Boston Fed Paper on Foreclosures

A recent Boston Fed working paper examines the rationale for government intervention to subsidise mortgage mitigation. The paper is sceptical about the benefits of this approach and they conclude the following:

An important implication of our analysis is that policies designed to reduce foreclosures should focus on ameliorating the immediate effects of job loss and other adverse life events, rather than modifying loans to make them more “affordable” on a long-term basis”.

I would respectfully call on our own Central Bank to start producing and publishing this type of research and my apologies to them if they already have and I am not aware of it. I am basing my belief that this research is not in circulation from looking in detail at the publications section of the Central Bank website. In general, I cannot find any good publications written in the Irish context on the implications of falling house prices on household financial positions and the policy issues associated with this. These policy issues are clearly different in Ireland than in the United States due to very different legal methods for dealing with mortgage default. We need a document though that spells out the different options available if a sizeable proportion of mortgage holders in areas where values have plummeted (and may never recover) start being unable to make their repayments. I am aware that all sorts of arrangements are currently being used in individual cases but this is hardly a substitute for a fully outlined statement of policy options that could be debated on forums like this and by smaller groups of experts.

To date, Ronan Lyon’s two blog posts seem to be the most sophisticated data analyses of negative equity and related issues in the Irish context. I cannot see how the monetary economists working in Ireland can claim to have a full grasp of the current situation without an understanding of these micro-features. I have absolutely no axe to grind here and I look forward to being shown the error of my ways.

Central Bank Publications Page

19 replies on “Boston Fed Paper on Foreclosures”

It has been pointed out to me that the above post may have been a harsh commentary on the Central Bank in that the Boston FED has a much higher budget and can afford for commercial suppliers to collect this data for them in ways that are not feasible in Ireland. I don’t know fully how to assess this argument but it is fair to put it out to accompany the post.

Hi Liam,

I have scanned the Boston paper and was quite disappointed by the blinkered scope of enquiry. The narrow focus excludes any examination of the broader economic impact of negative equity and debt overhang. As elaborated in Ronan’s post and subsequent comments (including yours) there are many direct and indirect effects identified.

In a contracting housing market and plummeting prices, these risks may be listed as:

Debt deflation trap where the real value of mortgage debts spirals as house prices drop
Labour immobility as negative equity destroys willingness to sell
Negative wealth effects as house prices fall
Distressed mortgages deplete disposable income and constrain consumer demand

Repossessions are more likely to impact buy-to-let mortgages, but it also clear that Ireland’s court system and banking crisis is actively seeking to mitigate the collapse of house prices rather than liberate the economy from illiquid asset values. Therefore, there is a real need for good empirical research on the dynamics between homeowned and buy-to-let housing to identify the potential for a prolonged drip drip negative feedback mechanism of tumbling rents as rental supply expands and prices fall as house sales continue to contract.

I believe that it makes sense to consider the persistent impact of the housing market on the Irish economy. Surely there are more questions to ask than simply whether mortgage modification abates individual hardship for borrowers and lenders.

In 198X I suggested , being then young and foolish, that the CB should perhaps collect data on equity release mortgages, on mortgage rollups and on credit card cash advances.
Liam – it has sweet damn all to do with resources and much much more to do with willingness to see whats going on , to take a wider view, to stand back. We have pervasive regulatory and data collection capture in this country.

An important issue in any economy that has been so tied to property, Ireland moreso than the US.

The obvious problem with efforts to mitigate the impact of negative equity on individual mortgage holders is that it will inevitably act to shore up the(still) overinflated house prices by impeding the downward price adjustment.

After all, nothing says “buyer’s market” like a rake of foreclosed, distressed assets.

Seen in this light, the “risks” raised by Steve in the above post are crowded in by the opportunities to new buyers at the steeper discount which would occur in the absence of mitigation.

Clearly an important question of substance which has received some attention in the Irish literature but surprisingly little recently. Traditionally Irish banks seem to have managed with much lower foreclosure rates than those in UK, presumably resulting in much more favorable outomes for the distressed individuals. But how will they behave going forward? With the taxpayer effectively on the line, this interacts with other policies to deal with the rising unemployment and as such should, as I argued at the January conference, be explicitly dealt with as part of budgetary policy.


Lower foreclosure rates are bought at the cost of short-sighted mortgage modifications. Banks are persuading distressed mortgagees to extend the term and to move to interest only repayments (with the caveat of admin fees and possibly penalties). This eases the budget constraints of borrowers in the short run, but is simply shifting the burden of debt over a longer time horizon. This suits banks more than borrowers.

Banks will do anything so long as it avoids the necessary price adjustment of residential assets and liabilities to natural levels. This has serious implications for long term growth.

Importantly, it does nothing to mitigate the risks of negative equity and debt deflation as indicated in earlier reply.

Query: Banks were required to attribute higher levels of capital to 100% mortgages as the financed houses at peak prices. All loans issued at LTV’s over 80% during 05/06/07, adjusting for property values say e40% decline, are likely to be showing LTV’s at 100% +. Are banks being required to provide for additional capital buffers on these loans? If not why not?

Another FED effort came out in the recent Journal of Economic Perspectives. A freely downloadable version is here.

“The main factors underlying the rise in mortgage defaults appear to be declines in house prices and deteriorated underwriting standards, in particular an increase in loan-to-value ratios and in the share of mortgages with little or no documentation of income. Contrary to popular perception, the growth in unconventional mortgages products, such as those with prepayment penalties, interest-only periods, and teaser interest rates, does not appear to be a significant factor in defaults through mid-2008 because borrowers who had problems with these products could refinance into different mortgages. However, as markets realized the extent of the poor underwriting, underwriting standards tightened and borrowers began to face difficulties refinancing; this dynamic suggests that these unconventional products could pose problems going forward.”

I agree entirely with Brian about the CB’s plea that it lacks resources for this kind of analysis. This kind of plea bedevils whole swathes of the Irish public service. Recent examples of the absence of using data to assess implications of developments are the Dept of Education failure to foresee the need for primary school places, the Galway water issue, transport planning. The foremost example is the need to bring back Colm McCarthy to review Public Expenditure and Public Service numbers.
Time to challenge this plea – whereeve it occurs!

One other issue that is being argued is that something like this should be conducted by the Department of Finance and not the Central Bank. With this in mind, I was dumbstruck by Marc Coleman’s assessment of the need for trained Economists to be working in these areas. This is not “jobs for the boys”. By all means, train existing staff or give them a mandate – either way the lack of institutional capacity to assess these questions is becoming rapidly apparent and Marc’s assessment that real world street-smarts are a substitute for proper data and ability to assess it is just wrong. We are not talking about hiring eggheads to develop clever physics algorithms to predict the stock market. We are talking very basic data analysis and assessment so that the government at least knows the round numbers at stake in these areas. If such analysis is falling between the cracks because different agencies think its not their responsibility this is a bad situation.

I’m inclined to dismiss Irish foreclosure history. Voluntary surrenders have masked default rates since 1995. In a stable/increasing price scenario, unemployment/divorce/death form the vast majority of defaults. When you have high house price appreciation, stressed borrowers can sell-up without loss.

Pre95, it seems reasonable to suggest that credit was restricted. Higher inflation would erode debt and there probably wasn’t an oversupply of houses.

Given full recourse in ireland, there is a “stick” which might lower default rates. A hugely important sector is investor mortgages and how they will behave. For example, if courts were to deny recourse to primary residence, then a high proportion to these will default.

On a seperate note, has there been any debate on whether high or low prices (both commercial and residential) are better for an economy on this site? I know many of the bank employed economists seemed to favour higher prices. Are their opinions reflected here? I know this seems like a very simple question, though an important one in my mind.

@Liam @Patrick

I think Ahura’s question is salient. How will the unquestioned orthodoxy of moderating house price deflation and avoiding foreclosure impact future economic growth?

“We need a document though that spells out the different options available if a sizeable proportion of mortgage holders in areas where values have plummeted (and may never recover) start being unable to make their repayments.)”

I wrote a guide about repossessions in Ireland and the options that are open to people, so this is from the personal side of the situation. The actual stats are not possible to get because of voluntary possessions etc. although the IBF said its about 3 per 100,000 mortgages compared to 200 per 100,000 in the UK

the guide is here

the regulators new code of conduct on mortgage arrears is now law, and that will actually skew the figures because part of it is that some banks don’t repo any houses.

while the guide doesn’t give metrics on the state of the market, it does talk about the options currently being used, the impact of bankruptcy, and the lack of modernised legislation in place.

the glaring oversight is that the CB don’t demand to know these figures from institutions here, but it wouldn’t be the first time they missed the mark.

Steve – there is a large literature on how homeownership affects employment patterns. Most of the literature argues that over-emphasis on home-ownership as opposed to renting is bad for the economy though recently there has been a more nuanced statistical and econometric debate examining precisely where causality is going. If you look up Andrew Oswald’s IDEAS page you will find a lot of papers on this and he references much of the other literature. Even if you could demonstrate a long-run relationship between homeownership and economic performance, this would not prove that one should welcome a sudden collapse of the property market. In the Irish case, even if we wanted to swing to a perfectly mobile renting market in the morning, there are massive legacy issues that could not be ignored, not least of which the hundreds of thousand of people living in owner-occupied dwellings purchased in the last few years.

Thanks Karl – I am assuming that the bulk of homeowners losing their jobs are negotiating various forms of refinancing arrangements with their lenders or will have to do so eventually. The Money Advice leaflets are below and warn of many caveats involved in these types of deals. As far as I am aware again, nobody (with the possible exception of the banks themselves) knows how this is progressing and the possible systemic relevance of the types of household balance sheets that will be created by mass refinancing of this nature. As pointed out in your guide “jingle mail” solutions are difficult in Ireland due to the legal position.


Thanks for the nod. I am actually more concerned how high house prices and debt deflation will crowd out investment in productive economic activity. The Irish economy needs to radically restructure the economy to expand and diversify economic activity. We need to reverse the perverse allocation of capital from financial services and construction to new business models.

As for legacy issues of negative equity and depreciated wealth, maybe they need to be discussed more openly in public discussions.

On a side note, I do not regard econometric modelling as a particularly useful area of economics. Empirical analysis demands more reliable statistics and better intellectual interrogation. Econometrics is a very limited methodology which is only as good as the theoretical assumptions used. Since we have no reliable assumptions, then I’d be best pleased if economists were more engaged in recording accurate descriptions of the economy and then used a little social imagination to propose coherent explanations.

Steve – I dont know what you have in your mind when you think of econometrics. Sure, there are heavily stylised models that require strong assumptions but there are also simple tests on good data. If you are thinking about the link, for example, between incentives for home construction and overall productive investment and macroeconomic performance then, whether you like it or not, you (or someone) will eventually have to state what this relationship is and then preferably put this to the test against some data. This is pretty much econometrics though some of the tests can be complex.


Unfortunately, even the simplest econometric model with comprehensive, reliable data may well indicate correlation between variables but this still offers nothing particularly useful without a coherent a priori theoretical interpretation. As the late Petr Skrabanek (TCD) ruthlessly exposed 2 decades ago with regard to the limitations of epidemiology, statistical correlation at best provides a signpost for the real experimental and theoretical investigation and at worst lead us totally astray. Statistical relationships are not equivalent to causal relationships, unfortunately econemtricians chronically ignore this important truth.

The economic circumstances we are facing demand more inductive thinking – based on intellectual debate and reliable information – and less deductive modelling based on stylised facts.

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