Debt relief

Debt relief

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One of the most popular (by comments) blogs we ever had on the site was about debt forgiveness and whether it was a good or bad idea.

In yesterday’s Independentthere was an article about the upcoming debt bill which must be put before the Dáil before April as part of the bailout package. The main concern is about whether or not it should include mortgage debt.

On one hand you have the Justice Department who want mortgages included in a non-judicial procedure that deals with all debts comprehensively, on the other is the Department of Finance who want mortgages kept out of it.

The question is who will win? Will Justice see justice prevail or will Finance see the financial concerns of banks hold sway?

When you take every problem account into consideration there are in the region of 150,000 mortgages in that space according to the IMF, 62,000 or more are in more than 3 months of arrears, another 70,000 or more have been restructured.

The idea which seems to be a popular solution at the moment is to allow people who have unsustainable mortgages (and there are likely 20-25,000 of these) to stay in their home, the property becomes owned by the local authority and they pay a rent to the banks in turn collecting a rent from the tenant (formerly the owner).

One obvious inequality in that is the transition from debtor to social tenant. There are 100,000 people on the housing list waiting for homes to become available.

The solution above means a person won’t have to wait, instead they’ll just jump the entire queue and their own home will become social housing. The advantage won’t be conferred because of any particular qualification in terms of need above other people on the waiting list, instead it will be because they borrowed and didn’t have the ability to repay.

Is that fair?

Hardly, but when you weigh it against turfing people out it begins to look less inequitable. What should we be doing? Every solution has multiple downsides.

In a paper written on this topic we outlined a programme that is not far distant from what Justice are proposing (it was sent to them but we are certain that it had zero influence on the outcome). Anything that stops short of a comprehensive solution will not work, if short term debts and unsecured debts are done in one realm of influence and secured debts in another (like mortgages) there will be some trade off in outcomes, or preference for courts which will give final answers on the mortgage debt.

This might make bankruptcy more attractive, or indeed necessary in order to reach closure…

Who knows where this will end? Will there be moral hazard? If there is some is it a valid price to pay in order to help a large cohort of people who will otherwise have no solution?

We are looking forward to your thoughts as always.

 

Karl Deeter (@karldeeter)

Operations Manager

Irish Mortgage Brokers

Dublin 2

http://www.mortgagebrokers.ie

There are 16 comments for this article
  1. Greg at 1:05 pm

    @Peterpaul:

    You stated:”On the other hand, the housing market collapse means that nobody can sell the underwater properties for the amount owed, in other words, somebody will have to absorb the loss in value. Should that be the bank (through debt forgiveness) and the taxpayer (through the State propping up the banks for their writedowns), or should that be the individual who made the bad judgment call (through bankruptcy)?”

    First of all the “Taxpayer” most likely IS the person suffering with their mortgage. It is the taxpayers money that is recapitalising the banks and paying off toxic bank debt. My wages have suffered significantly so to me in effect I am already paying for my mortgage twice!! Has nobody thought of this??????????? And what about the criminal charges that should be answered from both the banks and governments side? Economic treason has been committed in this country its as simple as that! Do I want people to go to jail?? NO, I would be happy enough if the REAL truth was told and every single person who caused this to own up and say sorry and then be removed from whatever office they hold. Not one banker or politician who caused this such be living in anything bigger than a three bed semi in a lower class area. No Foxrock or Dalkey or Blackrock etc. All their assets should be seized and they should not be allowed drive anything newer than a ten year old car. Pie in the sky idea???? Is it??? The people of this country the “TAXPAYERS” are paying for their mortgages twice. Their mortgages should be halved plain and simple. And one more thing…Fianna fail should be disbanded as a party and never be allowed sit in government again.

  2. Aidan at 2:20 am

    OK I am none too happy about people being allowed to walk away from there debts, but we do not have a choice.
    Ireland will default on its debt, just a matter of time.
    Now if our leaders continue on there present course they will end up with a Hugh problem, country broke, banks broke, bussiness broke, citizens broke, outcome tax revenue poof.
    There is only one answer and that is a bottom up approach debt releaf for the citizen (moral hazard is yesterdays argument). As long as people are saddled with unstainable debts there going nowhere, just existing as zombies.
    These people must be allowed to restructure, there numbers are going up on a daily basis and as more people loose there jobs and take pay cuts & tax increases its only going to get worst, anyone care to think how many will default when the civil service is hit with a 30% pay cut (its coming and sooner than people think).
    Right now we have a line of credit we will not be allowed to default yet, So please use this short window to get our house in order if the citizens of this country are solvent with sustainable debts then everything else will fall into place.
    Our time is running out.
    leadership ladies and gentlemen please.

  3. Doubleglaze at 11:40 pm

    Qu’ils mangent de la brioche!

  4. Bard at 10:00 pm

    I am so disappointed by the lack of empathy in this country regarding people in mortgages arrears. Not everyone who is having problems with arrears was reckless or greedy. I have had to separate from my husband due to an abusive relationship. Unfortunately,I didnt know when I took out my mortgage that i was going to be used as a punch bag. Now myself and my 4 young children will lose our home that I invested 200k into and I will have to be housed by the local authority. Before you judge so harshly walk a mile in my shoes.

  5. John at 7:02 pm

    Why can’t the bail out money help pay off the negative equity on domestic property? Then the banks restructure the mortgages, may free up some money for the home market people would be able to move to follow jobs ect. Or do they want all these properties on their books?

  6. Peter Paul at 5:53 pm

    There are two, partly conflicting, aspects to this when looking at the social and financial responsibility aspects of this.
    On the one hand, the people who overstretched themselves financially by taking out massive mortgages on overpriced property deserve some understanding in the sense that overpriced was the standard when they bought, and they may not have received the most objective, conservatively responsible financial advice from their mortgage provider. That understanding should translate into restructuring of mortgages, but should NOT be rewarded through debt forgiveness or preferential social housing entitlements.

    On the other hand, the housing market collapse means that nobody can sell the underwater properties for the amount owed, in other words, somebody will have to absorb the loss in value. Should that be the bank (through debt forgiveness) and the taxpayer (through the State propping up the banks for their writedowns), or should that be the individual who made the bad judgment call (through bankruptcy)?

    Imagine the opposite: when people or institutions make massive profits on their real estate deals, do they donate it to the State and society? No, it’s a private gain, well done! Just pay your capital gains tax. So the flip side should be considered a private loss, to be settled through the appropriate channels, which would be personal bankruptcy.

    Bankruptcy passes the security (house) to the creditor (bank), which finds itself with assets that it cannot sell at a price that will recover its costs / investments. The bank then has two options: 1. Sell at market value at a loss, or 2. Hold on in the hope that the market recovers and the property can be sold to break even or at a profit later.
    Option 1 further depresses the property market by potentially flooding it with foreclosed properties – but lower prices may bring properties within reach of new buyers or peopple moving through to a more suitable home.
    Option 2 risks degrading the property’s actual value because the bank will just turn off the heat and the house will rot away. The preferred but complicating alternative would be for the bank to rent out the foreclosed properties under a professional third-party management regime. A flood of rental properties may depress rental rates overall and hurt investors, but might just bring rental rates within reach of the just-bankrupted former homeowners, and ideally also a part of the people on the social housing waitlist.

    Absorbing the pain of a market correction is never pleasant. But the two objectives should be to 1. minimally extend the pain to people who were not at the cause of it in the first place (non-homeowners and those who pay for their homes on time), and 2. Position the outcome for the greatest possible access to the housing market by the average citizen.

  7. Sten at 3:16 pm

    Karl – in response – one question:

    How do arrears/defaults for those that arranged their mortgage through your company compare to the general market?

    I have often read that loans arranged through mortgage brokers are the worst quality (read non-performing/in arrears etc) because brokers were used by many people who normally wouldn’t qualify or to increase the amount borrowed beyond what a bank would otherwise give them. People with dodgy credit histories, ‘uneven’ earnings etc used mortgage brokers to massage their situation and obtain maximum sized loans.

    In effect mortgage brokers knew how to game the banks which led to overall lower quality lending standards. They gave no thought to the unsuitability of the loans that their ‘clients’ were getting themselves into.

    Considering this, you then come on here campaigning for debt forgiveness? Give me a break – you are part of the problem, not the solution.

    That people invite you to speak is their own choice (incidentially – does newstalk pay you, is it an advertising slot for your company or what is the commerecial arrangement? Appear for free but always mention of your company?).

    I am glad for you that your company survives – I just hope that for all those for whom you arranged unsuitable mortgages the same can be said.

  8. Brian at 2:28 pm

    If I stop paying my rent because I lose a job or have a paycut why shouldnt I be allowed stay and have the taxpayer write it off like this proposal??

    Why one rule for some? Another for the rest?

  9. Stephen at 2:27 pm

    Many of the people who cannot afford to pay their mortgages would/should not qualify for social housing – they have one or even two good incomes. It would be completely unreasonable to automatically convert them to social housing occupants, quite apart from the queue jumping aspect.

    The simple fact is that many (most?) of them either blindly or knowingly borrowed far more than they could have hoped to repay. They are now bankrupt and should utilise the bankruptcy procedures.

    A case could certainly be made for people who have lost their jobs and are genuinely impoverished. Such people would qualify for social housing along with other benefits. But, even in these cases, they shouldn’t be allowed to stay in houses that are not designated as social housing and are often far better quality than would ever be used in such regard. It would be insulting to those many people on the social housing list already to see others get great big houses in good locations ahead of them just because they were reckless during the bubble years.

  10. John at 2:23 pm

    If the banks lent out the money, for over valued mortgages which they valued before they lent the money, not taking into consideration that that they were gamblin with people lives for massive profits.When a person signs for a mortage at the bottom of the contract it say your home is at risk if you do not keep up the payments,now if i had of known what the banks were at, taking huge risks that i knew about i would have not taking a mortgage because a mortgage should not be a gamble :so the banks should bring all mortgages back by 50%.

  11. Karl Deeter Author at 2:20 pm

    @Dee That seems fair, but peoples past actions affect the present and exclusion based upon some past action isn’t necessarily the best idea – take another example, what about a person who is unemployed but in the past they left school early (their choice) and didn’t undertake any further trade/uni/professional training. Do we deny them any state support even though their current situation is largely a result of their own decisions? It’s really frustrating, and while I don’t have the answers at the same time doing nothing doesn’t strike me as an answer either, a levelling of the playing field would perhaps suffice?

    @Paul Browne: Actually I was on RTE about a story on this very thing (link at end of post), and I even started a protest about the creation of HomeChoiceLoan which is still a banger of a state agency. The state of council housing (from a financial perspective) is something that needs to be addressed, as it is set to get bigger if the proposed debt solutions go ahead.

    @Kieran If a person gets the property back at the end then it would require a debt writedown or a rate write off of some nature, how would that part be funded? Intersting idea though.

    @Richard Barry – agree with you on that entirely. Speed is of the essence.

    @Sten: I get the vested interest claim all of the time, and it’s true, I do have a vested interest in the mortgage industry, the same as everybody who works at anything has a vested interest of some sort. That doesn’t mean that opinions are therefore incorrect – it can mean there are inherent biases. So please point out what is the bias rather than that one potentially exists.

    Debt forgiveness doesn’t lead to more mortgages, in fact it would cause banks to work through debt provisions and that would take focus away from credit or lending. We have just had the worst year in mortgages since 1971 and the company I work for is still there and trading, on any level can you accept that it might be because we are actually good at what we do?

    Regarding whether I care or not, that is difficult to establish with any sincerity, suffice to say that I have been called up in front of several departments and asked for opinions on how to solve this mess I was also the first person to write a guide to the arrears process (before MABS or anybody else) and they asked me to speak at their annual conference.

    Perhaps under it all my intentions are mercenary and I’m the bad guy, you seem to have made up your own mind already?

    http://www.mortgagebrokers.ie/blog/index.php/2010/10/21/rte-6-news-34-of-local-authority-loans-are-in-arrears/

  12. Sten at 1:52 pm

    Karl – do you ever have an opinion that would be bad for mortgage brokers? I mean, you set yourself up as a commentator on the mortgage/housing market but obviously you have a vested interest, being a manager of a company that benefits from more (& larger) transactions.

    Is it just a happy coincidence that debt forgiveness would mean more transactions and so more business for your employer? Do you care about people with mortgage difficulties or about making more money for your employer?

    In your own mind can you even think independently of your employment when it comes to these topics?

    To be honest I’m a bit sick of hearing you and your biased opinions on myhome, newstalk etc – especially as you present them as a campaign for ‘the little people’. In fact you digust me.

    Regards
    Sten

  13. Richard Barry at 1:34 pm

    I’m not nearly qualified enough in economics to make detailed suggestions, however the key for me is that any arrangement is both swift and a sufficient deterrent to those who can pay but won’t pay their mortgage in the hopes of a freebie from the taxpayer.

  14. Kieran at 12:26 pm

    A state agency should be set up which would take the homes of people in trouble with their mortgages into public ownership. People should then be allowed to continue living in the house and pay a monthly rent to the agency. The system should continue until the outstanding balance of the mortgage was paid, when ownership wold be returned.

  15. Paul Browne at 12:13 pm

    Never, ever in all discussions on mortgages and debt has any commentator ever mentioned State, ie Council Mortgages, both town/city and county council charges. Affordable Housing and Shared Ownership schemes. Will anyone ever tackle this and ask the government to sort out its OWN mortgage book before lecturing banks on how to deal with customers. My experience suggests that the banks are a lot easier and better to deal with.

  16. Dee at 12:02 pm

    Why should the taxpayer be left to foot the bills of those who were sheep during the boom? I would really love to get a mortgage when I can afford it, ie have the deposit in cash and replace the monthly rent I pay now with a mortgage repayement.
    How can people have allowed themselves to get into situations that were just not feasible?
    What about credit card debt then? IS that the next step in all this?
    Am I going to be paying for somebodies holidays and Louis Vuitton handbags also?
    Nobody put a gun to anybodies head to buy some rediculously overpriced crap.
    People should have to deal with the consequences of being a follower.