k saved over the mortgage's life and I think the government are phasing it out down the road. Like any tax incentive or break it should be viewed as a bonus rather than cast in stone as it can be withdrawn at the stroke of a Minister pen.

At a rate of 4% interest the owner will have paid a total €929k (less the savings from interest relief) for an asset which is going to be worth, given the above (optimistic) assumptions a total of €271k in three decades time, 2041, Of course they will have had the benefit of living in the house for 35 years, something which is difficult to put a concrete cash figure on in order to do a direct comparison with someone who rented for 35 years. We can put a value on the costs of paying rent Vs paying a mortgage but that wouldn't account other variables such as the many thousands of people who bought homes from 2003-2008 and because of abnormal prices at the time now live in a commuter belt with longer journeys and the associated higher transport costs compared to someone who rents nearer their workplace in a city or town and can get a bus to work for €4 return daily or better again, walk to work. Other things to consider if comparing renting to buying property are maintenance costs, refuse and water charges, the new property tax, insurance and finally costs associated with the risks of ownership, i.e. flooding that insurance won't re-insure after the first instance, very real risk of pyrite, subsidence from poor structural work, etc.


When you tease it out and work some basic figures as above you can quickly see the incentive there is for people to strategically default on their mortgages, all other things being equal and even if their job is relatively secure, in fact you would have to factor in 1-1.5yrs lost net salary to any calculation as a safety net. But for each and every person mortgage holder who doesn't have a tracker there must come a tipping point where it is financially worth their while to default. It is just a matter of calculating their costs over the duration of the mortgage and allowing for what they think the house will be worth at the end, adjusted for inflation. No doubt people are already weighing things up and for those who bought late in the boom the savings to them could be potentially north of €400k over 30 years. That is approx €33k annually, which is not an insignificant sum to even a couple with a combined income of €100k. Especially as in order to have €33k cash in your pocket every year you'd have to earn somewhere in the region of €45k gross before tax before it ends up in your hands as €33k net.

For anyone who bought from 2004ish onwards and doesn't have an ECB linked tracker mortgage there is likely going to be a strategic money saving opportunity for them. As I said at the top of the thread I don't agree with the morals of this but anyone who subscribes to the notion of rational choice theory and basic human nature to protect ones self interests above all else then it is difficult to see how there isn't going to be a huge volume of defaults that didn't necessarily have to occur. Especially when the potential upside is savings that are nearly the same as the current prices of houses in their locality.

Of course a justification is needed for any strategic default, mainly as people will have to explain it to family & friends, humans have an inner need to feel accepted by those close to us and part of that is acceptance of our actions, choices, morals and values. It sounds like a difficult task at first, you are telling friends and family that you're basically doing a runner on a debt you signed up to. On some level there might be fear of exclusion from a group and also the paranoia of 'what will they think of me, will they trust me, etc. But in reality we can justify almost anything if the outcome is in our own self-interest and the interests of others around us.

So very neatly a mother or father of a strategic defaulter has their own self interest served by not being asked to help pay part of the children's mortgage themselves, a practice that is happening right now, I'm aware of two friends whose parents are currently paying their mortgage due to unemployment & cutbacks, one to 50% for the last 3 years, the other to 100% for 6 months now. In their individual scenarios the incentive to default is even higher as it can be justified as for the greater good; their reneging on their debt is saving their parents money, which they know is not sustainable in the long term. Finally they could also get a bit Machiavellian and reason that the money paid now by their parents means their eventual inheritance gift would be less as a result; and if you're thinking of defaulting then an inheritance payout down the line which falls outside the time frames of bankruptcy takes on greater importance than it did before the parents were helping pay the mortgage, all of which incentives the decision to default even further. It is easy to see how once a person has made up their mind that paying the entire mortgage makes bad financial sense then the easiest thing it to find a jusrification that fits some sort of moral code which is shared with your social circle for the approval you need to carry it out.

At the moment Sean Quinn justifies in his own mind the denial of €2.8bn to the Irish taxpayer for his costly and irresponsible gambles. He does so by saying he wasn't treated fairly by Anglo, he was conned by Sean Fitzpatrick, etc any number or reasons to allow his conscience do what he is currently doing, which is essentially a form of theft from every citizen in the country, all on a mammoth scale. As we're talking about nearly €3bn his actions can be directly linked to the consequences of hospital closures, cuts in education. The budget for the new Childrens Hospital is €1bn, but yet Quinn manages to justify moving assets valued at half its entire cost beyond Anglo and subsequently the taxpayer. On some level Sean Quinn must have thought that he is costing the country half the price of the children's hospital which is to the detriment of a lot of sick Irish children who currently dont get the care or facilities they need but he has a clear conscience, mist likely justifying it as a hospital for 'that lot up in Dublin who never did anything for Cavan, I did it all and got no thanks'. Even though he is clearly to blame here he can sleep soundly at night and doens't lose a wink as his own self interest is satisifed.

In order for the normal home owning citizen to justify a strategic default all they need do is find some injustice, whether real or perceived, to counter balance their crime. And when you consider the other side of the equation there is plenty of injustice about in Ireland at present. Since the person took the initial mortgage their circumstances have changed dramatically, and not due to anything they themselves have done. Since 2008 and as a result of the banking crises we have been hit with a USC at 4-7% of salary, a 0.6% levy on private pensions, 2% levy on insurance, about a 30-40% increase in the costs of car fuel and electricity, VAT gone up to 23%, road taxes going nowhere but up, water charges coming down the road and a full blown property tax which will probably lump them with a further bill of €30k over the next 30 years. All of which is a consequence of bailing out bankers, the incompetence of politicians, etc. In light of all that it is actually quite easy to justify a strategic mortgage default to yourself and those around you. The line will be that you were willing to pay it but then circumstances outside your control changed and "well why should I, I didn't cause this mess but I'm paying higher taxes while those politicians who're responsible have huge pensions and the bankers are in the Bahamas,etc, etc"

I'm scratching my head and thinking that when people do the maths on what they owe and how much its going to cost to pay off then we're going to see big numbers of ordinary people heading to the UK for bankruptcy. Of course bankruptcy isn't a silver bullet but it is fast becoming the single least worst option from a purely financial point of view. If going bankrupt would save someone €400k versus staying and paying the whole mortgage then there is a real incentive to do so. Especially when you consider that in order to pay that €400k they will have to earn €800k before tax. They're frightening sums.

There is already some anecdotal evidence coming through that (some) people are already taking this option. They've presumably done the math and it stacks up for them. They've considered the consequences of never being able to get credit again and they're willing to accept that, seeing it as preferable to paying out hundreds of thousands into an asset unlikely to reach its initial value again.

Of course there are other considerations like leaving the kids for a year, giving up the family home, a life of renting, leaving a secure job and finding one again. It is not as easy as just saying feck it and put it in motion. But the financial costs of not doing it may be too much for a fair amount of people. If it comes down to something like a choice between paying a bank or affording to send your kids to university or even living your retirement in practical poverty despite 40 years of honest work then it soon becomes a no-braner.



So are we soon going to be getting to that trickle of strategic defaulters becoming a flood? Its seems that anyone who bought post 2003 might gain long term from doing so but is it likely they'll try? And what are the worst consequences for them, is this ever likely to be an offense that could see people in prison? Or just swept under the carpet in the usual Irish way ?

I am not aware of exactly how many people have big mortgages from 2003ish onwards and who are also not on a tracker (which are the cheapest form of credit, given they're pegged to the ECB rate which is at a historically low level of 1% right now, they're actually affordable mortgages for most and have saved many from being in arrears) It'd be interesting to know the total number of mortgages who are paying variable rates in the order of 4-5.5% as this is the group who are most likely to strategically default, with those who purchased closer to the market peak having a higher likelihood and greater financial gain than those at the 2003 end. According to Ronan Lyons 1 in 7 mortgages is in arrears of 6 months or more, which is considered a danger zone at which recovering to repay it becomes less likely statistically.

So far in Ireland there has been virtually no firesales or repossessions, despite us being 4 years into a price crash where salaries are down significantly and taxes and the cost of living is consistently rising. In 2010 in the UK there were 36,000 repossessions which when adjusted on a per capita basis was 15 times more than the number in Ireland for the same period. The Uk is dealing with mortgages in arrears whereas we seem to be kicking the can down the road, perhaps a fear of evicting people given the historical context of landlords and tenents in Ireland
But something has to give soon and I'm thinking when it does a flood gate will open, strategic defaulters will see their opportunity and grab it too and the sum total of unpaid debt will be unsustainable for the country to manage.

It is difficult to see it panning out any other way, there has to be an end game to all of this.

AlekSmart

RATM wrote: »

Was just having a think about this last night on the back of a friend of a friend who is currently strategically defaulting on a mortgage took out in 2006. ......

........The alternative was to stay in a property market that had now become one where profits were entirely dependent on the continuation of tax incentives to invest initially and then tax breaks on loan interest and also for capital gains tax to remain at a historic low of 20% from its usual level of 40%. The whole buy to let market was created out of thin air by of McCreevy and Cowen, a return on investment was dependent on three things that are far from reliable- having good tenants who always make the rent and don't wreck the place, for prices to continue to rise unsustainably and for tax policy to remain unchanged. They used agents to shore up the first as best as possible, hoped for the best on the second and lobbied Cowen and Bertie for the third. But as soon as any of those conditions changed then the BTL investor was going to be caught with their pants down, especially at a 100% exposure.................

........ The EU has stagnated with 0% growth and here in Ireland soaking up a plethora of price increases on essential unavoidable services on an almost weekly basis, Bord Gais just a few weeks back, CIE back at the begging bowl soon, resulting in far less disposable income. Both sides are being hit, the level of income you've left after tax and then another whammy of increases in the price of goods you then want to spend your money on.Neither condition is exactly conducive to people being able to afford to pay higher house prices. Also as far as I remember there is a strong economic correlation between the level of unemployment and house prices- without unemployment going down it is an economical anomaly for house prices to rise, the report I read a few years back mentioned how a 10% unemployment rate typically has c25% of the a population genuinely scared for their job, their spending virtually seizes up as they save as much for a rainy day. It went on to say if 40% aren't spending in an economy then you'll house prices can't rise sustainably. ......

......It gets even worse when you consider the other side of the equation. Since the person took the initial loan circumstances have changed dramtically. We have a USC at 4-7% of salary, 0.6% levy on private pensions, 2% levy on insurance, about a 30-40% increase in the costs of car fuel and electricity, VAT gone up to 23%, road taxes going nowhere but up, water charges down the road and a full blown property tax which will probably lump them with a further bill of €30k over the next 30 years. It looks drastic. Someone in a €60k job is more or less going to be paying around 50% income tax and what little income they have left is now subject to higher taxes on everything they buy.

An excellent post,with it's premise made all the more frightening by the reality that it's the "Contributing Class" which are being relentlessly targeted in order to maintain the fallacy of our Social Normality.......the vast majority of those added ever increasing Taxes and Charges are deemed not to apply to those outside the contributing net...there's the added time-bomb ?

JimmyCrackCorn

Someone in a €60k job is more or less going to be paying around 50% income tax and what little income they have left is now subject to higher taxes on everything they buy.

That is exactly why I left, I had a choice of staying but took the "Lifestyle choice" of leaving and starting a life all over again elsewhere.

I was hitting the age where starting a family is next on the cards, well raising them in an economy with the certainty of uncertainty and continued cutting meant exit.

Its a shame as I would have likely started a small IT software house should I have stayed employing at least one other in the first year....

Boskowski

TL;DR but screw your "friend" anyway. At least that's what the banks will say. And they will turn every one of his stones over to see whether he is a cannot or a wantnot. He will be left with nothing or a fraud charge. Declaring bankruptcy doesn't mean you say you have nothing it means you have nothing. What difference does it make to him anyway what rise or fall his house makes somewhere in the midst of the term unless it was a speculative buy. In which case I say screw him doubly.

Sleepy

Difficult to prove the difference between a "cannot and a wont" tbh. Increasingly large cash withdrawals on a weekly basis could be easily explained away by attending Gamblers Anonymous for a few months prior to the court case whilst in reality that cash is sitting in a friend's loft / safety deposit box held in a friend's name etc.

If you'd bothered to read the OP Boskowski, RATM specifically states that he's not condoning the actions and, in fact, goes into detail as to how someone might justify the immoral decision to do this once they can ascertain that it's in their financial interest to do so.

For someone working in a healthy industry (say IT / Pharma) who would be able to find work relatively easily after a year of living frugally (at least on paper) in England while waiting to be declared bankrupt could seem well worth it if they stood to escape from a debt of the magnitude of that outlined in the OP. Add a couple of failed investment properties into the mix and it becomes increasingly attractive to an individual who can justify it to themselves.

Sponge Bob

It isa year and a half, I think you must be there 6 month before you start your one year bankruptcy. I know a few who are over there in the process myself, all were undone by 'investment' properties...lots of them.

I believe that the banks will lose another €20-30bn over the next few years on their mortgage books.

Would Ireland have 20,000 geniuses with €1m of 2002-2008 mortgage debt each including Investment properties????? I suspect it does you know.

Cuddlesworth

Brilliant post. It is a timebomb looming over all our heads and I have yet to see any action from our government or banks to address it.

Enduro

The only real action by the government is to make things worse really. Michael Noonan's repeated assertions that no-one in mortgage arrears will be ejected from their home just takes away another element of risk from any strategic defaulters. IMHO it actually makes it a crazy decision for anyone to continue to pay their mortgage on their home (whatever about investment properties). The first step of stopping all mortgage payments is now pretty much consequence and risk free.

Sponge Bob

Enduro wrote: »

The first step of stopping all mortgage payments is now pretty much consequence and risk free.

Yep, that 'guarantee' dates back to Lenihan though and his 1 year reprieve ploy. The fact that many underwater 'investment' property gambles are cross collateralised against a PPR pollutes the banks security even further.

KyussBishop

The simple reality is a lot of these mortgages just aren't going to be paid in full, so there must be a writedown on the principal of many mortgages, in order to get something out of them.

coolshannagh28

KyussBishop wrote: »

The simple reality is a lot of these mortgages just aren't going to be paid in full, so there must be a writedown on the principal of many mortgages, in order to get something out of them.

Agreed ,at what point does a default become a strategic default, this is a hare raised by the banks using one of the "independent " spokesmen to sabotage the personal insolvency legislation .
The value of property is down around 60 to 70 % ,the Americans have a term called jingle mail ,"strategic default ." is our version . At least the American system of non recourse lending encourages banks to properly assess risk and face up to losses . Until something similar happens here we are going nowhere .

coolshannagh28

KyussBishop wrote: »

The simple reality is a lot of these mortgages just aren't going to be paid in full, so there must be a writedown on the principal of many mortgages, in order to get something out of them.

Agreed ,at what point does a default become a strategic default, this is a hare raised by the banks using one of the "independent " spokesmen to sabotage the personal insolvency legislation .
The value of property is down around 60 to 70 % ,the Americans have a term called jingle mail ,"strategic default ." is our version . At least the American system of non recourse lending encourages banks to properly assess risk and face up to losses . Until something similar happens here we are going nowhere .

Sleepy

A strategic default is where you can afford to service the mortgage you stupidly signed up to but don't want to because living with the consequences of your poor decisions doesn't suit you.

Going forward, mortgages should be issued on a non-recourse basis in order to encourage more stringent lending practices however I don't believe we can, or should, apply it retrospectively.

If you can afford to pay for your mistakes, you should.

Laminations

I'm guessing the OPs 'friend' is employed and can pay the mortgage, otherwise it'd just be a regular default. And I guess they haven't approached the bank for a write down or review of repayments so the bank are unaware there's a problem? And the problem isn't that they are struggling to pay for the mortgage as well as other stuff like food, it seems to amount to them not seeing the value in the asset they are paying for - a value they accepted when they took out the mortgage.

While people in this situation should be helped (the first port of call should be the bank), running off to the UK to saddle the rest of us with your debt is developer-class sh1tty. And can you declare bankruptcy in the UK when you are employed in Ireland and have debts in Ireland? Is he planning to give up his job?

He should talk to the bank about paying interest only or writing off part of the mortgage or transferring part of the debt to a new property down the line if he wants to move. But him coming to the realisation that he doesn't like his debts and hatching plans to abscond is pretty stinky.

Either way we do need non-recourse mortgages, problem is that introduced any time soon and they'll deflate the property market making it more difficult for those in negative equity traps to recover. We also need bondholders to take the hit on mortgage defaults. They lent in to a price inflated market, they financed the deals where 200k houses were mortgaged for 500k etc. they need to get burnt here, not the taxpayers.

Farmer Pudsey

If I was in OP friends positionI be off to England as well. You will get no thanks for being patrotic.

Look at the figures he has a 500K mortgage over 35 years. If he is on a tracker his repayments are in the region of 18-20K a year at present this is doable. However if the ECB rate raises to over 4% in 2-3 years his intrest rate will be around 5% then his repayments jump to 27-30K/year. This may not be possible for him longterm.

If he is not on a tracker and is on a variable it is a no brainer already his repayments are in the 25K+ bracket. This is not possible to pay longterm. Say he stick with it and 10 years down and gets aserious illness the bank or the state will do him no favours. At the end of the day you have to do what is best for you and your family.

It was the stupid lending practices of the banks that got us in this mess and while some people made mistakes I do not believe that they should be sentenanced to a life of misery. They did not kill anybody. Nobody in the banks has been punished yet for the missdeeds that happened pre 2008.

In the USA Non recourse mortgages prevent to a certain extent the stupid lending the banks went on with. I do not believe that any person should be left with a house they will not pay for however I do believe that there is no reason any person should be expected to shoulder this type of burden. This is why countries like the UK and the USA has sensible bankrupy law's and as long as you are honest with the reciever you can have a fresh start.

Japan had the same type of property bubble as we had. We are making the same mistakes the did. They are after is it nearly 20 years of little or no growth. There seem to be a culture out there at present that some people want revenge on people who took out loans during the boom.

I do not believe that ordinary people should be punished when the wealthy are walking away relativly free. Also the government are not sharing the burden equally between all sectors of society but rather expecting some section to carry most of the pain. We no longer hear of senate reform, and the abolishing of upward only rent reviews seems to have died a death, loads of people who were self employed have had to emigrate after 3-4 years of trying to use there savings to survive.

So now the people with large loans after waiting for 4 years are getting sick of waiting for a sensible bankrupy/personal insolvancy legislation and are starting to considering going to the UK to solve the problem. This is not the first or second time Irish people have use GB to resolve issues that Irish governments have failed to grasp.

I do not judge OP friend least I be judged and I will not cast the first stone. I have seen too many empty promises from Irish governments, protection of elite sections of society and the failure to take these sections. Look at Croke Park, Benchmarking, Welfare, Quango's, our Health Service, PPARS, Voting Machines, Public Service Pensions which are a nightmare that is only 5-10 years down the road.

OP friend has to protect himself and the action he is taking may be his only choice

maninasia

Cuddlesworth wrote: »

Brilliant post. It is a timebomb looming over all our heads and I have yet to see any action from our government or banks to address it.

Listhen lads, don't be getting in a gander about dish, I have a skeme 'll do nicely. We'll dubble our betsh , put Quinn and NAMA and all our banks as collateral, sure we'll fool the market like.

Nody

Sleepy wrote: »

A strategic default is where you can afford to service the mortgage you stupidly signed up to but don't want to because living with the consequences of your poor decisions doesn't suit you.

Going forward, mortgages should be issued on a non-recourse basis in order to encourage more stringent lending practices however I don't believe we can, or should, apply it retrospectively.

If you can afford to pay for your mistakes, you should.

Good thing there were no housing bubble in US where it was in place; oh wait...

maninasia

Sleepy wrote: »

A strategic default is where you can afford to service the mortgage you stupidly signed up to but don't want to because living with the consequences of your poor decisions doesn't suit you.

Going forward, mortgages should be issued on a non-recourse basis in order to encourage more stringent lending practices however I don't believe we can, or should, apply it retrospectively.

If you can afford to pay for your mistakes, you should.

All well and good, but the horse has bolted. This scheme has always been there, but it was little discussed as Irish society USED to be dead against bankrupters. Not any longer. Culture changes when it suits people. They will be declaring bankruptcy from top to bottom.

Sleepy

maninasia, in order to be declared bankrupt, one would presume that the individual would actually have to be insolvent rather than simply having decided they no longer want to meet the terms of the contract they signed? I'm all for sensible bankruptcy laws but I think we need to ensure that such laws aren't open to abuse, that spouses are responsible for each others debts and that any attempts to hide assets from creditors are punished harshly.

Nody: did I claim non recourse mortgages would prevent bubbles? Combined with proper regulation of the banking sector, however, it might go some way towards reducing their scale or frequency.

Rabidlamb

My neighbour bought for the same price as myself about 3 months apart, 2005.
Despite my best advice he refused to take on a tracker as he'd a good fixed rate at the time.
2010 came & he was getting gouged by PTSB's variable rate, he also lost his job & has had nothing since.
His mortgage costs him €400 a month more than mine for the same bricks & mortar.
He's heading to Oz before the end of the year admitting he's just walking away & using the last of his savings to set him up out there.
Had the bank offered him a reduced rate comparable to a tracker mortgage he would have stayed.
Banks are guilty here of driving people into strategic default.

Sponge Bob

Rabidlamb wrote: »

Banks are guilty here of driving people into strategic default.

He took out the large mortgage himself, his choice. I know plenty who didn't in 2005 or 2006.

The banks are guilty of not cutting a deal which could see them take a limited restructuring hit of the mortgage, now the same bank faces taking a bigger hit.

They will chase him around the world for it and for years, but I am sure he knows that.

Rabidlamb

Sponge Bob wrote: »

They will chase him around the world for it and for years, but I am sure he knows that.

These are Irish banks, not the CIA, stop fear mongering.
My neighbour is happy to keep open lines of communication with the bank through e-mail but he won't see another red cent of his own money thrown after bad.
He's also happy to surrender any rental income the property may generate between now & repossession.

Sleepy

Well it's nice to see that he doesn't want to rob all of our banks money, just some of it. :rolleyes:

Dannyboy83

Rabidlamb wrote: »

My neighbour bought for the same price as myself about 3 months apart, 2005.
Despite my best advice he refused to take on a tracker as he'd a good fixed rate at the time.
2010 came & he was getting gouged by PTSB's variable rate, he also lost his job & has had nothing since.
His mortgage costs him €400 a month more than mine for the same bricks & mortar.
He's heading to Oz before the end of the year admitting he's just walking away & using the last of his savings to set him up out there.
Had the bank offered him a reduced rate comparable to a tracker mortgage he would have stayed.
Banks are guilty here of driving people into strategic default.

It's an interesting point.
Houses are a necessity. Therefore mortgages shouldn't be treated in the manner as a car loan or a TV Loan.

He may have signed up to a stupid contract, but the bank also signed the stupid contract.
He can't adjust the terms but the bank can.

I guess if the banks ever hope to get anything, they will have to share the loss.
Agreeing to share a loss may ultimately mitigate their total losses.

Sleepy

Sleepy wrote: »

Going forward, mortgages should be issued on a non-recourse basis....

If you can afford to pay for your mistakes, you should.

And if you can't you shouldn't?

What if you were even more reckless and stupid and made even bigger mistakes, while being facilitated by the same broken system as everybody else was at the time? Should you then have the consequences of your even more reckless decisions expunged from the record and have that cost foisted (via tax increases) onto the first group of people who only made moderately stupid mistakes which were affordable 3 or 4 interest points ago but are now close to financially crippling them as they forego many other essentials just to keep their roof over their head?

The lack of social justice in Ireland at the moment is sickening, and the worst part is the more honest and above board you are, the more you try to do your best and keep to the rules, the more you get screwed and the more you pay for all the idiots and hoodlums who were either too stupid or too crooked to do things properly when they had a choice.

The economic storm that was whipped up with the collapse of Lehman's in '08 and subsequent events did not bode well for Ireland. We had already made a lot of mistakes. However, with Lenihan and Cowen's disastrous bank guarantee, the fate of the people of the country was sealed. We created our very own perfect storm. There is now no way that the Irish state can redress the mortgage default issue in a just and societally fair way. Had the banks remained private, we would have at least had an option of changing our laws to allow for the management of gradual property default or mortgage redress and dissipating some of the losses into the private sector, instead of the cost falling back on the state (and hence back on it's people through cuts and tax increases).

pobber1

Considering the figures in the OP, there is only one choice i.e. walk. Why let one decision destroy the rest of your life? We are not talking about a problem that can be solved by putting your head down for 5 or 10 years and working hard. This is 30 year problem, a whole life time.

This level of debt would completely poison this persons life. They are making a wise choice by defaulting.

Dannyboy83

Dannyboy83 wrote: »

He may have signed up to a stupid contract, but the bank also signed the stupid contract.
He can't adjust the terms but the bank can.

I guess if the banks ever hope to get anything, they will have to share the loss.

This is just purely hypothetical, because much of the Irish banks losses have now been socialised, so the following point is moot at least on a mass scale, but does the distinction between a stupid contract and an illegal one apply here?

The banks broke the rules in over-lending to their customers, right? They signed contracts which should never have been allowed to be signed, so were they just bending "guidelines", or were they actually breaking the law?

The reason i ask is because if banks broke the law, retrospective redress which held banks responsible for contracts exceeding the statutory rights of their customers surely would be possible. You can't be held to an illegal contract, so why shouldn't any over-lending which took place as part of one be deducted from the balance of the mortgage in question?

Furthermore, f the lending isn't covered by law, and basically a bank CAN lend whatever it wants, then why not write it into law as a protection against anything like this ever happening again?

bbam

Dannyboy83 wrote: »

He may have signed up to a stupid contract, but the bank also signed the stupid contract.
He can't adjust the terms but the bank can.

I guess if the banks ever hope to get anything, they will have to share the loss.
Agreeing to share a loss may ultimately mitigate their total losses.

There is the added thing that often in the banks poor advice was given to get folks open new mortgage accounts, this in turn generated a very hansome comission for the bank employee.. Its a fact that the bank employees and bank branches benifeted greatly from people taking on larger mortgages and in many cases it drove poor advice... some banks had particular actioneers on retainer who would give whatever valuation was required to complete the deal..

Definitely people signed contracts and need to hold up their end of the bargain, however as the above poster stated the banks have signed many contracts that in hindsight were never going to be capable of being completed..

Compromise has to be the solution... people walking away from houses and unpaid mortgages isn't a solution... Individuals and the banks need to sit down and come to an arrangment on what can be paid and what portion is a "bad debt" that they jointly created..

Sleepy

I think that would require that legislation regarding borrowing limits or stress testing of loan applications to have been in place at the time the contracts were signed. Since our regulator at the time was doing nothing, I'd be amazed if any such legislation existed under which to challenge the contracts.

coolshannagh28

In a non recourse scenario the liability falls back on the bank ie the private sector ,a good example is the maple10 which will have further repercussions. The banks and their bondholders and investors have to stand the losses ,this is how capitalism works .
However in our current scenario the losses are being foisted on the borrowers and further down the line on the taxpayers ,patently wrong ,ultimately this will not work as the level of default ,strategic or otherwise is overwhelming .
In the long run the proper balance between risk and reward will be struck despite the best efforts of the insiders .

Benji1974

We all know that lending money is a gamble. If you’re going to extend loans you better be sure you have the means necessary to recoup. Unlike loan sharks, the financial institutions have long had the law on their side which is much more effective than the threat of physical violence. Problem is, they abused it and contributed greatly to the mess with their questionable loan practices so confidence in the system declined. Many people feel they signed their lives away.

We can debate about the rights and wrongs of defaulting but that’s completely missing the point, we are way beyond that at this stage considering how far property prices have fallen and the large amount of people affected. The biggest factor now is the ability and willingness of borrowers to repay home loans.

What I’ve said might seem simplistic but that’s my whole point. It really is simple when you look at it from the borrower’s perspective: trapped in a hopeless never-ending situation, there’s only one option if the other party is unwilling or unable to negotiate: default.

There’s no doubt this is a ticking time bomb. The onus is on the government to act and do all possible to ease the crisis.

bbam

bbam wrote: »

Compromise has to be the solution... people walking away from houses and unpaid mortgages isn't a solution... Individuals and the banks need to sit down and come to an arrangment on what can be paid and what portion is a "bad debt" that they jointly created..

Compromise isn't going to happen, at least not on any kind of large scale. I don't see any bank, especially a government owned bank, agreeing en masse to a structured default program. We simply cannot afford to do it as a country, because all losses made by nationalized banks now default to the exchequer. It would open a floodgate of structured default which would send the country's finances over the chasm that we've been teetering on for years.

Unfortunately, the most pragmatic solution to this problem from a political point of view is to cut adrift the cohort of people who are stuck in negative equity and who are struggling (but managing) to pay their large mortgages and at the mercy of variable interest rates.

This considerable group will likely have to stay where they are, and deal with the consequences of their poor decisions for the rest of their lives without redress for any of the financial mismanagement which they fell foul of, because we can't afford to help them.

They will be severely limited in terms of work, travel, and family options because they can't move or trade up. Those below them who are unable to pay and in worse situations will be given structured default settlements under non disclosure agreements through sheer necessity, and those above them who waited a few years will have better properties and much lower cost mortgages. Both of these groups will have better standards of living than them from the same income, they, on the other hand, will have no option but to "manage".

Life will go on for everyone...

Six or seven years ago, the Celtic tiger first time buyers were at the upper end of the most promising generation our country had ever produced. They were the ones with the best education, the best jobs and prospects, with the longest commutes, working hardest to get themselves onto the property ladder, and paying heavily in tax to do it and punching above their weight in terms of their financial contribution to society and the exchequer.

Now they are the ones being thrown to the wolves by that same state in order to save everyone else, while those responsible for orchestrating the disaster in politics, banking, and development, are all enjoying six figures, and ironically, even more of them at the state's expense than during the boom.

What does that say about us as a society? I've said it before, but i feel very strongly that there is no social justice in Ireland at present, and i think future generations will recall this as a very dark period in our state's history.

Farmer Pudsey

Sponge Bob wrote: »

He took out the large mortgage himself, his choice. I know plenty who didn't in 2005 or 2006.

The banks are guilty of not cutting a deal which could see them take a limited restructuring hit of the mortgage, now the same bank faces taking a bigger hit.

They will chase him around the world for it and for years, but I am sure he knows that.

Bob this is what I mean it is all about revenge. Bob I did not take a mortgage either but the reality is that this and the last government are too busy trying to save the banks and are not worried about the ordinary punter . He now has to like OP friend take what ever means he can to protect his fucture. Alot of wealthy inviduals did the same some will be caught some not. If the law allows for it in the UK or Timbucktoo go for it. With the carry on of this and the last government it is starting to be every man/women for themselves and god for us all.

This problem was forecast 3-4 years ago however the government was only worried about the banks and like an Ostrich has stuck it head in the sand.

Like I stated in an earlier post the government are protecting certain section of society and not worried about those in the pickle of debt, those that are the coping class either, it a case of the motto of the famous British regiment The Queen Own Deserters '' f##k this for a game of soldiers I'm off''

johnwest288

Call me Dumb. But instead of taking back the house.. why cant the banks take back a certain percentage of the building 51% Perhaps. I know a lot of people if this happened they would be able to stay in their homes.
Or could the bank amend the Mortgage to be passed onto Children like what they have in asia afaik Extending the life of the mortgage by 20 years or so. Difficult in both cases but better than throwing families from homes no???

bbam

Deleted User wrote: »

This considerable group will likely have to stay where they are, and deal with the consequences of their poor decisions for the rest of their lives without redress for any of the financial mismanagement which they fell foul of, because we can't afford to help them.

.

I fully appreciate that the helping of there people is byond the means of the state.. However expecting these families to stay under the burdon of poorly constructed contracts is expecting allot.. I expect many will up sticks and leave empty homes and unpaid mortgage balances, the tab for that in public banks will indeed fall to the state... Its happening already and as more taxes are levered onto these families it will likely increase.
The question is how much of this flight from mortgages will it take before the assessment is made that it is better to compromise on the bad debt than have the state lumbered with it all...

A compromise will get some money in against a bad mortgage... when a mortgage owner flees the contract the state will pick up the whole tab and the property is thrown onto the market and sold for little to no revenue.

The question is how the can't pay are distinguished from the won't pay and indeed how the portion of poorly sold/constructed mortgages are identified.

Sleepy

Cross-generational mortgages? No thanks, the son can't be held personally responsible for the mistakes of the father.

bbam

bbam wrote: »

I fully appreciate that the helping of there people is byond the means of the state.. However expecting these families to stay under the burdon of poorly constructed contracts is expecting allot.. I expect many will up sticks and leave empty homes and unpaid mortgage balances.

I fully agree with you...which leads me to the point below. Where is the breaking point for many of the people in that situation, and what do they do when facing into a choice of 30 years of crippling debt, 5-7 years of bankruptcy, or absconding from the country?

Paying your mortgage is the LEAST attractive of those 3 options, and people are only human...

Benji1974 wrote: »

.....confidence in the system declined. Many people feel they signed their lives away....

...it really is simple when you look at it from the borrower’s perspective: trapped in a hopeless never-ending situation, there’s only one option if the other party is unwilling or unable to negotiate: default.

VERY good post. I honestly think that we are at risk of very many people in our society completely losing faith in our democracy and it's ability to protect ordinary decent people and preserve social justice.

When you push and marginalize people to a certain point, a survival instinct kicks in, and people place the wellbeing of their family and a basic standard of life and dignity above all else. When you reach that point, phrases of the day (like mortgage default, crime, regulations, "politics, etc) cease to hold any meaning, and people do what they need to do to make sure their family and their dignity are OK. The history of the French revolution or the American war of independence tells us that. You can only push a society so far before something snaps.

Our society is guilty of failing a lot of very marginalized people at the moment, in favour of a lot of vested interests, and a backlash is inevitable unless those failings are addressed.

Taxi Drivers

The OP makes an excellent contribution but there are a few elements that don't seem to stack up.

RATM wrote: »

So basically his mortgage was €500k, he had a 10% deposit. Now five years on the guys line of thinking is that he is better off to go to the UK for a year and claim bankruptcy. At first I thought of it as a stupid idea but having had it explained to me I can see how he is taking the single least worst option.

So I just want to tease this out because if it is as I think it is then this is probably going to be the single biggest factor that will push Ireland as a nation over an economic cliff edge.

A €500k mortgage with a 10% deposit means the purchase price was around €555k. These are nice round numbers but they are not very common. From 2006 to 2008 Morgan Kelly estimates there were around 11,000 mortgages taken out that were more than €500k and that the large mortgages "were mostly for investment rather than own home mortgages".

There are around 700,000 mortgages in Ireland (owner-occupied and buy-to-let). 11,000 is just 1.6% of the total.

Also, a 90% loan-to-value was not the norm. Figures from the Department of the Environment show that for 2004 to 2008 36% of all mortgages had an original loan-to-value of less than 70%; 32% had a loan to value of 70-90%; with 32% at 90% or greater.

RATM wrote: »

So for example if someone took a mortgage in 2006 for 35 years then their term is until 2041. Lets say it was the €500k talked about earlier. So with interest payments the total repaid is going to be somewhere in the order of circa €900k-€1m. Putting €500k through a mortgage calculator with a 35yr term and 4% interest gives a repayment of €2,213 per month and a total repayment of €929,000 over the lifetime of the loan.

So five years into the loan period they have paid 60 months x €2213 = €133,000 plus their initial €50k deposit, so they've spent €183k in total.

Our homeowner is now sitting down digesting all the negative news in the economy and they are acutely aware that they're in huge negative equity. Now negative equity during a loan period (in theory) shouldn't matter if at the end of the loan the house is worth more than you bought it for. But theory goes out the window in the current situation and the homeowner takes the view that his house, now worth €250k is likely to level out at 30% of initial purchase price. That's a midpoint between Morgan Kellys 80% drop and others who are calling a bottom or near bottom right now at 60% of peak. So lets say we bottom in 2015 and the original €500k house is worth €150k 9 years after purchase.

So our homeowner now has a stark and frightening situation in front of them. They have a loan of €939k on which they have repaid €133k, leaving them a liability of €806k. The asset on which the loan is secured on is soon going to be worth a sum total of €150k in 2015, leaving the fully paid asset worth €735k less than what has actually been repaid. Plus another €50k which went on the initial deposit. Pretty quickly the figures are looking extremely depressing.

The loan is not for €939k. The original loan was for €500k. The original house price is around €555k. A 70% drop on that brings it back to €166k. However, the person did not buy at the peak which was September 2007. Lets say the person bought at June 2006 prices.

From June 2006 to September 2007 prices rose 9.7%. Working off the averages a €555k price in June 2006 would be equal to €610k in September 2007. A 70% drop from the peak would be around €180k. In a scenario of a 60% peak-to-trough drop the value would be €245k.

If this 70% drop to €180k happened in 2015 the owner would have a loan of €430k assuming they stuck to the 35-year repayment schedule. The owner is 250k in negative equity with a loan-to-value of 240%.

This is severe negative equity. Figures from Bank of Ireland's Annual Report show that less than 5% of its mortgage book had current loan-to-value of more than 180% at 31/12/2011.

The comparison is moot but after nine years this borrower will have made €240k of the €930k total repayment required. But there is little point in comparing the €930k to anything. The relevant comparison is the size of the loan and the value of the house.

Where do they stand now. On average a €555k house bought in June 2006 will be worth around €300k today (45% drop from June 2006 to June 2012). After five years the 500k mortgage would be down to €464k. There is €164k of negative equity and a loan-to-value of 155%.

RATM wrote: »

But it could get even worse- the counter argument to negative equity is that (in theory) over the course of the next 30 years the value of the property should increase beyond the level of inflation, thus closing this gap.

But lets get back on the topic of strategic defaults. Lets take €150k as the bottom value of the initial €500k purchased house, which is a total drop from peak of 70% (which is not an not an outlandish figure considering even the chief house price cheerleaders at the Irish Independent, who have remained permanently bullish about property, have reluctantly conceded that the current level of decline is 55% nationally)

So next we then assume (very generously I'd add) that the market immediately returns to being normal* in 2015
*by normal I'm referring to the following happening, all by 2015:- fresh lending begins with one or two foreign banks entering the Irish market, transaction volumes of house sales leave their current historic low, unemployment abates down to at least 9% (but 7% being more desirable), salaries rise and outstrip inflation, and the costs of living & transport reduce from current 2012 highs. These are all necessary conditions to deliver modest annual increases in house prices similar to historical price increases recorded long term in global markets

So the next assumption is that house prices increase from 2015 onwards and sustain their increases at 2% annually. (which lets assume is net of inflation of 1% for arguments sake, I'm being overly generous here) Assume that this 2% increase is after inflation is accounted for then continues to occur every single year for 30 years in a row. This would be seen by economist as a healthy & functioning property market,i.e. slow steady gains a la Germany. In fact if this did occur it would be a better performance than US house prices over the last 100 years of indexing real estate and adjusting it for inflation. So by US historical prices it is unlikely but I'm playing devils advocate here to illustrate how even a well performing market over the next 30 years may not be enough to save those in trouble right now.

So the 2012 house, bottoms to a value of €150k in 2015 but from then onwards has consistent increases of 2% annually compounded together for 30 straight years. Then that house that was valued at €500k in 2006 and €150k in 2015 is now worth a total of €271k in 2042, which is still far below the initial purchase price of €500k and a long way from the total €929k repayment. I'm using the compound interest calculator here to arrive at that figure of €271k
http://www.howtoretirestrong.com/default.aspx
The assumptions made are on the generous side given global historic data on real estate prices.

The assumptions are not generous. The 70% peak-to-trough drop to 2015 will give a house value of around €180k at the bottom. Annual rises of 2% would put that at 300k by 2041.

Sticking to the original repayment schedule would see the borrower remain in negative equity right through to 2029.

If the peak-to-trough drop to 2015 is 60% the house would be nominally worth €410k in 2041 and the borrower would not leave negative equity until 2026.

RATM wrote: »

Now maybe I'm missing something here and someone will fill me in. But it appears that a homeowner in this situation is likely to come in for a large loss by paying their mortgage off between now and 2041. Of course I haven't allowed for mortgage interest relief which does reduce the total repaid, but only somewhat. I'm not familiar with how it works so it would be good if someone could adjust these figuers to reflect the discount. But I'm guessing its impact is less than €30-40k saved over the mortgage's life and I think the government are phasing it out down the road. Like any tax incentive or break it should be viewed as a bonus rather than cast in stone as it can be withdrawn at the stroke of a Minister pen.

At a rate of 4% interest the owner will have paid a total €929k (less the savings from interest relief) for an asset which is going to be worth, given the above (optimistic) assumptions a total of €271k in three decades time, 2041, Of course they will have had the benefit of living in the house for 35 years, something which is difficult to put a concrete cash figure on in order to do a direct comparison with someone who rented for 35 years. We can put a value on the costs of paying rent Vs paying a mortgage but that wouldn't account other variables such as the many thousands of people who bought homes from 2003-2008 and because of abnormal prices at the time now live in a commuter belt with longer journeys and the associated higher transport costs compared to someone who rents nearer their workplace in a city or town and can get a bus to work for €4 return daily or better again, walk to work. Other things to consider if comparing renting to buying property are maintenance costs, refuse and water charges, the new property tax, insurance and finally costs associated with the risks of ownership, i.e. flooding that insurance won't re-insure after the first instance, very real risk of pyrite, subsidence from poor structural work, etc.

This is all very true but can't just dismiss the cost of rent on that basis. Assume that the €555k price meant the house was bought with an imputed yield of just 2.5%. This would put the rent at €1,100 per month in 2006. Assume it has dropped to €750/month now and rises by 2% per annum from here on in (it will be 2031 before it gets back to €1,100).

Over the course of 35 years the total amount of rent paid will be around €430k. It is happenstance that the interest on a 500k mortgage at 4% over 35 years is also 430k

RATM wrote: »

When you tease it out and work some basic figures as above you can quickly see the incentive there is for people to strategically default on their mortgages, all other things being equal and even if their job is relatively secure, in fact you would have to factor in 1-1.5yrs lost net salary to any calculation as a safety net. But for each and every person mortgage holder who doesn't have a tracker there must come a tipping point where it is financially worth their while to default. It is just a matter of calculating their costs over the duration of the mortgage and allowing for what they think the house will be worth at the end, adjusted for inflation. No doubt people are already weighing things up and for those who bought late in the boom the savings to them could be potentially north of €400k over 30 years. That is approx €33k annually, which is not an insignificant sum to even a couple with a combined income of €100k. Especially as in order to have €33k cash in your pocket every year you'd have to earn somewhere in the region of €45k gross before tax before it ends up in your hands as €33k net.

Over 30 years €400k is just over €13k per annum, not 33k.

In the very simplified analysis here by 2041 the owner will have paid €555k for an asset that might be worth a little over €300k at that time. They will be down €250k which is a massive loss. However, from then they will benefit from no further interest/rent payments and continued 2% house price inflation will erode the gap.

If the current fall gives a peak-to-trough drop of 60% the nominal value in 2041 would be around €410k at the 2% per annum increases.

RATM wrote: »

For anyone who bought from 2004ish onwards and doesn't have an ECB linked tracker mortgage there is likely going to be a strategic money saving opportunity for them. As I said at the top of the thread I don't agree with the morals of this but anyone who subscribes to the notion of rational choice theory and basic human nature to protect ones self interests above all else then it is difficult to see how there isn't going to be a huge volume of defaults that didn't necessarily have to occur. Especially when the potential upside is savings that are nearly the same as the current prices of houses in their locality.

I'm scratching my head and thinking that when people do the maths on what they owe and how much its going to cost to pay off then we're going to see big numbers of ordinary people heading to the UK for bankruptcy. Of course bankruptcy isn't a silver bullet but it is fast becoming the single least worst option from a purely financial point of view. If going bankrupt would save someone €400k versus staying and paying the whole mortgage then there is a real incentive to do so. Especially when you consider that in order to pay that €400k they will have to earn €800k before tax. They're frightening sums.

There is already some anecdotal evidence coming through that (some) people are already taking this option. They've presumably done the math and it stacks up for them. They've considered the consequences of never being able to get credit again and they're willing to accept that, seeing it as preferable to paying out hundreds of thousands into an asset unlikely to reach its initial value again.

Of course there are other considerations like leaving the kids for a year, giving up the family home, a life of renting, leaving a secure job and finding one again. It is not as easy as just saying feck it and put it in motion. But the financial costs of not doing it may be too much for a fair amount of people. If it comes down to something like a choice between paying a bank or affording to send your kids to university or even living your retirement in practical poverty despite 40 years of honest work then it soon becomes a no-braner.

So are we soon going to be getting to that trickle of strategic defaulters becoming a flood? Its seems that anyone who bought post 2003 might gain long term from doing so but is it likely they'll try? And what are the worst consequences for them, is this ever likely to be an offense that could see people in prison? Or just swept under the carpet in the usual Irish way ?

I am not aware of exactly how many people have big mortgages from 2003ish onwards and who are also not on a tracker (which are the cheapest form of credit, given they're pegged to the ECB rate which is at a historically low level of 1% right now, they're actually affordable mortgages for most and have saved many from being in arrears) It'd be interesting to know the total number of mortgages who are paying variable rates in the order of 4-5.5% as this is the group who are most likely to strategically default, with those who purchased closer to the market peak having a higher likelihood and greater financial gain than those at the 2003 end. According to Ronan Lyons 1 in 7 mortgages is in arrears of 6 months or more, which is considered a danger zone at which recovering to repay it becomes less likely statistically.

It is worthwhile reading what Ronan Lyons has actually said.

http://www.ronanlyons.com/2011/08/30/top-ten-facts-in-relation-to-ireland%E2%80%99s-mortgage-debt-arrears/

There are some people in dire straits facing negative equity of 100s of thousands, the prospect of negative equity for nearly 20 years and the likelihood that the house will not reach the nominal price paid for 40 years. There are some people in this position but they are very very few of them.

maninasia

Sleepy wrote: »

maninasia, in order to be declared bankrupt, one would presume that the individual would actually have to be insolvent rather than simply having decided they no longer want to meet the terms of the contract they signed? I'm all for sensible bankruptcy laws but I think we need to ensure that such laws aren't open to abuse, that spouses are responsible for each others debts and that any attempts to hide assets from creditors are punished harshly.

Nody: did I claim non recourse mortgages would prevent bubbles? Combined with proper regulation of the banking sector, however, it might go some way towards reducing their scale or frequency.

I'm not attacking your posting and your sentiments are correct. But it is too late now to solve this issue. The lack of bankruptcy options in Ireland until now has started to push many people to the UK. It's not difficult to do and it makes sense for people who don't really have the ability to pay back OR are unwilling to spend the next 20 years shovelling money into negative equity. They are going to choose making a new life for themselves whatever way they can. So as I said we will see the previous stigma against bankruptcy change quickly, the Quinn's and the developers did it, I'm going to do it too argument. And who can argue with that?

You squeeze the balloon and people are going to find a way out one way or the other.

Sleepy

How?

For the vast majority of mortgage holder their income is PAYE so ability to re-pay can be shown in court. Unless someone is prepared to go the nuclear option in respect of their career and commit some act of gross misconduct in order to be fired, the lack of a redundancy payment would demonstrate in court that they'd voluntarily given up their jobs and were actively pursuing a "strategic" bankruptcy rather than a genuine one?

maninasia

Nody wrote: »

Good thing there were no housing bubble in US where it was in place; oh wait...

Good point, however this system allows the housing market to run through the crises faster than would otherwise be possible. Foreclosure happens, the houseowner can generally walk away without large negative equity, banks need to recognise the losses faster.

maninasia

Look at the figures he has a 500K mortgage over 35 years. If he is on a tracker his repayments are in the region of 18-20K a year at present this is doable. However if the ECB rate raises to over 4% in 2-3 years his intrest rate will be around 5% then his repayments jump to 27-30K/year. This may not be possible for him longterm

I think everybody should read this, and then read it again. That's nuts.

Taxi Drivers

maninasia wrote: »

I think everybody should read this, and then read it again. That's nuts.

And yet back in 2008 the ECB rate was 4.25% and had risen to 3.50% by the end of 2006.

Assume the mortgage is ECB + 1%. In 2008, the payments on a €500k loan over 35 years would be €2,600/month. Today the payments are €1,600/month.

The ECB rate will eventually rise from its current lows. The likelihood is that it will probably fall to 0.5% in the next few months. Predicting interest rate is very difficult but we are likely to stay in a low-interest rate environment until at least the end of 2014. The Fed has already committed to keep its rate at historic lows until that time.

If rates do start to rise around then they will likely rise by 25 basis points every couple of months. During the last ECB rate tightening cycle it took from December 2005 to July 2008 for the rate to rise from 2% to 4.25%. That was nine rate rises spread across 32 months.

A similar cycle beginning in July 2013 would still only put the ECB rate at 2.75% in February 2016. The €500k mortgage would have a payment of €2,140 if that was the case. This would still be below the repayments required when the mortgage was originally taken out ten years earlier in 2006.

cson

That's an absolutely cracking post and illustrates why it'll be the very long term before Ireland returns to any kind of normality or pre 2002 growth/prosperity levels.

Further; I think you can expand the core theories behind the post into the sovereign debt realm to the point where it would be more beneficial for the country to strategically default sooner rather than later instead of carrying the debt millstone the 2002-2006 boom created for potentially half a century. World War 1 reparations and Germany come to mind - the final payment was made in 2010. That is potentially what we're facing; burdening an entire unborn generation with an incredible debt burden.

Joe 90

Cuddlesworth wrote: »

Brilliant post. It is a timebomb looming over all our heads and I have yet to see any action from our government or banks to address it.

In fact it's going to be two timebombs. As taxes rise more and more people who are employable are going to be leaving the country. That's going to leave fewer and fewer to pay the taxes to keep those who cannot leave. Vicious circle.

Joe 90

Joe 90 wrote: »

In fact it's going to be two timebombs. As taxes rise more and more people who are employable are going to be leaving the country. That's going to leave fewer and fewer to pay the taxes to keep those who cannot leave. Vicious circle.

Don't forget the long ignored pensions time bomb which will happen when all of the people who are lucky enough to have jobs currently eventually retire and there aren't enough workers/jobs/income to pay for their state pensions. Our pension reserve is all but gone at this stage and the government is in no position to make any provisions to replenish it.

Ireland's mid to long term future does not look rosy....

the culture of deference

Sleepy wrote: »

A strategic default is where you can afford to service the mortgage you stupidly signed up to but don't want to because living with the consequences of your poor decisions doesn't suit you.

If you can afford to pay for your mistakes, you should.

Does this apply to the banks that would be all bankrupt now without gov intervention.

For 10 years we have had a regulator, government, and banking sector that did nothing, while being run by incompetent management. They thought they were great.

Deleted User wrote: »

Don't forget the long ignored pensions time bomb

Ireland's mid to long term future does not look rosy....

Its a disaster.

The simplest solution would be to write off all neg equity.

Then change your mortgage to a loan ending today, adjusted for the interest you have paid from the start of the mortgage.

If the UK can print 400 billion QE cash it shouldn't be a problem here.

howamidifferent

the culture of deference wrote: »

If the UK can print 400 billion QE cash it shouldn't be a problem here.

We dont have our own currency so we cant print money out of thin air as much as we would like to. :cool:

the culture of deference

howamidifferent wrote: »

We dont have our own currency so we cant print money out of thin air as much as we would like to. :cool:

we do not have to stay in the euro

average_runner

the culture of deference wrote: »

we do not have to stay in the euro

Moving out of the euro would be a disaster for us now. Imports will sky rocket thru the roof.


We are screwed anyhow

creedp

Sleepy wrote: »

Cross-generational mortgages? No thanks, the son can't be held personally responsible for the mistakes of the father.

But the son can personally benefit from the father's decisions. Its strange how the son will have no difficulty inheriting the father's assets but should in no way should be lumbered with his debts. In the case of the intergenerational mortgage he is inheriting the house which has a mortgage on it. Unless the mortgage was simply colossal when take out by the father, inflation would render it pretty affordable for the son. Should this option not be made available? Would you prefer the son to be thrown out of his home because his father can't pay the mortgage and look after him at the same time? The son would then have no house to inherit! I think in the circumstances it should be considered an option in some circumstances. However, maybe you would probably prefer that your son pay future taxes to bail out that son's father so the latter can inherit his house without any incumberance. Don't see the logic myself.