How to fix the credit crisis.

Akrasia

Here's what I think should happen with mortgages.

All of the below is based on the following facts.
1. Tracker mortgages are loss making for the banks. Banks can not borrow at the ECB rate because their credit rating is (understandably) sh1te
2. Variable rate mortgages are currently far higher than the ECB rate because the banks are using variable rate mortgage holders to subsidise the tracker mortgages
3. The more the variable rate goes up, the more people fall into arrears thereby making the mortgage crisis worse
4. The banks are not prepared to lend to new customers because they are trying to reduce their exposure to the housing market and their cash reserves are tied up in their mortgage book and because the rates they would have to charge means lending is too expensive for people and businesses.

Here's what the government should do.

1. Take all the performing tracker mortgages from the banks and place them in some kind of state mortgage company which is able to borrow at the ECB base rate. The borrower still has the same repayments over the same term, but they're repaying the mortgage to the state, not a bank.

2. Force the banks to place all of their non performing mortgages into a separate entity which will be funded by the bailout money already provided by the state for exactly that purpose.

3. Now that the bank's mortgage liability has been massively reduced, and they have had a big cash injection from the state (in exchange for the tracker mortgages) The banks should have more than enough reserves to get a good credit rating and bring down their own cost of borrowing. Their increased cash reserves would facilitate new lending and they would be able to offer more favourable terms to businesses and consumers and the credit crisis that has been stifling the economy for the last 5 years will be over.

Can someone tell me why this won't work?

Godge

Akrasia wrote: »

Here's what I think should happen with mortgages.

All of the below is based on the following facts.
1. Tracker mortgages are loss making for the banks. Banks can not borrow at the ECB rate because their credit rating is (understandably) sh1te
2. Variable rate mortgages are currently far higher than the ECB rate because the banks are using variable rate mortgage holders to subsidise the tracker mortgages
3. The more the variable rate goes up, the more people fall into arrears thereby making the mortgage crisis worse
4. The banks are not prepared to lend to new customers because they are trying to reduce their exposure to the housing market and their cash reserves are tied up in their mortgage book and because the rates they would have to charge means lending is too expensive for people and businesses.

Here's what the government should do.

1. Take all the performing tracker mortgages from the banks and place them in some kind of state mortgage company which is able to borrow at the ECB base rate. The borrower still has the same repayments over the same term, but they're repaying the mortgage to the state, not a bank.

2. Force the banks to place all of their non performing mortgages into a separate entity which will be funded by the bailout money already provided by the state for exactly that purpose.

3. Now that the bank's mortgage liability has been massively reduced, and they have had a big cash injection from the state (in exchange for the tracker mortgages) The banks should have more than enough reserves to get a good credit rating and bring down their own cost of borrowing. Their increased cash reserves would facilitate new lending and they would be able to offer more favourable terms to businesses and consumers and the credit crisis that has been stifling the economy for the last 5 years will be over.

Can someone tell me why this won't work?

Where is the government going to get the money for the big cash injection from the state for the tracker mortgages?

How will the bailout money which went on the big loans be used again for the non-performing mortgages?

Both of those ideas cost billions. We don't have billions.

Akrasia

Godge wrote: »

Where is the government going to get the money for the big cash injection from the state for the tracker mortgages?

How will the bailout money which went on the big loans be used again for the non-performing mortgages?

Both of those ideas cost billions. We don't have billions.

The Bailout money is currently 'resting in the banks account' and not doing anything.

It's supposed to shore up the banks liquidity ratios to allow them to lend, but they're using it instead just to meet regulatory requirements on existing loan books and other liabilities such as pension fund deficits.

If we take tracker mortgages off the banks, we will instantly improve their reserve ratios by an injection of Cash and a reduction in size of the Mortgage loan book

Where does the money come from to buy the tracker mortgages off the banks?
It's a revenue neutral exercise
The assets (mortgages) will secure the borrowing from the ECB.
We create a 'special purpose vehicle' that borrows the money at ECB rates and collects the mortgage repayments from the customer which goes directly to pay off these loans.
This 'special purpose vehicle' won't appear as Irish national debt because it is offset by the assets, but it will be able to borrow at the same rate that the Irish state can borrow at from the ECB.

We would have to get agreement from the ECB to lend to this 'special purpose vehicle' at the base rate.

Akrasia

Just to add that I'm not an economist or a banker so I'm possibly missing something major here, Just on the face of it, it seems like it should work...

dlouth15

I think the problem would be getting the ECB to lend at low rates to a state owned institution.

hfallada

Firstly the tax payer should not give two ****s about a foreign lender that gambled in irelands property bubble and was burned very badly eg Danske, Ulster. Most foreign banks were the biggest seller of tracker mortgages. We should only be concerned with PTSB, EBS and AIB. These are the banks we(the tax payer) hold a large majority. These are businesses not operating like a business. They have a ton of non performing mortgages, but why would you repay your mortgage when you know nothing why happen. A lot of people dont pay their mortgages as they know their home wont repossessed.

The state owned banks need to get real. They need to engage with customers. Not simply ask them when are they going to pay the mortgage they cant pay,

Geuze

dlouth15 wrote: »

I think the problem would be getting the ECB to lend at low rates to a state owned institution.

ECB lending to banks happens all the time, with various types of bank owners. It's fairly normal.

Now, the banks must be solvent, AFAIK, and they must provide collateral/security.

Geuze

Akrasia wrote: »

The Bailout money is currently 'resting in the banks account' and not doing anything.

I'm not sure if that's true.

The State injected capital into the banks. The capital was used to shore up the balance sheet.

Let's go back to basic accounting:

Balance sheet: assets = liabilities + capital

So as the banks paid off, in full, the bank bondholders, and corporate deposits, so the liabilities declined. The injection of capital boosted the RHS.

I think that's what happened.

Geuze

Akrasia wrote: »

Here's what I think should happen with mortgages.

All of the below is based on the following facts.
1. Tracker mortgages are loss making for the banks. Banks can not borrow at the ECB rate because their credit rating is (understandably) sh1te


Here's what the government should do.

1. Take all the performing tracker mortgages from the banks and place them in some kind of state mortgage company which is able to borrow at the ECB base rate. The borrower still has the same repayments over the same term,

Can someone tell me why this won't work?

This part seems ok, as long as:

• the State agency buys the tracker mortgages at their book value, so no losses to the bank sellers
  
• the State agency can borrow at ECB rates (0.5%) - this means it would have to be a bank, as the ECB can't lend directly to governments

What would happen to the bad debts / non-performing tracker mortgages?

ardmacha

Geuze wrote: »

This part seems ok, as long as:

• the State agency buys the tracker mortgages at their book value, so no losses to the bank sellers
  
• the State agency can borrow at ECB rates (0.5%) - this means it would have to be a bank, as the ECB can't lend directly to governments

What would happen to the bad debts / non-performing tracker mortgages?

This is a repeat of the NAMA model. The non-performing tracker mortgages would have to written down in the banks and this might (or might not) trigger a need for further capital.

Scofflaw

Akrasia wrote:

This 'special purpose vehicle' won't appear as Irish national debt because it is offset by the assets, but it will be able to borrow at the same rate that the Irish state can borrow at from the ECB.

We would have to get agreement from the ECB to lend to this 'special purpose vehicle' at the base rate.

States can't borrow from the ECB at all.

dlouth15 wrote: »

I think the problem would be getting the ECB to lend at low rates to a state owned institution.

The ECB is currently lending €34bn to the Irish banks at base rate. That lending has been as high as €90bn (although that was ELA rather than LTRO).

cordially,
Scofflaw

gaius c

hfallada wrote: »

Firstly the tax payer should not give two ****s about a foreign lender that gambled in irelands property bubble and was burned very badly eg Danske, Ulster. Most foreign banks were the biggest seller of tracker mortgages. We should only be concerned with PTSB, EBS and AIB. These are the banks we(the tax payer) hold a large majority. These are businesses not operating like a business. They have a ton of non performing mortgages, but why would you repay your mortgage when you know nothing why happen. A lot of people dont pay their mortgages as they know their home wont repossessed.

The state owned banks need to get real. They need to engage with customers. Not simply ask them when are they going to pay the mortgage they cant pay,

And the ones who "can't" pay because they've got discretionary spending to look after first? I'm working with a fella who is a personal friend but he has 9 different properties (one being his own home and another being his daughter's home), all on interest-only and he refused to revert to capital repayments when the interest-only term was up because he "can't afford it".

Part of the reason he can't afford it is that he makes 4 trips a year to his property in the Canaries and doesn't see anything wrong with claiming that he is being "bled dry" by the banks! All this while his daughter gets a cheaper house than anybody else in the area at the expense of the bank.

It's BOSI so it's not really our problem directly but it's a common enough trend across the sector. If the customers want a deal, then they need to be prepared to be honest about their personal finances.

skafish

gaius c wrote: »

And the ones who "can't" pay because they've got discretionary spending to look after first? I'm working with a fella who is a personal friend but he has 9 different properties (one being his own home and another being his daughter's home), all on interest-only and he refused to revert to capital repayments when the interest-only term was up because he "can't afford it".

Part of the reason he can't afford it is that he makes 4 trips a year to his property in the Canaries and doesn't see anything wrong with claiming that he is being "bled dry" by the banks! All this while his daughter gets a cheaper house than anybody else in the area at the expense of the bank.

It's BOSI so it's not really our problem directly but it's a common enough trend across the sector. If the customers want a deal, then they need to be prepared to be honest about their personal finances.

This is a huge problem. And what makes it even more insulting is that these people are quite happy to sit back and let the rest of us pay for their houses and lifestyles. Makes me mad to think about it

perfectring1

There is an argument for letting market forces find their own equilibrium. From an economic perspective, government intervention is not always a good thing. The market in theory should always find its balance - if the price of something is too high nobody will buy it so the price will adjust (fall). If the price of something is too high resulting in excessive profits, new entrants will enter the market and drive down price. The market, if left to its own devices will find a balance.
The best thing for the government to do (any government) is create an environment to facilitate free entry and exit of a market and good infrastructure to facilitate economic activity (and obviously look after its people).
The best thing to happen would be for new entrants/banks to enter the market
I would not like to see the government get more involved in the banking sector - they are not qualified to run such things - less is more.

Scofflaw

perfectring1 wrote:

I would not like to see the government get more involved in the banking sector - they are not qualified to run such things - less is more.

That's kind of an amazing argument, given the size and ubiquity of the current crisis, and the general agreement that it resulted in a large part from allowing bankers to self-regulate to too great a degree.

cordially,
Scofflaw

perfectring1

Scofflaw wrote: »

That's kind of an amazing argument, given the size and ubiquity of the current crisis, and the general agreement that it resulted in a large part from allowing bankers to self-regulate to too great a degree.

cordially,
Scofflaw

I dont think self regulating is a good idea, we can agree that it is what caused the problem.
Think the government should have proper regulation in place, bring in experts (which they are in the process of doing) and let the experts resolve the issue. I would rather see a finance expert regulating the banks over a politician with little to no finance skills.
The economic argument of 'market forces' and allowing a natural equilibrium arise is the fundamental principal of all economics - See Adam Smith - 'The Wealth of Nations'. Its one of many theories about how government can and should run a economy (in opinion of one of the leading economists of all time)