A sound funeral plan can prolong a bank’s life
This post was written by Philip Lane
Anil Kashyap has an interesting article on the FT website about the design of ‘funeral plans’ for banks: you can read it here.
Tags: Banking Crisis
This post was written by Philip Lane
Anil Kashyap has an interesting article on the FT website about the design of ‘funeral plans’ for banks: you can read it here.
Tags: Banking Crisis
June 30th, 2009 at 9:31 pm
It is an idea that is gaining traction. Paul Tucker of the bank of England discussed a similar idea at a meeting today of the British Banker’s Federation.
Discussed here (again the FT)
http://ftalphaville.ft.com/blog/2009/06/30/59706/structuring-yourself-for-failure/
IMO the idea is a good one, but perhaps better suited to a situation where we have more and smaller banks. In Ireland it would certainly require the break-up of the current institutions. A task that would be best achieved under nationalisation (where the banks could be sold off piecemeal as their component parts are ’sorted out’).
So, would require nationalisation (probably), openness to new ideas (and leadership!) and good and strong regulation (ermmm..)
July 1st, 2009 at 1:20 am
Things such as bank funerals happen faster in the US than in Ireland.
Here, we are still waiting for NAMA.
The below “short sale” method of selling distressed property in the US is unthinkable here. No Irish bank could bear the thought of another Irish person getting a bargain through a discounted mortgage.
HB
+++++++
The Short Sale
A short sale is a way of getting out of a mortgage without enduring the pain of going into foreclosure. So the seller basically agrees to sell the property at a lower price than the mortgage - i.e. at a loss. But the sale can’t proceed without consent from the lender. It’s then a matter of negotiating with the lender to figure out how much responsibility the seller has for the loss.
The Short-Sale Saga
Once a short-seller sets a price and gets offers, he takes them to the bank, which then decides if it wants to eat the difference between the loan amount and the amount offered by the buyer.
In most cases, the banks come back with a different, higher amount - and then the circus begins.
The seller naturally balks at the higher price because he wanted less burden - i.e., a free lunch.
The buyer balks because the price is much higher than the listing price - which was a joke to begin with.
By the time the process churns through, three to four months have passed because the bank is obviously in no hurry to take the hit on its books. Moreover, it’s in no rush because the government is subsiding its operations and providing cheap money to lend.
For example, one place I looked at was listed at $300,000 just three years ago. Today’s price: $75,000.
Not only that, the carrying costs are high because it’s a condo that comes with high monthly homeowners fees and property taxes, which were based on higher assessments.
A similar property sold a few weeks earlier. It was a “short-sale,” listed at $75,000. The bank had returned with a counter-offer to the buyer of $150,000. The home eventually closed for $135,000. The seller was lucky. The buyer must really have wanted the place. But it still took three months for the process to close.
And don’t expect any help from the realtors listing the property either. Sure, they’re doing it in hopes of making sale, but they won’t spend much time on it - and sometimes won’t even respond to a short sale.
Why? Because the prices are low… they’re artificial prices that don’t reflect the home’s real value… and the short sale can take months to consummate. Not only that, it will often result in a lower commission because the bank will ask all parties for concessions.
And if the short-seller has moved out and is renting the place, tenants’ rights can interfere with the sale, with many paying below-market prices and not compelled to keep the place in showable condition, or be available for a showing.
July 1st, 2009 at 6:13 am
@ Henry Barth
Thanks for that! Of course, this only applies if the holder of the mortgage, being the fifth such in a chain since the original mortgage was created, actually has the paperwork! Frequently this goes missing in the chain. As a result, some loans are a total loss. Deutsche Bank found this problem in Cleveland. If a borrower is in trouble they have several options open in the USA. This does not apply to Irish mortgages. Migration or bankruptcy is the only out for many.
Thus the US situation described by you, the short sale, may arise in some cases in Ireland, as sales occur.
Any new banks should stay well away from all lending secured on property. No one will lend for more than 50%, if they are sensible. Credit and capital are still being destroyed.
July 1st, 2009 at 2:35 pm
This is of course a great plan if it can be implemented.
I would suggest that it cannot be implemented unless the banks only deal in legal instruments in a standard form approved by Govts internationally with such instruments to be interpreted uniformly across the relevant jurisdictions.
There is of course an opportunity for some country to develop such agreements and the legal framework to support them. In the same way that some countries have become the international leaders in construction arbitration, this country could become the leaders adjudicating rapidly on such instruments. French or English would have to be the main language. No doubt London will take this opportunity but it is a pity we didn’t and aren’t even putting up a fight.
July 2nd, 2009 at 1:08 am
The US law Pat Donnelly refers to is simply that the Lender who holds the original Note from the borrower is the only one entitled to claim on that Note. No other party without physical possession of the Note has any legal claim.
This is rather basic law, and the I’m sure the same in Ireland. Any claimant must have the original Note; copies don’t count.
And true that in the US there are options available which are not going to happen here. In the US, a judge in federal bankruptcy court may reduce the mortgage terms or simply void it. No Irish judge would dare that.