Principles of Household Debt Restructuring

The IMF has a new Staff Position Note on the role of government intervention in improving the efficiency of household debt restructuring: you can read it here.

5 replies on “Principles of Household Debt Restructuring”

The paper is, of course, presented as a Staff Position Note, i.e. it is not the view of the IMF as an institution. However, given the range of authors and their positions in the Fund, it is hard to imagine the IMF arriving at a view that differs much from what’s canvassed here.

The paper certainly recognises the main economic drivers for household debt restructuring. But it also notes with emphasis that despite the benefits that can come from properly-executed state-led restructuring, the rationale for doing so is severely restricted by the fiscal “breathing space” of the state and the effect on bank capital. Regarding the latter factor, the paper talks of restructuring being done hand-in-hand with bank recapitalization; clearly, it would not make much sense for a state to recapitalize its banks and then introduce debtor-friendly measures that decapitalise the banks all over again.

So any expectant debtors in Ireland should not hold their breath for state-led restructuring, at least not the type likely to find favour with the IMF…

One issue that has been commented on frequently in the Irish case is that Irish mortgage holders are less likely to face foreclosure proceedings and also are less likely (able) to simply default on their mortgage than in most of the countries looked at in the report. It does beg the question though of whether the arrangements currently in place are welfare enhancing. Stopping mortgage failure simply by making it hard to either default or foreclose is certainly a direct approach. I have not read research on this for Ireland but it would be interesting to examine the distributional consequences of the legal arrangements in place for distressed mortgages. Many people seem to view these as being almost evidence of altruism on behalf of the banks, perhaps even reflecting some sort of desire not to evict people due to cultural legacies from the famine. Perhaps though, it would be better for some households if they could just “hand in the keys”. Or perhaps the Irish arrangements are an Irish solution to an Irish problem and are saving people from major psychological distress and cultural stigma surrounding losing access to their house.

The document mentions some support for allowing asset management agencies to take on distressed mortgages. In my reading of the document, I can’t find reference to the principles whereby more lenient treatment would be made conditional on any observable circumstances of the mortgage holders (though the quote below from the report partly covers this). In some of the schemes mentioned at the end of the document, some element of assistance is made conditional on things like the time period during which the mortgage was taken out, the percentage of income spent on mortgage payments, rules about what happens in the event of sale and so on.

“The program should, where feasible, be selective and target borrowers who
cannot meet their debt service obligations but whose ability to service their debt is likely to be restored upon restructuring. The restructuring program could be designed to compensate the targeted group of borrowers either partially or in full—but in any case at a sufficient level to restore sustainable debt levels and servicing capacity of borrowers. Defining criteria for such selectivity and reliably applying the criteria could be a major challenge, especially where data is unreliable and political or social considerations are pressing factors. In cases where public funding is used, it would need to be sufficient to cover each qualifying participant. Conversely, the scope of the program would be subject to the public funding envelope.”

In the event of stamp duty being abolished and property tax becoming a feature of the Irish housing environment, this issue will be highlighted further. Perhaps someone could estimate how much a targetted assistance programme would cost and whether it could be incentive-compatible? The measurement of the conditions under which support would be given and the potential politicisation of the process are clearly two difficult issues with this, even before the cost is worked out.

@Liam Delaney.

“The measurement of the conditions under which support would be given and the potential politicisation of the process are clearly two difficult issues with this, even before the cost is worked out.”

This is certainly the crux of the issue. Just look to today’s arguments about the children’s allowance issue where the old arguments arise, i.e why should taxpayers who have no children pay for the children of those who decide to have them?

Looking at the numbers for principle private dwelling mortgages (€80bn ish) we can see that any significant reduction in mortgages/ relief on payments would compete with the banking bail-out on a cost to the tax-payer basis. But targeted relief for certain mortgage holders would be a political and administrative nightmare.

Also giving any relief to mortgage holders would not be viewed favourably non-mortgage holders.

So, it might be a good thought experiment, but IMHO is probably a dead-duck before it starts.

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