Morgan Kelly calls for debt forgiveness for struggling mortgage holders

mathie · 19-08-2011 10:02am #1

http://www.thejournal.ie/morgan-kelly-struggling-mortgage-holders-should-be-given-debt-forgiveness-204994-Aug2011/

THE ECONOMIST WHO predicted Ireland’s property crash has said that a €6 billion bailout for householders in mortgage arrears that allows them to walk away from their home loans would solve most of the problem.

The UCD economist Morgan Kelly told the Irish Society of New Economists at the university yesterday that “spending €5 billion to €6 billion on mortgage forgiveness, mortgage principle reduction and allowing those hopelessly indebted to walk away from mortgages, would probably solve most of the problem,” for mortgage holders the Irish Examiner reports.

The Irish Times goes on to quote him as saying: “We are talking sums in the region of €5 billion to €6 billion which would be necessary to spend on mortgage forgiveness, which by our standards are not very large”

“This sum to sort out tens of thousands of people with big problems does not seem enormous.”

He delivered what he deemed “good news” by explaining that “if you leave investment mortgages out [of total mortgages owed], which are largely the banks’ problem, and look at mortgages people have on their own houses, there are about €55 billion of these out there.”

Looks like a step closed to debt forgiveness when MK trumpets it as the answer.

Paulw · 19-08-2011 10:16am

But why should there just be debt forgiveness for those struggling?

Why is that fair?

Would it not be fairer for blanket debt forgiveness? Why should those who have managed their money well (not that I'm blaming anyone who is struggling) not also be assisted?

Frank Black · 19-08-2011 10:25am

I don't think most people would have an issue with 'debt forgiveness' if the assest on which the debt is based is surrendered.

Some people seem to be under the impression that their debt will be written off and they will be allowed to continue living in the overpriced place that they bought during the boom.

Dades · 19-08-2011 10:47am

So, how would this work?

Does the "negative equitee" have to sell the house, give the bank the proceeds, and walk away?
Or do they just walk away leaving the property in the hands of the bank?

Either way there are big potential issues.

Also, there would be a serious flood of houses on the market.
/Rubs hand in glee

Raskolnikov · 19-08-2011 10:58am

Dades wrote: »

Does the "negative equitee" have to sell the house, give the bank the proceeds, and walk away?

I doubt it.

The most likely scenario would be that part of the negative equity would be written off.

variety · 19-08-2011 11:17am

So what happens if the person given debt forgiveness retains the property and sells it in the next property bubble (say 30 year time) making an enormous windfall as a result. Would they then be expected to pay back the amount given debt forgiveness to the bank? Unlikely.

I agree with the other posters- if there is debt forgiveness for those in trouble, there should be a comparable benefit given to the savers.

Zamboni · 19-08-2011 11:24am

Moral hazard alert.
I'm surprised at Prof Kelly to be honest.

When this kind of solution was bandied around before I remember the common attitute by people who keep up with their mortgages, despite NE, would be to stop paying too. i.e. why should one group be let off the hook etc...

Raskolnikov · 19-08-2011 11:36am

Zamboni wrote: »

Moral hazard alert.
I'm surprised at Prof Kelly to be honest.

It's too late for moral hazard alert.

We're already bailed out the banks for making mistakes and allowed most people in these companies to keep their jobs.

We've already written down and forgiven part of the debt that NAMA developers owe.

These people were speculators, and they've been forgiven; so what's the problem in forgiving ordinary homeowners?

krissovo · 19-08-2011 11:42am

What a crazy notion, already half the country feel hard done by by the down turn. Now there is a possibility of upsetting the other half if people are excused thousands of euro and there is nothing in return for those who were "smart" during the good times.

Balmed Out · 19-08-2011 11:42am

I presume they would also have to be walking away from their houses, a reduction is silly, everyone would be struggling all of a sudden:D. I dont have a problem with helping out people who have lost their income and are struggling with their mortgages but on the other hand most of the people struggling bought in the expectancy of their asset rising in value. If it had would they be giving up the profit? People forget that more then politicians, bankers and developers those who fuelled the boom buying overpriced houses got us into this mess.
Im in my mid thirthies and have wanted to buy a home for over 10 years, what I could affoard never represented value for money for me so I havent. All of these measures as well as the existing NAMA situation seem to be designed to protect those who made mistakes thus meaning I still cant get value for my money.
So many many people in this country have income thats not declared. I remember in college in the 90s people who were recieving grants getting dropped in by parents driving fairly expensive cars. There would be no way to do a scheme like this without an awful lot of people taking advantage of it to wipe out bad investments at the taxpayers mistake.

People need to start taking responsibility for their own decisions instead of looking for bailouts. I do feel for those jobless and would like to see some sort of mortgage freeze until they get on their feet agian but at the end of the day if you take out a loan then you not the taxpayer should pay it. Obviously we do also need to update the bankruptcy laws so people do have some sort of an option if they are in a hopeless situation but not this.

Zamboni · 19-08-2011 11:57am

Raskolnikov wrote: »

These people were speculators, and they've been forgiven; so what's the problem in forgiving ordinary homeowners?

I'm not arguing about the moral hazard regarding banks and property speculators.
I'm talking about rewarding poor financial decisions by the individual.
Multiple wrongs don't make a right.

Dades · 19-08-2011 11:57am

So unless every homeowner will be allowed have their property valued, and their mortgage principle cut to that new value - there will be serious inequity.

Compare the guy who is not 'struggling' to pay a 400K mortgage on a 200K house - with a guy in the same property position but with no job to make the repayments. The struggling guy gets to walk away from his mess, but then gets a job down the line and is debt free if he wants to buy the same house for 200K. The guy who kept his job is still in debt the red to the tune of 200K and hasn't cost the taxpayer a cent.

The more you look at this the more it looks like a can of worms.

Faolchu · 19-08-2011 12:08pm

Paulw wrote: »

But why should there just be debt forgiveness for those struggling?

Why is that fair?

Would it not be fairer for blanket debt forgiveness? Why should those who have managed their money well (not that I'm blaming anyone who is struggling) not also be assisted?

Couldnt agree more, I've managed to get by not miss a payment and wwhat not. why should i be expected to continue like this while someone that lied on an application form, over extended themselves or just had a run of bad luck gets their debt written off. what are they more deserving than me?

Zamboni wrote: »

the common attitute by people who keep up with their mortgages, despite NE, would be to stop paying too. i.e. why should one group be let off the hook etc...

if this started happening across the board the first thing i'd do is stop my direct debit on my mortgage account. actually i'd probably close my bank acocunt and open a new one elsewhere and use that for everyting instead.

sharper · 19-08-2011 1:00pm

Faolchu wrote: »

Couldnt agree more, I've managed to get by not miss a payment and wwhat not. why should i be expected to continue like this while someone that lied on an application form, over extended themselves or just had a run of bad luck gets their debt written off. what are they more deserving than me?

For any type of debt forgiveness you end up with haves and have-nots, since the current crisis is ultimately debt driven the "haves" are those that precipitated the crisis and the "have-nots" are those that didn't.

Consider two people living on the same street side by side. Guy A did as you describe: over extended himself to get a mortgage. Guy B thought it was all madness and rented instead. Now guy A gets bailed out using taxes from guy B. Guy A is left with the house, guy B is left without a house and with less money to ever buy one.

The only real solution is bankruptcy reform. The process of discharging your debt must be a painful one and not one that leaves the person ahead, it simply unloads a burdon they can never hope to satisfy.

If people want to lose the house, lose their assets and any savings in order to discharge their jumbo mortgages then fine. You can be pretty sure though that what people are actually expecting is simply for their mortgage to be reduced by 20-50%.

snickerpuss · 19-08-2011 1:11pm

I can't believe someone I thought was vaguely sensible has come out with this idea. If only I'd been reckless and bought what I couldn't afford, I'd get a free house. Whoop! Honestly... Why in Ireland must we always reward people who are reckless and unprepared?

Zamboni · 19-08-2011 1:21pm

snickerpuss wrote: »

Whoop! Honestly... Why in Ireland must we always reward people who are reckless and unprepared?

As a very young and naieve nation, we vote on popularity rather than competence.

seamus · 19-08-2011 1:23pm

Dades wrote: »

The more you look at this the more it looks like a can of worms.

Not necessarily, if you use the carrot-and-stick approach that I posted on AH. That is, "Here's a lovely carrot if you want it, but I will beat you with this stick while you eat it".

Basically you give people options for getting out of their situations that aren't completely just get-out-of-jail-free cards.

So, let people walk away from their mortgages, but leave them in a "bankrupt" legal state for five to ten years or so. They can rent or emigrate, or whatever, but they'll never get credit. Ten years is a surprisingly long time when you have to live it, so I don't think this would be an "easy" way out by any means.

Or you could reduce someone's mortgage but leave them in a no-profit position for the life of the mortgage. If they move or die, the bank takes everything.

Both would provide ways for people to escape from an impossible debt burden, but come with harsh enough consequences that simply sticking with it isn't a bad choice either.

Wile E. Coyote · 19-08-2011 1:24pm

Debt forgiveness will never happen in this country because as a nation of begrudgers we don't want to see someone else benefit where we can't.

What I'd like to see happen is the government force banks who benefitted from a bailout to drop the interest rate on all homeloan mortgages, bought during the boom, to 2% and fix them there for the next 5-10 years. This would still hold people responsible for the principle amount that they borrowed but would significantly reduce their month bill. Any one who isn't struggling to meet their payment could maintain the current amount and clear down their negative equity a lot sooner putting them in a position to sell the house if they wanted.

Theboinkmaster · 19-08-2011 1:54pm

Wile E. Coyote wrote: »

Debt forgiveness will never happen in this country because as a nation of begrudgers we don't want to see someone else benefit where we can't.

What I'd like to see happen is the government force banks who benefitted from a bailout to drop the interest rate on all homeloan mortgages, bought during the boom, to 2% and fix them there for the next 5-10 years. This would still hold people responsible for the principle amount that they borrowed but would significantly reduce their month bill. Any one who isn't struggling to meet their payment could maintain the current amount and clear down their negative equity a lot sooner putting them in a position to sell the house if they wanted.

I agree Irish people can be more begrudging than other nationalities however this has nothing to do with it. Why should someone who is financially prudent pay for someone being reckless? It's a morality issue - it's just wrong.

Why should the government reduce rates for just a select period? Therefore this charge to the country's finances will be paid for by whom exactly - everyone else?

IMO best solution is either the bank takes equity stake in house or mortgage is passed onto next generation.

Wile E. Coyote · 19-08-2011 2:13pm

Theboinkmaster wrote: »

I agree Irish people can be more begrudging than other nationalities however this has nothing to do with it. Why should someone who is financially prudent pay for someone being reckless? It's a morality issue - it's just wrong.

Not everyone who bought a house was being reckless. Most people were buying homes but things have changed and a lot of people are now struggling to pay bill and maintain mortgages on houses that are worth half of what there were a few years ago. Hindsight is a great thing that we all have but we're not all mind readers and economists who could forsee the severity of what was to come.

Why should the government reduce rates for just a select period? Therefore this charge to the country's finances will be paid for by whom exactly - everyone else?]

The cost would be paid by the bank as it should have been from the start, not the taxpayer. I'm not saying the government should make up the additional 3% that the bank would have received over that period, simply the bank don't make as much profit.

If not for all homes bought during the boom how about just for family homes in negative equity? We've bailed out everyone else and the only complaints about it were from the keyboard warriors on the internet so why not help the average person in the street?

IMO best solution is either the bank takes equity stake in house or mortgage is passed onto next generation.

Why should the next generation be forced to take on the mortgages? So your happy to pass on the burden to a generation who probably haven't reached voting age or been born yet as long as it doesn't come near you?

Dades · 19-08-2011 3:15pm

seamus wrote: »

So, let people walk away from their mortgages, but leave them in a "bankrupt" legal state for five to ten years or so. They can rent or emigrate, or whatever, but they'll never get credit. Ten years is a surprisingly long time when you have to live it, so I don't think this would be an "easy" way out by any means.

Or you could reduce someone's mortgage but leave them in a no-profit position for the life of the mortgage. If they move or die, the bank takes everything.

You'd need a combination of the two, really.

In option 2 there's no incentive to keep repaying the mortgage. It becomes simply rent, and once the owner decides they can actually rent a better place for the same as their monthly repayments they'll move on.

Also, I would suggest the "bankrupt" legal state would have to be ten years. Five years would just be doing people a favour by forcing them to stay out the market for a sensible time.

But overall you would have to address the effects of a huge amount of good homes suddenly coming on the market, and 10 years from now a whole load of people suddenly becoming solvent again.

Theboinkmaster wrote: »

IMO best solution is either the bank takes equity stake in house or mortgage is passed onto next generation.

Terrible idea to burden our children even more - like we didn't fcuk it enough for them already!

seamus · 19-08-2011 3:21pm

Dades wrote: »

In option 2 there's no incentive to keep repaying the mortgage. It becomes simply rent, and once the owner decides they can actually rent a better place for the same as their monthly repayments they'll move on.

Indeed, that would need a little more work. Theoretically someone with financial sense might see that they have 15 years to pay off the mortgage, so they'd be silly to move after ten years and throw away €X amount of equity when they can keep going for another five and then claim the equity when the mortgage has been paid.

The problem arises with people who might need a 25 year mortgage to pay off their smaller amount. When given the option of ten-year bankruptcy or ten years of renting their own home, they'd likely go for the latter, and then move when it suits them, with a solid credit record behind them, effectively giving them debt forgiveness with no stick.

But overall you would have to address the effects of a huge amount of good homes suddenly coming on the market, and 10 years from now a whole load of people suddenly becoming solvent again.

Just implement another debt forgiveness program 15 years after that when that bubble bursts. Lather, rise, repeat. What could go wrong?

Spiritofthekop · 19-08-2011 4:57pm

I would lose all faith in this country if this was even spoken about happening.

In fact I would openly do everything from that moment on (if it happened) to never pay taxes, bin charges, water charges etc etc again. I would consider this country a place of disgust & an immoral place to live & I would speak of Ireland as a country in this manner to anyone who ever asked about it.

Its wrong & immoral & makes me so angry that this person would even mention it as a possiblilty.

Why should the greedy be bailed out & helped & the people who lived with-in their means suffer again.

Shocking!

edit....

to self...

Count to 3..........1....2...3...now relax :P

Snakeblood · 19-08-2011 6:30pm

Wile E. Coyote wrote: »

Debt forgiveness will never happen in this country because as a nation of begrudgers we don't want to see someone else benefit where we can't.

What I'd like to see happen is the government force banks who benefitted from a bailout to drop the interest rate on all homeloan mortgages, bought during the boom, to 2% and fix them there for the next 5-10 years. This would still hold people responsible for the principle amount that they borrowed but would significantly reduce their month bill. Any one who isn't struggling to meet their payment could maintain the current amount and clear down their negative equity a lot sooner putting them in a position to sell the house if they wanted.

But taxpayers own the banks. So instead of getting the money from people who took the loans, taxpayers would be paying the banks to service the interest on loans that people *decided* to take out. It's debt forgiveness by another name.

mebird · 19-08-2011 9:16pm

I don't think debt forgiveness can or will be operated in any formal manner. It is however, already being operated on a case by case basis where people are being allowed walk away without being followed by the debt...

The only solution for someone who wants to remain in the property is a debt / equity swap.

One option is that they would pay back what they could afford and the bank would retain the equity on what they couldn't afford. On their debt... sorry death...their beneficiaries do not inherit any debt but have the option to buy out the rest of the house, or if it is placed on the market benefiting of whatever may be left after the bank has been repaid.

The second option is the bank takes back the asset and leases it to the borrower for 40, 50, 60 or 90 years at a rate they can afford. But they will never own the house.

For some reason I do not know, the banks will not entertain the notion of any debt equity swap. I think it is because they cannot afford to do it.

Which brings us back to the main problem. Our banks are bust. Any capital we injected went straight out the back door to departing deposit holders who put it in Rabo, gold, or under their bed. The banks need money and not reduced mortgage payments.

What a mess.

mikemac · 19-08-2011 11:05pm

I haven't heard such madness since Fine Gael wanted to compensate Eircom investors

boogerballs · 21-08-2011 10:09pm

Spiritofthekop wrote: »

I would lose all faith in this country if this was even spoken about happening.

In fact I would openly do everything from that moment on (if it happened) to never pay taxes, bin charges, water charges etc etc again. I would consider this country a place of disgust & an immoral place to live & I would speak of Ireland as a country in this manner to anyone who ever asked about it.

Its wrong & immoral & makes me so angry that this person would even mention it as a possiblilty.

Why should the greedy be bailed out & helped & the people who lived with-in their means suffer again.

Shocking!

edit....

to self...

Count to 3..........1....2...3...now relax :P

You would take this stance now when ordinary folk on the street are being helped.... where was this attitude when the banks were being bailed out, where was it when pensions reserves were being drained... another keyboard warrior... all bluster, no substance!!

Zamboni · 22-08-2011 9:46am

boogerballs wrote: »

You would take this stance now when ordinary folk on the street are being helped.... where was this attitude when the banks were being bailed out, where was it when pensions reserves were being drained... another keyboard warrior... all bluster, no substance!!

Banks are scum = collective responsibility.
Individual mortgage = individual responsibility.

You cannot socialise an individuals losses. Sure if that were the case, why not refund every non winning lotto ticket from the excheuquer?

Ray Palmer · 22-08-2011 9:55am

Spiritofthekop wrote: »

I would lose all faith in this country if this was even spoken about happening.

Why should the greedy be bailed out & helped & the people who lived with-in their means suffer again.

WOW!

It is being spoken about. Missing some understanding about how things work in this country by the looks of it. Media leak gauging public reaction then they do it if the reaction is not that bad.

There are lots of people who weren't being greedy and bought within their means. In case you didn't notice wages and jobs dropped. The main idea seems to be in order to get people spending money. If people don't spend money we are in real trouble.
Money has to keep moving and if it just keeps going into the banks we are going to be in more trouble. The national debt was simply moved to individuals and then a bigger national debt was created when the banks crumbled. Very little of this was really an Irish thing we were just bobbing on the financial sea.

boogerballs · 22-08-2011 11:21am

Zamboni wrote: »

why not refund every non winning lotto ticket from the excheuquer?

Ah come on now, that is getting a bit ridiculous when comparisons like this are being made do you not think.

The facts are:

1. Banks are not lending to small business, individuals, mortgage applicants etc..
2. The whole economy is completely stagnant
3. We need money to start flowing around the country
4. We bailed out the banks out under the assumption they money they received would kick start the economy - we know how that worked out!!

The idea of debt forgiveness which may sound unfair to some, is just another attempt to fix this mess. Something needs to be done and done quick. Last June the banks were told they could only repossess houses after 12 months of arrears plus another 6 months of legal process. That 18 months is this Christmas - wait and see what really starts hitting the fan then.

Zamboni · 22-08-2011 11:38am

boogerballs wrote: »

Ah come on now, that is getting a bit ridiculous when comparisons like this are being made do you not think.

The facts are:

1. Banks are not lending to small business, individuals, mortgage applicants etc..
2. The whole economy is completely stagnant
3. We need money to start flowing around the country
4. We bailed out the banks out under the assumption they money they received would kick start the economy - we know how that worked out!!

The idea of debt forgiveness which may sound unfair to some, is just another attempt to fix this mess. Something needs to be done and done quick. Last June the banks were told they could only repossess houses after 12 months of arrears plus another 6 months of legal process. That 18 months is this Christmas - wait and see what really starts hitting the fan then.

Unfortunately, not one word of that makes debt forgiveness a good idea.

Morgan Kelly calls for debt forgiveness for struggling mortgage holders

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