Mortgage Arrears and the Draft Partnership Pact

The Draft Partnership Pact referred to in today’s Irish Times states, in the section on “Stabilising the Financial and Banking Sector”, that government action will seek to  “assist those who get into difficulties with their mortgages.  In early 2009 a new statutory Code of Practice in relation to mortgage arrears and home repossessions will be brought forward and the mortgage interest scheme will be reviewed”.  I’d be interested to hear people’s opinions on this.

6 replies on “Mortgage Arrears and the Draft Partnership Pact”

I think it will foster more bailout culture, if you are going to protect the banks from impairment then do that directly, not a two pronged system where you prop up the bank on one side and the lender on the other, in that example you are kind of paying twice, no?

really we need simplified and less punitive bankruptcy as well, the current system is amongst the most draconian in the developed world.

a strong code of practice by the regulator should ensure banks don’t jump to Repo but at the same time you can’t foster revival of financial services and not have recourse to non-performing loans.

as always the main question is this: where is the money coming from to support this?

In the US context, some pretty hard-nosed economists are supporting mortgage workout arrangements in order to stabilise the housing market and ultimately the financial system. A large part of the problem stems from the fact that mortgages are limited recourse in the US, so there is a strong incentive to walk away when the value of the property falls below the value of the mortgage. The resulting dump of houses onto the market is pushing down prices. Am I right in believing that mortgages are not limited recourse in Ireland? If so, the economic rationale for such assistance seems much weaker.

yes, the mortgages are avec recourse as they say in the invoice-discounting business.

Realistically, we are talking about having a human, understanding approach to this stuff that results in the best possible outcome for the bank, the borrower and the economy generally.

How this seems to work (and it’s nothing to do with the economics) is that everybody panics. First the homeowner panics and thinks they’re in serious trouble, but they don’t do anything about it. Then the bank panics because this guy hasn’t paid for four months and no one knows why – maybe he’s just a deadbeat? The reality is actually that there’s no reason to panic. You’ll get a job and pay for it eventually. Interest rates are low, so providing the bank doesn’t act the jerk, the size of the loan won’t mount all that quickly – it’s not like the eighties when, if you missed a year’s payments, that was basically it, you could almost never come back -.

Finally, the house gets repo’ed and dumped in the market. Nobody wants to buy it – why would anybody want to move to a new house during a recession? Then property prices drop like the proverbial Lead Zeppelin. Everybody else gets more depressed and more prone to panic. The bank is really screwed now, because their whole book of loans is going underwater fast.

Now everyone has a legitimate reason to panic.

So anything that can slow this process, even for a few months is probably A Good Thing for everybody involved. Provided the people genuinely can’t pay and are happy to stay living in the house, then there is little or no moral hazard.

@Antoin – reposession in ireland is a drawn out affair, with many firms court solutions are only sought after 2 years (but sometimes less), there are not many repo’d homes on the market, indeed it is the dirge of newbuild that is at over capacity. last big court date saw 25% repo’ orders granted which amounted to 9 houses, and the stat that isn’t collectable is that of ‘voluntary vacancy’ where people agree outside of any court proceedings to walk away.

@John McHale – total recourse (but not jail), eventually bankruptcy which in Ireland buries you for c. 12 years.

I wonder if something like this will happen in the states. We have already seen stimulus packages come through the Senate but we have never seen anything that specifically targeted homeowners. It will be interesting to see if they follow Ireland’s footsteps.

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