Moving paper – Could we solve some of our 100,000+ mortgage problems with American methods?

Moving paper – Could we solve some of our 100,000+ mortgage problems with American methods?

Today’s news that we are now over the 100,000 mark in terms of troubled mortgages is shocking but expected. We are often presented with the news and then told that there are ‘no easy solutions’, but is that really the case?

In the USA there is a transaction called ‘moving paper’, and it is where a person sells their house by having another person take over the mortgage. It isn’t very common, but when it occurs the new ‘buyer’ goes onto the mortgage deed with the lenders’ consent and in effect takes over the debt.

In the past this might be done because there was a favourable rate on the mortgage or because the seller had marginal equity and threw it in as part of the sale, or the buyer had a preference for the term or structure of the loan securing the property.

Could we use something like this in Ireland to help out people in negative equity? Or people who are in arrears and want out?

If a person has €10,000 negative equity and can’t fund the difference and they are trying to sell, or if they were unable to pay their mortgage and wanted out, would making it possible for a new buyer to ‘take over’ the mortgage be a solution? The seller wins, clearing negative equity or arrears, and the buyer wins by getting a great mortgage. The bank wins by having a loan that is performing instead of being impaired? Naturally this should work in that case right?

In theory it does, in practice it doesn’t. Banks don’t want to know – we have even seen where a couple break up and one person wants off the deed and they won’t do it without issuing an entirely new mortgage (normally they are doing this to ensure you legally lose your tracker – there is no regulatory protection in this instance).

Where there is a deep level of negative equity this may not be practical, but if you were buying a house and were told you could pay €10,000 over the odds for it and have a tracker mortgage in return would you take it?

Do you have any other ideas that might help make transactions possible? The hard part is to come up with one that doesn’t involve using government money! Do your best readers, we are looking forward to some creative input!

Karl Deeter (@karldeeter on Twitter)

 

  Karl Deeter is the operations manager with the Irish Mortgage Brokers

There are 21 comments for this article
  1. Viv at 6:04 pm

    I don’t think this will work, I agree with JP, when there is value houses around why buy a second hand home?

  2. abdel at 12:34 pm

    Please , please I need an answer for this

    Are there any place for Swap saling houses or even swap renting ?

    As I have 5 bed room lovely house in county Meath , South Drogheda in very Quite safe area , close to schools ,Clubs & M50, 40 minutes from centre Dublin, 20 minutes from Airport.

    The problem is I have for sons all of them studying in Dublin Univerisity.

    I am very flexible , open mined to negociate for swap sale

    I am ready to pay 1000Euros as difference in swap rent

    To myhome .ie can you please adopt this ideas please & let me know if any responce to them

    Thank you

  3. Patrick at 8:09 pm

    Certainly it would have a limited but useful input.Another option might be where the vendor wishes to downsize they would be permitted to carry the negative equity, or part thereof to their new mortgage,Depending on which way our esteem Leaders and financial directors wish to take us on this unending merry go round of total mismanagement. There, just might be a glimmer of hope that one day house prices will again increase in value. In the meantime, where there is great hardship, people would be well advised to hand the keys back to your lender, and if enough of us adopt this approach, I expect you will soon find the alternatives come tumbling in. Get a life and rent yourselves an affordable little place where you and yours can once again live in harmony,and away from this insufferable greed, that has consumed this once proud little country.

  4. Stephen at 3:00 pm

    A number of attempts have been made to get the market moving again while keeping house prices at an artificial level – the creation of NAMA and the continuing moratorium on repossessions to name two of the obvious ones. These haven’t worked as the CSO figures show – all they’ve down is forestall the inevitable.
    It’s been repeated ad nauseam – the best way for the housing market to get moving again is for it to find its natural floor.
    @Karl “Regarding the ECB, I don’t know that >50% likelihood of breakup is a surety”
    interesting / frightening reports are emerging on a daily basis. For example, see today’s
    http://www.telegraph.co.uk/finance/financialcrisis/8897775/Asian-powers-spurn-German-debt-on-EMU-chaos.html
    If it’s likely that Ireland ends up with its own currency again (either through the complete implosion of the Euro or through something like a slimming down of the Eurozone) then the resulting inevitable devaluation of the Irish currency and corresponding massive inflation will take care of a lot of the debt that people are currently in. In that scenario it will pay to be holding a big mortgage.
    To be honest, I don’t think there’s going to be time to find some nifty way of getting the housing market moving again anyway. We’ll have bigger troubles working out how to go forward economically after the tidal wave of debt comes crashing down and the Eurozone is washed away.

  5. karl deeter at 12:35 pm

    @BarrierReef Putting rates at 1% might force losses on the banks, but your idea is precisely the same thing – force the losses en masse – and that doesn’t distinguish between people who are unable to pay and those that can. The idea of using a French/German rate would (because rates here are generally lower) not always result in lower payments due to the rate increase, and the writedown on good loans would eat capital beyond provisions (which are for bad debt) while breaking the contract people signed up for in tracker mortgage loans.

    @John interest only is the same as a 100 year loan, term extension can only do so much. In terms of fixed rates. There would be more than 100,000 people in trouble if we all had fixed rates – they tend to be priced off of longer term govt. bonds and are higher in cost. As ECB dropped rates people would have been stuck at the higher price – as banks are not refinancing you couldn’t just go re-fi the problem away. The argument for fixed rates is ideological in some respects.

  6. john at 11:44 am

    would 100 year mortgages with some percentage write down of the negative equity over the rerm of the loan help?

    a long term fixed rate mortgage removes a lot of speculation, reduces repayments and frees up some money.

    popular in germany ???

  7. purple at 11:38 am

    Ive always said banks sud take a cut in the interest rate banks are charging any mortgages where the buyer’s wages no longer matches the repayments or where they’re in financial difficulty.
    *Also would reduce the amount of mortgage interest supplement the government is paying to banks for ppl unemployed with mortgages.
    It’s ridiculous that the only option they offer ppl in difficulty is interest only payments and interest could be as high as 5-6%.
    Banks only pay the ECB rate of 1.25% so they still making profit on the balance of interest charged.
    We got a cut in the interest rate on our IMF loand so we should be able to negotiate with banks that it’s in both our interests to cut Variable Rates on loans already taken out.

  8. BarrierReef at 11:34 am

    Banks can’t reduce interest to 1% as their cost of funds is much higher than that. What you are asking them to do it to take losses every year for the next 20 years.

    These ideas might work when we are talking about 10 or 20k negative equity, but in reality we are talking about hundreds of thousands. I can work out NPV etc… but as there is no visibility as to what ECB and hence tracker rates will be in the future, I would be unwilling to take on someone else’s negative equity even if the deal looked +EV today.

    In my opinion what we need to do is to force the banks to look at their mortgage books at a macro level. They have 60% of mortgages which is probably 80% of the mortgage value on tracker mortgages. These are loss making and will continue to be for a long period of time. Like they did with Nama they should face up to those losses now… and write down the value of EVERYONE’S mortgage by the amount those future losses are. In return for this the government should allow them to take all the mortgages and apply a fixed interest rate. ( at a rate comparable to those available in France/Germany, which over the lifetime of the mortgage would have the borrower repaying roughly the same as their original deal ( even better for the Variable guys, but they have taken it for the team over the last couple of years )

    This fixed rate would be higher than currently in the market and would only be applied to those choosing to take the write-down.

    As a claw back for the government they should then apply a high Capital Gains Tax on any profits achieved between the written down mortgage and current mortgage value price. This future tax could be used (through some magic promissory SPV wizardry that they are good at) to provide any capital that the banks need to perform this. And lets face it as soon as the can runs out of road they need this capital anyway.

    If they did the above I see the immediate benefits:
    1. Banks still get the same amount repaid each month (lower value @ higher interest rate)
    2. People would be free to sell their house now, if there is no gain they can walk away without the need for Bankruptcy.
    3. If most of our mortgages are at a higher rate the banks should be able to interest pension funds/ investors to buy them. They would also provide an incentive for foreign banks to come to Ireland and compete (no-one can compete for my PTSB mortgage at ECB + 1% currently).

    The last question is what about the foreign banks, well I think that if they were taken into a room and offered 60% of their mortgage book value which is secured on property which is worth 50% of the book value they will snap someone’s hand off and head for the hills.

    Sorry for the long post!

  9. karl deeter at 11:26 am

    One addition: if a person had equity and wanted to sell and this was possible – it may make their property more attractive to a buyer, I don’t know if this advantage would be a distortion, but it could be something that works for those who just want to sell too

  10. karl deeter at 11:25 am

    @JP Not all property is 50% in negative equity, in fact, of the near 63,000 in arrears a huge portion have a lot of equity. This idea would be that you can do a calculation whereby it may be worth ‘buying negative equity’ because of the finance backing it. By buying the loan you buy the underlying property. Loans are often amortizing as well – so there are good trackers taken out in 2003 (and let’s not forget that the 50% fall you mention is from 2006 prices) was below the peak, a decent deposit paid and balance reducing but it could still be in negative territory.

    @PaddyMakesAPlan That is what we call ‘open ended bridging’ in mortgage lending. The problem with your proposal is that by taking on the 2nd property without having the 1st one sold you then carry two loan balances simultaneously and you might be unable to sell the 1st property and it is very high risk.

    @John Sounds like Nirvanna, how do you get such a plan into the realm of reality?

    @Tony Murray This ‘crap idea’ actually helps thousands of people a year already! I think proof speaks for something!

    @Jim I think you’ll find that the banks would be taking a massive hit, it would undo their maturity cycle, leave them susceptible to economic factors that thay are not fully exposed to otherwise and undo their ability to sell assets due to uncertain terms and conditions attached to them.

    @Granny sadly it seems to have always been that way, and I doubt your generation or mine will solve that particular mystery.

    @TaxSlave as mentioned, it sounds great, but how do you make it happen when banks are paying 4% for money to stay open?

    @Regina Japan has never come back since the 80’s.

    @Stephen If you want to make a comparison about values/cost over time then you need to factor in money spent on rent for a similar duration. On making valuations, you can use the investment method – although in residential there is often a premium over this as the market is dominated by owner occupiers. The idea of a ‘free market’ – nobody would force this idea, it merely opens the option for buyers and sellers and unlocks people from property they may not want to be in. Regarding the ECB, I don’t know that >50% likelihood of breakup is a surety, and if it did break up rents would change too. I like the ‘conspiracy theorist’ idea, but please tell me (because I don’t see it) how does the vested interest make money on this transaction? It would involve the banks giving a mortgage deed change & a small solicitor fee?

    @PaulThat is kind of the idea, but obviously you would need to make sure that your transaction makes sense for the buyer

  11. Paul at 10:28 am

    Great idea but will it pass legals ie can borrowers be replaced without new contract.This would be something that could sell the property I have. The potential purchaser/renter could have the advantage of a well priced tracker (.90+)and although 12 years (shorter term) left I could leave the balance owed on the 2nd property secured to the mortgage or negotiate the balance and try to clear with alternative mortgage.

  12. Stephen at 10:25 am

    The only conditions in which this would work would be if the buyer was pretty confident that the amount saved through having a tracker mortgage was at least equal to the amount of negative equity in the mortgage. However, there are a couple of effectively insurmountable problems in the Irish market for a start:
    1. the actual value of any property is extremely difficult to estimate at the moment with the market all but stalled.
    2. even confidently estimating a value ‘now’ for a property is not sufficient, because the CSO is reporting continuing monthly falls in prices of above 10% annualised – so further negative equity has to be accounted for

    Regardless of these valuation problems there are far bigger considerations. Just for emphasis let’s repeat the vital factor of a deal like this – the buyer would be getting a favourable mortgage, which in Ireland means an ECB tracker mortgage. At this point it looks more than 50% likely that there will be no ECB in 12 months time. What will happen to those tracker mortgages then? At very least they will all be converted into Irish Central Bank trackers and the interest rates will shoot through the roof.

    A conspiracy theorist might say suggestions like this stink of vested interests desperately trying to grab the last bit of money they can before Armageddon.

    I, perosnally, wouldn’t go that far. But I do think Europe is doomed and the shock-waves will be massive.

  13. Regina Kearney at 10:13 am

    The best way out of this mess is for Banks to cut interest rate for Homeowners for a 20 year term to 1% this is what most Banks did in Japan in the 80’s

  14. Tax slave in private sector at 10:04 am

    I think John’s idea of set interest rate @1% is great. Mortgage holders on SVR are being hammered by increases in rate and thus are renegotiating the payment level – result the bank scores as they still get the higher interest payment – the borrower just pays back less capital every month. A low interest rate would result in people paying back more capital every month and still being able to afford to live.

  15. Granny at 10:02 am

    Some of the older generation want to help, but can’t until banks realise a mortgage of 500,000 on a property worth 200,000 doesn’t make sense. These bankers encouraged our children, we can’t give into the present mortgage as we wouldn’t solve the problem, but if the mortgage was realistic, we’d be in to help. Meanwhile we sit and wait, – until we can help.

    Banks need to take some of the hit. I don’t see them taking possesion of Sean Quinn’s mansion, but they will take my childs very modest house.

    One rule for the playboys and one for the hard working small people!!!!

  16. Jim at 9:54 am

    Buying/selling is a separate issue and not the real problem, which is that mortgage payers have taken a cut in wages, pensions or lost their jobs so that they do not have enough money to pay all their expenses. I think that mortgage payments should be cut in the same way and then, when wages and jobs pick up again, mortgage payments could be increased in the same proportions. This would not be implemented on an individual basis (no moral hazard) but applied to all mortgages based on an index and enforced by the Central Bank. The banks would take a small temporary hit that might even be in their long-term interests.

  17. Tony Murray at 9:48 am

    No this would never work here due to houses actual worth and other factors …. How was this even suggested or thought up it is actually a crap idea to be blunt.

  18. John at 9:38 am

    No, the best way is to have a set interest rate for home loans at 1%,for the next 20 years.

  19. Paddy makes a plan at 9:34 am

    A person with a mortgage greater than resale value should be allowed to sell the property when the outstanding amount is added to the mortgage of a new property. Conditions; the second property is purchased before the sale of the first property, and the market value of the second property is at least equal to the first.

  20. Jp at 9:22 am

    This would never work in Ireland. Especially in this climate. Firstly, who would want to take over anyone’s existing mortgage when it is more then likely upto 50% more then the actual value of the property? And secondly, the market is flooded with choice and value now- it would be much cheaper for the potential buyer to get their own mortgage and negotiate a better price BEFORE buying the new property.

  21. Jamie at 9:07 am

    I don’t think making pizza a vegetable is going to solve our mortgage problems, but it’s worth a try!