Mortgage Modifications

As posted earlier, Brian Lucey has a timely article in today’s Irish Times on the government’s plan to perhaps have a plan to help people who can’t pay their mortgage.

Brian makes a number of important points on this issue (moral hazard, fairness of helping those who took out excessive mortgage, limited capacity of these banks to take further losses leaving it back on the hard-pressed Irish taxpayer, bankruptcy reform).  I was going to post a comment on it but the thread’s already really long and I wrote too many words, so I’ll put this on the front page instead.

I’d like to add to Brian’s points by discussing a stylized example in which a mortgage modification plan could work in the sense of easing the difficulties of current owners without costing the bank or taxpayer anything. Then I’ll note how the conditions of the stylized example won’t necessarily hold in many cases.

A couple bought a house three years ago for €380,000 with a mortgage of €350,000. They have now lost their main income and have fallen behind on the mortgage. The house is now worth only €250,000, so they cannot pay off the loan by selling the house and moving to a cheaper one. However, they could afford a lower mortgage of €250,000. In this case, here’s two approaches the bank could take:

(a) The bank could look to repossess the house, put it up for sale and end up recouping less than €250,000, incurring a loss of more than €100,000.

(b) The bank could adjust the principal on the mortgage down to €250,000. In return, they could look for a two-sevenths ownership stake (i.e. a stake of 100,000 / 350,000) with the couple having an option to purchase the two-sevenths back at a later date.  Fully marked-to-market, a loss of €100,000 has still been incurred. But I suspect that the bank could probably keep the combination of the loan and the equity stake on its books at a value equal to full €350,000 value of the original loan. (Perhaps those who know financial accountancy could tell me if they could get away with this – this idea may be iffy but it’s no dodgier than this kind of thing.)

However, there will be lots of situations in which the conditions described here don’t apply:

1. The couple may not be able to afford a mortgage for even the new reduced value of the home, in which case the bank is better off repossessing and selling the house.

2. If a program is in place to help people like this, it may be hard to really distinguish between people who genuinely can’t pay back versus those who could do so without the government’s help (for instance, via help from family, assets hidden from the government,  or additional lifestyle adjustments.)

3. This example applies to people who have stopped paying back already and are in a hopeless position. Any program that starts modifying mortgages for those who are perhaps only a couple of months behind or are still paying but having difficulty doing so (e.g. the US HAMP program’s idea of risk of “imminent default”) could end up being extremely expensive.

4. Once such a program exists, there may be an incentive for people to stop paying their mortgages in the hope of obtaining a mortgage modification.

So I would argue that a carefully-targeted mortgage modification program might be a good idea in theory but it may be a legally complex thing to carry out successfully in reality. Larger less well targeted programs are likely to have significant deadweight loss, potentially be seen as unfair and could inflict very large costs on the banks, and eventually the taxpayer.

97 thoughts on “Mortgage Modifications”

  1. The machanics of any scheme are what will count.

    “(a) The bank could look to repossess the house, put it up for sale and end up recouping less than €250,000, incurring a loss of more than €100,000.”

    In that case the bank would still have the right to pursue the borrower for the €100,000 so the bank may not incur that loss.

    “(b) The bank could adjust the principal on the mortgage down to €250,000. In return, they could look for a two-sevenths ownership stake (i.e. a stake of 100,000 / 350,000) with the couple having an option to purchase the two-sevenths back at a later date.”
    – The bank is getting a bad deal here as €100,000 represents two fifths of the value of the house (100K/250K).
    – This is no good to the bank as the asset is totally illiquid.
    – Furthermore, the couple still cannot sell their house as somebody has to pay for the bank’s interest.

    People who cannot pay their mortgages and will not be able to pay their mortgages need to sell their houses and restructure their debts or go through a reformed bankruptcy procedure. As the law stands one might offer one’s right arm and one’s first-born rather than be enmeshed in the prolonged hell that bankruptcy is. If the bank does not think it is commercially prudent to allow interest to build up on the full amount then they should not be forced to do so.

    People who can pay their mortgages, notwithstanding that they are in negative equity, need to be allowed to sell their house and bring their negative equity to a new house so that they can follow employment and raise a family. Banks could perhaps be required to allow people who met lending criteria to obtain loans on competitive terms (with reference to the market for non-negative equity borrowers) provided they did not worsen their amount of negative equity in the process. This would help restore liquidity to the market and would also help people get on with their lives without creating a moral hazard.

  2. @ Zhou

    “People who can pay their mortgages, notwithstanding that they are in negative equity, need to be allowed to sell their house and bring their negative equity to a new house so that they can follow employment and raise a family.”

    Nationwide BS in the UK were offering 125% mortgages to existing customers for this specific purpose last year (may still be doing it).

  3. Your stylised example omits the “levee” effect: The cost to potential buyers of withholding this house from the market, in terms of holding back housing supply.

  4. the bank own more than 100% of the asset already because the 1st lien is on the foot of their loan note, so you’d need to give them a moratorium maybe, if you marked to market then the loan loss had to be realised and they own greater than 100% of the underlying.

    its a tricky one, but some mix of it could work. an ongoing moratorium until things pick up (if that doesn’t happen we are in big trouble anyway!) wouldn’t be as expensive either- that would result in a smaller transfer from the taxpayer/institution (one way or another though the final underwriter will be the taxpayer).

    going forward the easiest change to our debt laws would be to not revise them all, but instead insist that recourse on certain lending is the asset only, the natural byproduct being lower LTV’s, more stringent underwriting, more appropriately priced risk etc.

  5. Karl,

    How would you treat the monthly repayments? Fixed for the mortgage duration or floating? Anything ‘variable’ may prove might land you back in the same position a few years from now.
    I think the idea of taking equity is too messy. I guess the bank wouldn’t charge the owner/tenant rent, as it would diminish affordability. So the bank has an asset that produces no cashflow. In which case, it wouldn’t be easy to sell their interests to a 3rd party. It would be hard to justify holding such an asset at face value. As this would be a form of joint ownership, would the bank have to way a portion of the properties maintenance or (future) property tax?

    Perhaps a way around this is a second lien mortgage with some form of discounted interest roll-up. The downside for the borrower is that this debt grows and might work against the borrower in the long term.
    Finally, the lender should always have the option to repossess the property. I know it might sound oldskool, but it has worked in the past. Don’t deduce the lack of foreclosures in Ireland being down to banks with charitable souls.

  6. @Eoin

    No sign of anything similar here. In fact, if you want to borrow at 70% LTV and have a good income they nearly start crying because they know they’ll have to give you the money.

  7. Set to one side (I know its difficult) who is to ‘blame’ for the Residential Mortgage disaster (yes, it is a disaster!) and focus on the outcomes. All are dreadful – but one is least worstest (stet) than the others. Write down the debt: let the financials take the complete hit. If they go bankrupt so be it, that’s the market. This will clear the system. It won’t mean a resumption of business-as-usual: that’s over. It just means that we avoid impoverishment of those who are privileged enough to continue in employment.

    There are no papatable options here: just concentrate on protecting the citizen, not the financials. You can re-instate a business, but not ruined lives (aka. Debt Slaves).

    B Peter

  8. Get people back into the jobs market is the answer not tweaking mortgage loans. The absolute lack of a “Stimulus” in this country is the problem. I am fed up hearing that it will all leak out in imports which is rubbish. Rising boats for everyone will improve house values and get the junk Banks sort out their Balance Sheets. As an example there is so much infrastructure needed in this country which could be funded by tolling all motorways/bridges/bypasses/tunnels and using the funds to get “real” needed construction projects underway. How many of the present motorways are joined up properly ? Very few with the result that it takes as much time to get on to a motorway as the trip on the motorway. Diesel in trucks is wasted everyday on these elongated trips that could be paid in tolls. Dont forget like the French realise that tolls are paid by foreign road users as well as locals which effectively is export revenues to the State. The one proviso I have on Roads devolopment is that control be taken away from Quangos like the NRA who have not got a proverbial clue let alone a plan that is logical. Did anyone ever hear of motorways in any other country that do not have Fuel and rest stations except of course in Ireland ?

  9. @TRP: I empathize – to some extent, with what you say. However, the real reality is that the current Economic/Financial Model-in-Use is on Life-support, and the prognosis is ‘terminal’.

    I realize that this is very difficult (probably impossible) to accept: but I did do the math 4 years ago (2 years before Morgan Kelly!). It was horrible then, it is horrible now, and will remain horrible until the the Median Residential Property value is NOT MORE than 3 x times the Median Income (for a specific residential area).

    Unless the residential property debt burden is ‘crammed down’, the current deflationary situation will continue to deteriorate. Like an infestation of Dry-rot: slow, inexorable and un-seen. Terminal!

    You could pray (if your religiously inclined), that the God of Inflation will rescue us. I did notice last week, that the ‘average value’ for residential property in Dublin was almost SEVEN times the Average Industrial wage!! This is madness. It will end – (absent some adult behaviour, very badly indeed!).

    B Peter

  10. There are further economic costs to foreclosed homes – they reduce property values for the homes around them. In addition having large numbers of essentially immobile people also has an economic cost.

    I find it interesting that there is so much focus on homeowners who might get away with something when other players in this economic crisis have no such effective oversight over what they’re getting away with.

    In any given mortgage two players made a calculated risk. Those seeking a mortgage were hoping to see appreciation in their homes; banks were hoping to see debtors pay their debts. Mortgage modifications allow the loss to be shared between the debtor and the bank.

    In the future I think the law should be changed such that residential can more easily walk away from bad debts – just as commercial borrowers can. Not cost-free, but it shouldn’t be as difficult. It’s clear that banks did not clearly understand the risks in the property market; exposing them to greater potential loss is a market-based approach to forcing better behaviour.

  11. The problem with these programs is the practical one. It’s practically impossible to know what might have happened, or to apply retroactive rules to deciding whether an investment ought to have been a good one or not, or to know whether people could have tried harder.

    The question I have for these bailout programs is simple. “Is it too late to join?” After all, there are some lovely houses in Killiney and Foxrock that I can’t really sensibly afford to buy, or where I’d struggle to pay the mortgage – especially if I was to stop working for any reason.

    I think we could all agree that it’d be great to be able to continue living in a nice house in Killiney or Foxrock, especially a house that we were never really able to afford, especially if someone else were to be generous enough to pay for us to continue living there. I mean, once it’s our family home, how could anyone be cruel enough to evict us? Then, of course, it’d need to be heated too, and maintained, and of course someone else would have to pay for that as well.

    So, is it too late to join? If it is too late to join, then why?

    Have we all suddenly agreed on legally enforceable guidelines for prudence and for sensible investments? Have these guidelines not always been roughly the same or has there been a new proclamation from God that I missed? Absent a proclamation from God, why should there be an enforceable and retroactive legal privilege associated with having been imprudent in investments in a specific asset class between two specific dates? Only that asset class, only those dates?

    As B P Woods mentioned, the madness will have ended when house prices are sensible.

    Unfortunately there’s no nice path to lower house prices for those who bought at high prices, just as there was no nice path for those who invested in .com shares at Feb 2000 prices, or for people who bet on a horse that just finished 4th, or for people who invest in a sensible business that doesn’t work out.

  12. @ Hugh Sheedy

    Yes
    They could
    Yes
    Yes
    We’ve moved on!
    No
    Maybe
    There shouldnt
    No

    It would show poor character if a Govt allowed a dispersed group of people, who did overpay for property against its ltev, become marginalised in society, especially since Govt had no problem profiting in terms of taxation from the whole enterprise.
    Probably best done in some limited form of mortgage interest relief?

    That, or people throwing the hat in altogether and becoming travellers.

    Al

  13. Kevin Lyda says:

    “In any given mortgage two players made a calculated risk.”

    Well, lets look at that more carefully, in the context of the entire residential and commercial lending practice by banks. I covered much of this in my blog entry linked above, but here is the bones of it.

    Here is Nama II.

    With a pool of 1,000 no. residential mortgage loans, the banking institution has an opportunity to diversify their risk across 1,000 no. participants. While also, the banking institution obtains control over the mortgage pool, to extend it’s usefulness as a form of collateral to provide funding to itself.

    Compare that to Nama I.

    For sake of argument, say the principle value of 1,000 no. residential mortgage loans, equates to 10 no. (larger) loans to develop commercial property. Now in that situation, the lender is lucky to obtain any interest payment at all, not to mind principle.

    The lender has the risk of 10 no. large borrowers defaulting, or simply deciding not to pay, never mind defaulting. In return, the 10. no. commercial property development borrowers get exclusively control of the useful collateral in the arrangement, the flow of rental income from the said commercial property. The bank’s only silver lining in the commercial loan, is an option to use the interest payments of the 10 no. borrowers as collateral – yeah, like that will work.

    Conclusion.

    Now, guess which the tax payer was lumped with first.

    You’ve guessed it, the commercial property loans which were of little use to the bank anyhow, even in the best of times.

    Sidebar.

    It has been suggested that lenders in Ireland extended 100% loans to commercial property developers.

    In other words, the commercial property developer, did not even bother trying to make profit from the development, but rather made profit on the ‘margin’ obtained, when he/she sold on the completed commercial development, its having raised in value in property selling price, above the value of the original commercial property development loan.

    But I would argue, that didn’t happen so much in commercial property, where players were serious and meant business. The real carrot that dangled with commercial property, was not to sell the property, but instead to use the rental stream off of the commercial property as a source of collateral to obtain better credit terms going forward.

    The commercial property development was merely an instrument used by the builder. Instead of the banking institution getting the use of the collateral, as with the pool of 1000 no. mortgages, the builder used it instead. The use of the said collateral, of the rental income stream from large commercial tenants was more valuable than anything else, occuring in the entire transaction.

    Now where residential mortgages were concerned, from a borrower point of view, an investor in residential property – there, the idea was to extract equity out of the arrangement by the rise in value of the property, and taking advantage of a very liquid residential property market in Ireland to sell the residential property, and release this gain in value to the private investor.

    That game was well document by Frank McDonald, author of the book, The Builders.

    But with commercial property loans, I would argue, the borrower gained a lot more by holding onto the property, rather than by selling it. That is why we see the story in today’s Irish Times in relation to Anglo Irish bank and its subsidiary, Anglo Irish Assurance Company (AIAC).

    http://www.irishtimes.com/newspaper/finance/2010/0203/1224263659097.html

    I hope that some of this explanation, can set up in peoples’ minds, the difference between a NAMA I and a NAMA II, type of scheme.

    BOH.

  14. Also, it is worth bearing in mind my above explanation of risk-sharing and mortgage securitization, when thinking about the residential property over-production problem in Ireland.

    From my blog entry:

    “Why did Ireland need to build 90,000 homes in 2006?

    It was a lost opportunity for Ireland, to put the Irish construction resources to some use other than building residential property – a massive over supply.

    But bear in mind always, bank(s) do like residential property.

    It seems to offer them a very sweet deal, with good ‘margins’.

    (Read diversified risk form of collateral)”

    I would suggest, we have to be careful about this in Ireland. Any study on housing policy in Ireland, should look at the impact of lending institutions on the situation. Rather than relying on anything such as loans to large industry etc, to source their collateral, it seems as though Irish banks are prone to over-utilising the residential property sector as a source.

    The prime example being lenders to Dunloe Ewart, wanting to cover Cherrywood Science and Technology park in carpet housing.

    Also, Morgan Kelly’s study of the relationship in Ireland between lenders and residential property prices, aught to consider what I say above.

    http://www.irisheconomy.ie/index.php/2009/12/22/morgan-kelly-the-irish-credit-bubble/

    BOH.

  15. This quite comical debate on how many un-used homes we have in Ireland, from Pat Kenny’s TV show, The Frontline, is worth a look for those of you who haven’t watched it already.

    http://www.rte.ie/news/2010/0125/thefrontline.html

    I would hate to leave future housing policy in Ireland to that same bunch – the professional architects in the audience that night included – who should all be sent back to college, to try and understand banking and basic economics, before being allowed to utter one solitary statement, or advice on housing policy.

    Some of the architects in Ireland, had their views on housing policy posted on their websites until recently, but have since taken them off. Probably no harm.

    BOH.

  16. For the future, non-recourse loans, as per Karl Deeter’s suggestion, make the most sense and make banks think a bit harder about how much money they’re lending to whom.

    For those facing disaster now, I really think the only hope is bankruptcy reform. Let them pay what they can and walk away to start again rather than nailing them to lifelong debt. It will help them re-invest in the future which actually in the long term helps the economy. I thought this article made a good case for those concerned about the possible resulting moral hazard http://www.theatlantic.com/doc/200906/bankrupcy

  17. @ Sarah Carey,

    thanks indeed for that article link. Super.

    I would insert one comment though, if it is about the situation in the US. In the US, you had these huge residential property boom following the second world war. Which was almost exclusively aimed at white-only neighbourhoods. We tend to forget that here, in a place like Ireland. That until very recently, the deeds of a home in the United States could specify, that you cannot sell this home to a coloured person.

    The closest thing we have in Ireland, is what Kevin Lyda described above:

    “There are further economic costs to foreclosed homes – they reduce property values for the homes around them.”

    But in Ireland, the race issue isn’t involved, to the extent it is in the US. Therefore in the United States, housing policy had to be informed by maps of cities, where whole swathes of land existing, within which, no member of the community could obtain any loan for anything.

    This is where the ‘re-invest in the future’ aspect to the mortgages debate, really comes into play. The recent subprime mortgage roll out in the United States was aimed at retro-fitting a housing policy began in the Kennedy years, based on racial descrimination lines. Or rather bit blotted areas of ‘red’ as seen on the mortgage brokers maps.

    Subprime lending didn’t work out. But that still doesn’t mean, we should stop trying to integrate the big red blotches on the map.

    It is the same with Obama’s healthcare policies. That is like a whole other layer, one could overlay on the same maps.

    Then you place the maps of schools and education on top of that again. As Elizabeth Warren has said in her reports on the middle class family in the United States: families are not buying homes, they are buying schools.

    It is worth thinking about those red blotches on the map though, when one reads an article such as the Atlantic one, which Sarah linked to. It is part of a whole bigger socio-economic problem, with many, many layers.

    I understand and appreciate that. Indeed, I could talk about housing and planning policy until the cows come home.

    But I want to emphasise very, very clearly, that in Ireland, what we need to do is sweep aside all of that. Our professional planners and architects are very good on the socio-economic engineering side of things, and in any case, our socio-economic problems are nothing like what they are, in places ruled by maps with big red ink blotches on them.

    What we do need to do in Ireland, is send all of our professional architects back to school, to wise up a little about the process of bank lending, property development and economics.

    That is the key part of the jig-saw we are missing in Ireland, with regards to housing policy. The professional architects in Ireland were absolutely ecstatic in Ireland, as we rose to 90,000 housing unit production in 2006. Absolutely ecstatic.

    There are every bit as bad as the bankers and deserve to be shown up for it.

  18. “What we do need to do in Ireland, is send all of our professional architects back to school, to wise up a little about the process of bank lending, property development and economics.”

    And just to prove definitively, I can, throw the hammer after the hatchet.

    The above point, is where Frank McDonald’s writing falls down completely and absolutely.

    Rather than combat the native lack of sophistication, amongst our professional architect classes regarding development of a housing policy – all that Frank McDonald has managed to do after the effort, of several decades of his writing and publishing – is to reinforce the problem, and the lack of economic sophistication of our designers of housing policy.

    He is a complete disaster area, when it comes to sound appraisal of housing policy, and never once praised Zoe developments for one iota of contribution to Dublin’s housing development.

    Constantin Gurdgiev in addition, rather than being utilised for his economic insight in a genuine way, has rather been brain-washed by the so-called architectural professionals in Ireland, in all of the latest anti-Zoe developments crap.

    BOH.

  19. Fair point. One thing though on Kevin’s point

    “There are further economic costs to foreclosed homes – they reduce property values for the homes around them”

    Everyone talks as if reducing property values is a bad thing. Negative equity aside (and in fairness that *is* a big aside) surely it’s good if houses are affordable? If house prices come down, so can wages and then that helps competitiveness and please god, get us a few jobs.

  20. @ Sarah,

    The simple fact is, on the one hand, you have the architectural professional contributor to the debate in Pat Kenny’s show, The Frontline. He disagreed with the idea, that Ireland aught to now house all of the housing lists in spare properties left over from the building boom. His argument was, that Ireland was just beginning to build good, purpose-built social housing. We should not do a U-turn now, and return to what we did back in the early days of Tallaght, Clondalkin and so forth.

    This is where your point about ‘re-invest in the future’ is definitely relevant. We should have moved on by now, in terms of our sophistication regarding socio-economic engineering of planning and development.

    But then you listen to Bernard McNamara’s comments. That in Ireland, 30 years ago, a certain Irish builder, built 50,000 social housing units in the Dublin area. Now we can’t build them at all.

    The truth is, they are both correct.

    Bernard McNamara is correct from his point of view, efficiency of production of units. (This is where Zoe developments can leave architectural professionals in the dust too by the way)

    The architect professional is also correct. It is not about the quantity dimension alone – housing needs to build communities, not simply provide roofs over their heads, which would have been the driving force behind Tallaght, original Ballymun, Clondalkin (have I left anything out).

    But the fact is, the same architect professionals were able to build quality social housing units in Ireland, recently, but they weren’t learning how to build them cheaply and economically. I know that myself. It was laughable.

    Rather than admit to that, I assume the architectural profession will continue to stick its head in the sand, and give anti-Zoe developments sound bytes to Frank McDonald to use in his newspaper articles.

    BOH.

  21. @ Sarah

    Agreed that this should happen…
    But what about those darned neighbours with the lower wages and the large mortgages with increasing interest rates???

    Ignoring the prudence question, and the speculative component, these are people who commited in the long term to ‘de country’.

    They didnt seek Govt assistance by haunting local authority lists, etc. In fact they sought to cost the state as little as possible,
    What to do with them now….

    Al

  22. @ Al, Sarah,

    As I commented only recently,

    “If one listens to the discussion on radio today – it is hard to know if the trade unions in Ireland are saying (A) Lower the price of wages, Ireland will regain competitive-ness and home prices will decrease, (B) Home prices need to return to realistic levels and wages in turn can decrease, or (C) somewhere in between the two parameters.”

    http://www.irisheconomy.ie/index.php/2010/01/29/economics-expertise-in-the-irish-government/#comment-33789

    Fundamentally, what was really dangerous, was that Ireland received a wad of cash on the international markets – and we had no better ‘plan’ for what to do with that wad of cash, other than throw it at building housing.

    I have mentioned in my blog entry, at Designcomment blogspot, that it was an opportunity missed, to employ our construction resources, and cheap international finance to some other purpose than hitting record breaking targets for home building production.

    Why didn’t our architectural professionals see some other purpose for the investment of the money? They let us down. The fact is, that the architectural professionals of this country cheered it on from the sidelines, as we exceeded the 90k home production benchmark, and now we are turning to them for assistance with creating housing policy? ? ?

    Refer to the ‘Quotes from the Irish Property Bubble’ to find some comments from the ‘experts’ during the boom times.

  23. @ BOH
    Very few people in this are innocent.
    Throwing eggs at other people (architects) isnt productive work.
    Good night
    Al

  24. @ Al,

    Well, your point is a fair one.

    On the up side though,

    Credit must go to UCD economist Karl Whelan who has been like a ‘breath of fresh air’ injected into the public debate here in Ireland, over the course of 2008/09/10.

    Hip, hip!

  25. Graham Stull
    “withholding this house from the market”
    Good point and I advocate finding the true value asap, but there are too many houses in
    Ireland. The impact will be minimal? Allowing tranfers will impact the market positively, (as a Libertarian, TARRA! I believe that) every free choice is an enrichment of society as a whole. For every such transfer two houses are sold and a bank creates money!

    Brian O’ Hanlon
    You and Karl should just get a room.

    B P Woods
    I have posted on affordability yesterday!!! Detroit affords many a house for $25,000, but the city is literally bulldozing suburbs as it reduces in size and population. In view of the response so far, I have no hope that Ireland can avoid this. Houses in Australia routinely are said to be unaffordable as they exceed 9 times median but still they go up in price…… for the moment.

    Sarah Carey
    Such a good point! That is the nub. A bubble has caused malinvestment and housing is extremely over priced. As deflation and depression work, prices will fall, and the slower they fall, the longer the depression will last. Deflation is actually good, unless one is a banker. Sorting out the social need is good as it means more are fit to work and contribute. Sorting out who pays for it is the problem!

  26. Karl Whelan wrote:

    “I was going to post a comment on it but the thread’s already really long and I wrote too many words, so I’ll put this on the front page instead.”

    I intend no criticism of KW (or anyone else) or of this blog, but the quoted sentence encapsulates my problem with this blog (and with many other excellent ones).

    Once comments exceed 10 or so, it becomes a real chore (albeit often a very productive one) to plough through them. Many, if not most, of the comments are too long – they deserve to be blog posts on their own. Unfortunately, they cannot be because the commenters do not have the capacity – or whatever – to “put this on the front page instead” (*any* front page).

    Can’t I be constructive ? I wish I could be more so, but I fear that it’s beyond my individual wit to solve the problem.

    One suggestion for this particular context: Irish Economy to become a blog community (i.e. with a KW blog, a Tol blog, a Scott blog etc etc) rather than a single blog.

    Another: commenters (like me, perhaps) to comment less and use their own blogs more to

    A third: no more anonymity. At a minimum, identity should be disclosed to the moderators. I accept that some anonymous comments are very useful, but overall the effect is to lower the tone.

    The over-arching difficulty is that, pace Sarah Carey and the rest, a blog, whatever its undoubted other merits, is *not* an ideal, or even a good, format for conversation or discussion beyond a certain very limited point.

  27. @ SC: “For the future, non-recourse loans … … make the most sense and make banks think a bit harder about how much money they’re lending to whom” Yes indeed. Very difficult olitical decision though. ‘Systemically Vital Financial Interest Groups’ will fight it tooth-and-nail.

    “For those facing disaster now, I really think the only hope is bankruptcy reform.” Ditto, as per above.

    “It will help them re-invest” In what? Perhaps you consider that Sean and Marie Citizen are sheep when it comes to their savings! Perhaps you’re correct!

    Sarah, our Economic Model-in-Use, (annual incremental economic ‘growth’ through the medium of increasing credit and debt, using levered up technology powered by relatively inexpensive fossil fuel), is over! And it will never return, (except for a few ‘Dead Cat Bounce’ reprises). If you believe I am mistaken in this belief, then please put me straight.

    B Peter

  28. There is a variation on the bailout theme which suggests that the state should loan people part of the mortgage debt to allow people to sell their houses and acquire new houses:
    http://blogs.ft.com/economistsforum/2008/08/how-to-shore-up-america%e2%80%99s-crumbling-housing-market/

    The borrower would still own the debt which would affect his or her indebtedness and credit-worthiness. Also, we could end up buying the banks’ bad debts at no discount!

    If there were a real “NAMA For The People” then the state would buy the negative equity portion of the debt from the banks at a discount and the borrowers would still be liable for the full amount!

    The state would then have to collect the debt which seems totally unwieldy unless it were integrated into the PAYE/tax returns system.

    The banks can now foreclose and recoup most of the debt (particularly if the bank got LTEV for the negative equity debt). Furthermoe, the statute of limitation on the debt is likely extended.

    What is the upside for the borrower in this though? Just like the developers they will be left in not much of a better position. Again like the developers, the only possible benefit they might be given time to work out the debt. In the caseof homeowners, they might be allowed to space out the debt owed to the Govt over a longer period and at a lower interest rate.

    However, the state does not have the resources to agree a bespoke payment schedule with each home-owner. That is what banks do.

    At the end of the day, we come back to (i) bankruptcy reform, and (ii) a facility for people to bring their negative equity to a new property.

  29. Sleeping on things I would have a couple of points to add to what I offered by suggestion yesterday.

    (1) Frank McDonald,

    Very good journalist, combines the politics with the environmental issue. Really painted an accurate picture of the purchaser of Irish residential property in his book The Bankers. But when it came to figuring out what the ‘experts’ have to input, he made a fatal mistake, in casting his net not widely enough. I.e. Asking Irish architects what they think, without first bearing in mind, Irish architects are a very small subset, within a very small population on a small island.

    A bit like the problem, of how do we improve standards of Irish corporate governance which I wrote about yesterday.

    http://designcomment.blogspot.com/2010/02/on-corporate-governance.html

    (2) During boom times,

    Irish architects should then be planning ahead as a profession – they should realise, that 90k housing units production per annum, cannot continue indefinitely.

    But many of them behaved as if it would, building up practices to try and capture as much of that market as they possibly could. PBS website has a very good documentary called ‘Living in the Dust Bowl’, which described the plight of farmers in 4 no. south west US states, in trying to hold onto survival when their lands all turned into dust.

    The farmers in the south western states were part of a larger natural cycle, and had great years of harvest in the early years, but then it changed. The profession of architects in Ireland must find a way to work on areas to move into in the bad times, while they are still in the good times.

    (3) During the bad times,

    If I had one question for minister of Housing on the Pat Kenny The Frontline TV show, it would be, how many architects is he employing?

    It is similar to George Lee’s question, how many economists are the various government departments employing.

    The reason for this is simple, the architects combined with the departments, need to be building a certain amount of projects during the bad times. The purpose of those projects is to figure out, how Bernard McNamara’s ideas of an efficient building model, and economic one, and a model sufficiently good to address all of the social and community needs of urban planning, can be combined.

    If you fail to do this, as we are failing to do in Ireland right now, because architect(s) are ‘too proud’ to demand jobs from the minister of housing – what you create is a vacuum.

    Into this vacuum steps the next Zoe developments, who in the absense of a socio-economic model for development, (actually realised and built on several test cases) proceed to do their own kind of social engineering (shoe boxes) and invent their own economic way of building (putting one block on top of another, as Gerry McCaughey used to say).

    The existence of these built test cases, in various building types and locations, serve as examples for the local authority, planning departments to use, as a benchmark.

    So then, when the next Zoe developments comes along at the start of the next Celtic Tiger, then the local authority can confidently say to them – go howl at the moon – because we have built ‘X’ number of test cases. They work from a sustainable urban planning point of view, and they work from a construction economics point of view. Now go off and figure out how to build like that, and come back to us.

    But those test cases are not being built by the minister for Housing – instead he is talking about renting vacant homes. (i.e. fire-fighting the problem that is straight in front of him) We are effectively creating the vacuum in these lean times, into which the next Zoe developments will arrive.

    When the next Zoe developments establishes their model as the benchmark in urban planning standards and in construction economics suitability, the whole rest of the construction industry follows suit.

    Conclusion

    Both during the good times and the bad times, there is work which the profession of architects in Ireland needs to do, but are not doing.

    The architectural profession did not plan ahead when we were in the good times. It was in denial. Now that we are officially in the bad times, its only solution is to react poorly, and invent some kind of populist anti-Zoe developments, shoe boxes, song, which they all sing.

    Then they get a respected economist, Constantin Gurdgiev to go on The Frontline and sing that song on their behalf – to polish their own populist turd so to speak. This is not making housing policy my friends, this is only looking for a party to blame, and feeling sour for themselves.

    BOH.

  30. “When the next Zoe developments establishes their model as the benchmark in urban planning standards and in construction economics suitability, the whole rest of the construction industry follows suit.”

    I think it is what Eamon Dunphy would term: Allowing someone else to dictate the pace of the game.

    BOH.

  31. So far the only real suggestions appear to be from zhou_enlai with
    (i) bankruptcy reform and
    (ii) a facility for people to bring their negative equity to a new property.

    Given the scale of the overborrowing and negative equity in many cases, people who take advantage of longer mortgage terms or other flexibility from the bank – government driven or not – are likely to be simply prolonging their misery. At least with reasonable bankruptcy laws some people might have a chance to rebuild their finances.

    Taking moderate negative equity to a new property may be a solution for some people, although a cold eye would have to be cast over family finances before discarding the idea of bankruptcy – although again, really only if a less draconian version of it were introduced in Ireland.

  32. I hear Pat Kenny on the radio right now, discussing the ‘innovative new scheme’ to rent empty houses to people on the housing list.

    That is great, that makes me feel all warm and fuzzy inside. Let’s give ourselves a big slap on the back. (thump)

    But where it in the above, is the government prepared to dictate the pace of the game itself? To use the Eamon Dunphy sport phrase.

    Where is the government looking ahead, and avoid creating that vacuum I talked about, which the next Shoe box king will walk into?

    All the government is doing consistently is playing a defensive game – waiting for the construction industry to dictate it’s terms to the government, instead of the other way around.

    I am sorry people, as warm and fuzzy as I do feel about ‘Lease-ing in County Laois’, and as good a thing as it is to fill all of those empty houses.

    We should be ashamed of ourselves, and so should the architects of this country, none of whom want to demand jobs working on the state to build state funded building projects.

    The PPP which Bernard McNamara pulled out of etc.

    BOH.

  33. @ Hugh

    its not just the legislative framework that needs to be changed for the bankruptcy process, our whole concept of it needs to be changed. At this moment in time, bankruptcy means that you are, more or less, admitting that you are a “failure”, whether as an individual or as a company owner. However in the US, and even the UK to an extent, it is a much less humiliating process, and would be better described as a resolution process to allow you to start over. Obviously if you make it too easy it is prone to abuse (you walk away from debts at the first problem), but something whereby bankruptcy is a difficult but manageable process, with some sort of social stigma but not so much as to make you as “failure”, is what is required going forward.

  34. @ Fergus O’Rourke,

    Fergus, I do agree with your suggestions to use our own personal blogs more in the future. I will endeavour to follow this suggestion myself going forward.

    @ Eoin,

    Thanks for that contribution. We need to encourage new processes, new behaviours, as much as possible. I listened to Richard Curran’s comments on Morning Ireland yesterday, the Anglo Irish Assurance Company, loaning money to Green Propties to buy it’s €1.0 billion worth of investment property, to avoid declaring the losses. As Richard Curran said, already, in our nationalised banking institution, Anglo Irish bank, we are falling back on the same old procedures which got us into the mess in the first place.

    Back to your point.

    We need to slaughter a whole lot of sacred cows. Certainly, laying out better ground rules for bankruptcy, would provide a suitable foundation, in advance of Ireland’s future economic recovery. The corporate governance issue for instance – of how do we encourage more out-sider(s) onto our boards? Again, new ideas and new processes.

    If we could encourage higher corporate governance standards and similarly better guidelines for bankruptcy in Ireland, those would be 2 no. huge steps forward. Those alone would give Ireland a real fighting chance. In addition to tackling our competitive-ness issues in terms of global export markets, of course. (Like I say, build those test case projects I referred to above, using state investment, to try and pre-empt the model of urban development as we go forward, instead of being on the ‘back foot’ always, with the construction industry taking the lead)

    Brian Lucey is right. At least Eamon Ryan is talking about the problem of mortgage default and negative equity. It would be good to find ‘innovative solutions’ as Eamon Ryan suggested to the defaulting mortgage holder in Ireland. But we should not allow ourselves to become pre-occupied with treating the symptoms, instead of reviewing the over-arching process – how and why we arrived at the mess we are in. We need to be very careful about what Richard Curran describes – the same old tricks are creeping back into procedures, and we slide back down eventually, to where we started.

  35. @ B P Woods, if you really want to let the market run its course then don’t write down residential mortgages as a start, instead just repossess everybody who can’t pay – the write down will come afterwards but doing that first as you suggested puts a bank into the red for no reason, ripping apart the asset base in advance and during a time when they are guaranteed by the state (thus the taxpayer will get shafted). marking to market on a property that shouldn’t be written to market level unless repossessed would be a fairly rapid catalyst to a meltdown i reckon.

  36. I think Sarah Carey hits the nail on the head. One of the key problems facing the Irish economy post-bubble is how to allow distressed businesses and households make a fresh start. This will require new bankruptcy mechanisms and mortgage default procedures that assist those who must find an exit from unmanageable financial burdens, i.e. those whose sole reasonable option in the new financial conditions they find themselves is to cease trading or hand back the keys.
    Current Irish law denies households and banks the freedom to declare bankruptcy without onerous and crippling conditions. I am sick and tired of people blaming ordinary people – who simply wanted to improve the lives of their families – for the financial mess the country faces. A meltdown precipitated by “safe as houses” capitalism as promoted by all the political and business class. The market failures were not the result of our individual aspirations for better housing and higher income.
    The blame game is not constructive, let’s move on by promoting a culture of real innovation and entrepeneurship which rejects the tried-and-failed model of risk aversion and short-termism. First but by means last, is the reform of how we deal with households and firms that must fail. We need a legal system that assumes there is nothing wrong with individuals handing back the keys for their offices or house to the courts so they can walk free of crippling debts. Given that more and more homes are in negative equity, then it seems sensible that homeowners should be free to decide to limit their losses to the deposit. After all, it should be the lender who ought to assess the risks of default as part of due diligence. A firesale of repossessed houses may well cause further deflation in the housing market, but that’s no harm in the long run for the Irish economy. If house prices plummet to mid 90s prices, that simply reiterates why NAMA is such a bad deal.
    In order for the Irish economy to move forward, we have to face the challenge that the rules have changed. If Irish business and political leaders refuse to understand this, then our opportunities to create a new momentum for growth will be scuppered.

  37. @ KD: Thanks for the thoughtful reply. I guess we are agreed that any resolution of the Residential Mortgage situation (for those in NE, and whose incomes would not sustain repayments) is fraught with real problems of both a political and financial nature.

    Neo-realism suggests that the citizen must be protected before private companies who do business in the public marketplace. If you impoverish the citizen (or reduce their incomes significantly) those plcs may not be able to function on a Business-as-Usual basis (levered credit + debt). I agree that all of this is predicated on one’s Economic Model-in-Use* – this is what drives our view, opinions, beliefs and ultimately our choices.

    Those residential mortgage holders who are in NE and/or have impaired incomes, are backed into a Debt cul-de-sac. We cannot leave them in there. Their property asset value will continue to depreciate until … … !

    I wish I had the appropriate answers to this horrible mess. I don’t. Hence my somewhat draconian suggestion of ‘debt cramdown’. Every cent of repaid debt is deflationary. Prolonging the indebtedness prolongs the deflation. And if nominal interest rates rise in parallel with deflation … … ymonoce seog mooB! Thanks again for the comment.

    * My economic Model-in-Use is PermaDeclension (an annual, incremental decline in aggregate output – say -0.2%).

    B Peter

  38. @ B P Woods

    ““For the future, non-recourse loans … … make the most sense and make banks think a bit harder about how much money they’re lending to whom” Yes indeed. Very difficult olitical decision though. ‘Systemically Vital Financial Interest Groups’ will fight it tooth-and-nail. ”

    I agree with Sarah and Karl Deeter that non recourse loans and proper bankruptcy legistlation would be a good start legistlation wise.
    You mention that systemically vital financial interest groups will fight it.

    So who are these people? Are we talking about the bondholders again? Anyone else?

    At any stage does the public interest come before these people?

  39. Oh and re legistlation.
    I also think putting a legistlative cap on a mortgage to income ratio would be a good idea. eg no more than 90% and 3-4 times annual earnings.
    It’s New deal time but very few progressives are arguing in coherent way for consumer protection.
    At least make politicians in ten to twenty years time have to go to the trouble of repealing sound consumer protection laws (like Clinton did with glass-steigal) that only have a chance of being implemented just after a financial disaster like this.
    Bringing in laws like these may stifle growth but at least the growth we get is more likely to be sustainable.

  40. @BP Woods.
    What does “Neo-realism suggests that the citizen must be protected before private companies who do business in the public marketplace” mean?

    Private companies are nothing more than a collection of citizens’ investments, so the way I read your statement is “Neo-realism suggests that some citizens must be protected more than other citizens”. Is that what you mean?

  41. @ Karl Whelan,

    I don’t know when you are scheduled to give your next economic tutorial to the Labour party. But I was listening to Eamon Gilmore speak about ‘shovel ready’ projects on the Newtalk 106 radio station the other day. I wrote something down, which tie into the opposition party’s policy for creating jobs.

    http://designcomment.blogspot.com/2010/02/shoe-box-king.html

    It might be useful to someone, I don’t know. The main prong of my argument, is that different disciplines and points of view, with regards to construction/development in Ireland have not very much experience working with one another. Because until very recently in Ireland, we did not have too much economic activity to justify such an activity as collaboration on too much.

    The reason, I suggest government gets involved to build multi-disciplinary teams is to address the problem of divergency between raw construction professionals, who don’t have an idea what each other’s role should be. What I am suggesting is that one set of professionals gets more aware of the other set, in order that we can devise feasible projects, which can be built and create jobs. (multiplying effect) Projects which everyone can be proud of.

    Enjoy.

    BOH.

  42. TRP is more or less right in that we need to focus on reducing the numbers in unemployment, NOT pumping more cash into the bottomless sinkholes that are the banking institutions in Ireland. Do that and the mortgage question resolves itself. There are a great many fine tapdances that can be applied to recapitalising the banks, all of which fall apart compared to just_repaying_the_loan.

    If one partner has lost their job, find a job for them. Identify and create work, reskill, upskill, put a hiatus on payments until that has stabilised, or reduce payments for a few years until both partners are working again – these are the options we need to start thinking about.

  43. And while I’m on it, ithe entire argument put forth by Karl is spurious – if the house is repossessed, the couple still need to repay the difference, and if they can afford to pay off €250,000 they can certainly afford €70-€60,000, since they have already been paying it off for three years. So the bank loses nothing.

  44. @ Ronan Burke,

    Very good points Ronan. If you have an hour to spare some time, the best thing you could do, is sit down and watch on YouTube Elizabeth Warren’s lecture:

    The Coming Collapse of the Middle Class.

    I think, with regards to one spouse losing a job, in the typical family etc – Warren’s analysis of that problem, is about as good as it gets, in a one hour lecture at least. Granted the situation she describes relates very much to the US context. But you could see, how the exact same thing was coming down the line here in Ireland. In fact, one of the few positive aspects of the economic slump in Ireland that I can think of, is it might prevent us from building the kind of middle class which Elizabeth Warren describes in her lecture.

  45. Could someone please post a link to a summary/discussion of (what’s wrong with) Ireland’s bankruptcy laws?

  46. No that I think of it, the research done by Elizabeth Warren on the middle class family unit, is relevant also, to our discussion here about Ireland’s bankruptcy laws.

    What Elizabeth Warren endeavoured to do, in her research, is treated the middle class family unit, as if it were any other business. Ms. Warren is a commercial lawyer and sees cases every day which relate to businesses in bankruptcy. (One of her other major hobby horses is the credit card industry – PBS.org, The Frontline TV show, has worthwhile programs)

    But a full review regarding bankruptcy laws in Ireland could tie into a broad study on the situation, with regards to families as economic units. Ms. Warren’s research compares the typical family of 1970 to the one in 200x.

  47. @ Casimir

    for one, it takes, i believe, a mimimum of 12 years to exit the process (assuming you don’t pay off all your outstanding debt in that time). Its alsoa fairly complicated and drawn out affair, which makes it difficult for those without legal resources to plead their case adequately.

  48. @Brian O’Hanlon &Tomaltach

    Hi Brian – I believe you have your own blog – so no need to reproduce all of it here – headings and the links OK – and you do come up with some relevant stuff ……….. but I do not have time to wade through yards and yards and yards of opinionated text which is irrelevant to the thread, nor do I have the time to develop my own blog since I gave up on the philosophy of consciousness and learned the futility of talking to meself too often – so I humbly request that you get a bit more specific and concise and take the time of others into consideration before launching into Joycean streams of consciousness. Thank you!

  49. I’m curious why people think pulling down wages is how to make us competitive.

    Highly skilled people have the world to pick from. I know people who could work here but don’t because the pay is too low. Why work in Ireland when you can get better pay in Silicon Valley, New York, London, Zürich or Paris? And if you’re a company who wants talent you go where you can find people.

    Other posts on this blog lament the lack of PhD economists in government. Why would they be here? It’s a small economy with little innovative thought that doesn’t pay well. If you want to influence a low-pay, no-frills economy on a massive scale, go work in China or India. If you want to make loads of cash and influence a richer and more evolved economy then go work in Switzerland, the UK or New York.

    Honestly the conversations here strike me as insane. Hoping house prices fall? Is there some economic theory on evaporative capitalism? Yes, what we need is for everyone across the country to have less capital – that’s how to make money, lose billions.

  50. casimir

    “Could someone please post a link to a summary/discussion of (what’s wrong with) Ireland’s bankruptcy laws?”

    Everyhting

  51. @ Hugh S: “Private companies are nothing more than a collection of citizens’ investments, so the way I read your statement is “Neo-realism suggests that some citizens must be protected more than other citizens”. Is that what you mean? ”

    Yep!. I always thought that this was the real-politic situation: the sheeple get shorn by the shepherds. Now its the turn of the sheeple. Please correct me if I have gotten this arseways.

    @ Eamonn: “So who are these people? Are we talking about the bondholders again? Anyone else?”

    Usual suspects Eamonn. The ones who benefited on the way ‘up’ and who also wish to benefit on the way ‘down’. Its just a fact of our financial system. It (the system) is nourished by virtual credit and defecates real debt. This is grand until the s**t shovellers decided to start saving, pay down as much debt as fast as possible, and more worryingly, tell the financials in no uncertain terms, what to do with their virtual credit. No credit uptake – they die! Think 1847.

    As I have said on several occasions on this blog: you must have an economic Model-in-Use to guide your thinking. Not a single contributor to this blog (apart from myself) has ever mentioned their Model-in-Use – so what does this indicate? I can surmise. But how useful is that?

    Thanks for the replies.

    B Peter

  52. @Kevin

    “Hoping house prices fall? Is there some economic theory on evaporative capitalism?”

    Are you saying that a 3-bed semi-d 50 miles from Dublin should be worth 350k?

  53. Kevin Lyda
    Yes. I empathize! The economy has been iin a bubble hence all values are topsy turvy.

    The problem is that houses are falsely valued and will revert to a real value when the economy normalizes. Borrowing money to prop up banks to keep land values high in fact prevents this and Japan ensues. Until true price levels are revealed and more importantly, people accept this, they will not lay out what capital they have and in the absence of this, the economy continues to contract, probably overshooting. Deflation caused by deflation! A spiral. In Detroit etc etc.

    Wages may have been driven up too, but I quite agree that IBEC etc are stupid to think they can impoverish workers and expect them to consume as well!

    Greg
    You probably know that the US complicated and hardened their bankruptcy laws in 2005, knowing, KNOWING, what was coming. Bankers lobbied most and made most contributions to CONgress. Laws are the means by which those who run society take wealth and liberty from others. Normally.

    Maybe they will do a good job reforming these laws. And porcines may aviate….

  54. I got into trouble before by pointing out that having two partners at work is bad for society and all the individuals ina family. It occurs as governments promote it through lower tax rates but higher taxes overall. Business likes it as all have to use transport etc and much malinvestment ensuses in the name of progress socialism blahblah. Americans can look back to the 60’s as their heyday. In saner times all worked the family farm and input costs were lower, denying government the chance to take a cut from every worker.

    Radical re organization may well ensue as we use land to better effect. After all, we are going to have 30% unemployed soon. May as well encourage some to share land?

  55. @ Pat Donnelly,

    I suppose to qualify that Pat, no one is objecting against 2 no. spouses being at work, rather more, we would all encourage it.

    However, listening to that one hour long lecture on YouTube by Elizabeth Warren, on the coming collapse of the middle class, one realises, where the problems begin is when the family with 2 no. working spouses, which has more consumer index linked income in 2010, than it did in 1970 – but the out-goings of the family economic unit are greater than what is coming in.

    Everyone here will agree, that the family in Ireland, as an economic unit, regardless of whether there was one income or two spouses, was generally sailing a lot closer to the wind, that it had done in the past.

  56. @ David O’Donnell,

    David, agreed. I will take a different tack from now on. I really and truly lost the run up above, and in other threads recently. Anyhow, out of all the stress and chaos I made for myself, at least one serious contribution to the debate in Ireland, did come of it – the ‘Shoe Box King’ blog entry, which I linked above, is a solid suggestion on how Ireland can create an embryo form of the ‘smart economy’, so that future generations of Irish people in any discipline can actually build from an initial prototype.

    It does have some relevance to this thread in fact – a sustainable community, is a community where: When it comes to a balance between, I don’t think I will bother paying this mortgage debt, versus, I really don’t want to default on this mortgage debt – members of the said community, or settlement, favour the latter rather than the former. By definition, an un-sustainable community or settlement, is one that is likely to become a big red blotch on a map, where the combined layers of negative equity, unemployment and poor credit history overlap. Who would want to live there?

  57. @ All,

    Someone above mentioned that the complicated ‘tap dance’ approach to resolving the mortgage debt problem, might be a waste of time. That is, compared with simply paying down the debt. Brian Lucey’s original article outlined some difficulties with interfering in the process of normal debt repayment. Other contributors have offered more angles. Before people here shut the book on the ‘tap dancing’ approach altogether, a couple of tap dances, are worth listening to. Feasta the voluntary environment foundation organised these 2 no. talks.

    James Pike Architect,

    http://www

    Chris Cook,

    http://www

  58. http://huffpostfund.org/blog/2010/02/03/victim-real-estate-scheme-tell-us-your-story

    There is an industry in reorganizing debt. Money is to be made and suckers fleeced. The strong of stomach prey on the weak of credit.

    Eventually, rolling up credit and other debt kills off another consumer and too frequently, we have a killing and suicide. I expect to hear of families slaughtered as debts get too great and the husband, occasionally the wife, snaps. But in Ireland, I do not expect to read of their debts, as banking is sacrosanct. So we can ignore the problem, as it doesn’t exist…. it can be interred with them.

    The Celtic Tiger, eating its young.

    BOH
    You do realize that the pendulum will do what it does and no one can stop it? It is not within the power of any government to stop it. Not even Karl Whelan can stop it overshooting and for a long time. It will feel longer for those who have to live through it.

  59. @ Pat Donnelly,

    I posted something there a minute or two ago, which will be approved by the moderator in a while. It is a couple of videos, describing some of the work, which architects and urban planners are engaged in at the moment. It looks at solutions, or ways out of Ireland’s debt crisis, regarding residential developments as we tend to build/manage them in Ireland. You may find the videos I linked of interest. I don’t know too much about this research, but I said I would mention it, as it is on-going and of relevance to the current thread.

  60. The moderator has released those video links (James Pike Architect and Chris Cook) above now, thanks.

    I will point out that these ideas sort of come out of the ‘Green’ movement, even though they are to do with finance. The green movements focus on sustainability has as much to do with finance as much as anything else. The working prototypes which I suggest the government might develop, through collaborative young peoples’ efforts hired on contract by the state, would evolve according to sound financial as well as design ideas. In a way, everyone at IE, in this thread, is concerned with and discussing sound green-collar employment opportunities and visions. Enjoy, BOH.

  61. @ PD: Posting over on TheOilDrum – commentary, by George Mobus on Tainter’s, The Collapse of Complex Societies: Energy Flow, Emergent Complexity and Collapse.

    B Peter

  62. “However, last night the regulator said that all lenders would have to wait a year before starting legal moves to repossess a home as part of an amendment to the statutory Code of Conduct on Mortgage Arrears.”

    “The regulator said in a statement last night: “The Financial Regulator is of the view that lenders should only seek repossession in less than 12 months in very exceptional circumstances and when all reasonable attempts to encourage engagement by the borrower have failed.””

    http://www.independent.ie/business/personal-finance/latest-news/debt-lifeline-for-thousands-in-bank-repossession-ban-2051105.html

    Regulator overturns contract law.

    Judicial review anyone?

  63. @ Pat Donnelly

    “Maybe they will do a good job reforming these laws. And porcines may aviate….”

    There are so many flying porcines (or is that prokys) in Ireland that global warming will be cured as they block out the light of the Sun.

    😀

  64. I was wondering if something couldn’t be structured along the lines of products (certainly offered in the UK e.g. with Aviva – not sure if they are here/popular in Ireland) that are usually offered to older people such as home income plans, home equity release, home reversion plans, etc.

    e.g. whereby the mortgage holder, instead of receiving a lump sum or income as normally happens with these plans, gets, say, 50% of their current mortgage written off in exchange for some kind of ‘settling up’ on death or moving into long term care – or on sale of property if earlier?

    Let’s face it, if where I live in North Co. Dublin is anything to go by, property values have dropped by about 50% in reality, regardless of what anyone’s stats say.

    Obviously, if the mortgage holder can’t even afford 50% of their existing mortgage then, as Karl points out, the mortgage co. will have to take the house.

    Could be set up/backed/controlled by government and outsourced to a private company (with a good reputation natch) already in this field who have the systems, admin. expertise, etc..

    It would obviously need to be closely regulated so that it doesn’t turn into a shark pool – I reckon if it were set up equitably, you could find a win/win situation for both mortgage provider and holder.

    It would be better for the providers than having to administer a large scale default and write so much off. And it would stop the ‘moral hazard’ whiners/’why should my taxes bail out others?’ moaners if the holder still eventually paid.

    I think what really does need to be avoided is setting up this ‘expert panel’ to advise the government and we find it’s made up of people who are only really interested in ensuring the mortgage providers get the best of the deal. The word is ‘equitable’ not ‘plunder’.

    I will put something up in more detail on my blog over the next few days.

  65. Joseph,

    I think “Senior” mortgages only work because they are very low Loan to Value.

    If the mortgagor is already in trouble and the mortgage liability is greater that the security value there would seem little point in that type of product.

    The banks might like it though.

    New marketing campaign.

    “Debt until Death”

  66. I’m just trying to think outside the box. Maybe something can be structured that will work, maybe it won’t Greg. I could take the easy option and just sit here giving out about the situation but will do my best to try and think of a solution (rather than have one put forward that only benefits the banks and we get stuffed with the ‘TINA’ argument again – which seems to be the SOP/modus operandi with this government).

  67. Joseph,

    I’m not against creative solutions to the residential mortgage problem and I would certainly like to see one that doesn’t involve tapping the Citizen/Taxpayer to pay off the bad debts of those who borrowed too much and now cannot pay it back.

    But that is the rub is it not. Many of these debts cannot be paid back … ever.

    The banks and building societies will engage with the regulator in loan modifications because the quid pro quo will be that the regulator will overlook the impaired nature of the mortgage.

    So as long as the mortgage is performing (under the terms of the modification) no write-downs will be required.

    It’s extend and pretend.

    Will rolled-up interest be counted as revenue by the banks?

    That’s what they did with development loans, until the market caught up.

  68. Greg – sorry I think you think I was having a dig – I wasn’t!

    “the bad debts of those who borrowed too much and now cannot pay it back.”

    I think a better starting group might be those who were fine until they lost their jobs in the past couple of years – through no fault of their own – and can’t pay back because their income fell by 70-80% overnight.

    The stupid and greedy can get to the back of the queue and we’ll see if they can be dealt with afterwards…..

  69. @ Greg: “Many of these debts cannot be paid back … ever. Yep! Sunk Costs? Have to be abandoned!

    Its this predicament (cramming down the unpayable mortgage debts) that’s sticking in some peoples’ craws. My intuition is that a Debt Jubilee will eventuate – the legislators will have no other option if they want to be re-elected. Unlike financial institutions, the taxpayers cannot (legally), conjure up their own money supply to pay the principal + accumulating interest. Rock and a Hard Place?

    ” … “… until the market caught up.” Not going to happen as it did in times past; (for a number of reasons – which can keep for another time).

    The median price of res. prop. will decline for a considerable time. Estimating this is v-difficult (3 yr?) – ’till the med. price approximates x2.5 times the median wage for a specific location, and you put a 20% cash deposit on the table. Also, no more funny money mezannine loans for stamp duty and fees either. Large Rock and very Hard Place!

    This means a deep level of Neg Eq for many homeowners. Selling would incur such future costs as to prevent the purchase of an alternative residence – unless we are ‘fortunate enough’ to have a significant and sustained increase in the money supply – cash, not another bout of virtual credit.

    So I guess its “extend and pretend” for some time. “Debt until Death” – lovely!!!

    B Peter

  70. Joseph,

    I didn’t think you were having a dig.

    It is just that I am of the opinion (a minority one I’ll grant you) that the debt/credit problem is bigger than residential mortgages, development and land loans, Ireland, Europe & America.

    There will be a reckoning and it won’t be pleasant.

    The politicians should prepare for a State of Emergency.

  71. BP,

    I agree entirely that “affordability” at say X times median income is the only way of valuing the “common” housing stock. There will always be exceptions to the common of course.

    I would say that X could equal 3.5 and at a stretch (young professional) up to 4.5.

    I would also suggest that lenders should stress test affordability on the mortgage term using the yield of sovereign bonds equivalent to the term of the mortgage. And then add margin.

    What absolutely astounds me is that the asking prices for “common” houses in Dublin still 10 times median income.

    It seems to me that politicians are anxiously awaiting the tooth fairy (massive global growth for the next have decade) while the pain just gets worse and worse.

    I think there is a complete failure (officially at any rate) to recognise the massive structural global shift facilitated by mountains of cheap money.

    This will end badly.

    Heard any talk of green shots lately?

  72. @ All,

    I find it funny, the funding industry based in Ireland’s IFSC is jumping up and down on radio this Saturday morning.

    The Public Private Partnership for housing on public land(s) in Dublin city – it relates to the Islamic Finance provisions in the new Finance bill. There are models for inclusive housing, which relate very much, to systems of finance that have less to do with interest, and more to do with assets. This is one of the missing components in much of what we do, regarding property in Ireland.

    I linked Chris Cook’s lecture in the ‘Mortgage Modifications’ thread earlier, worth a watch.

  73. @ Greg: “Heard any talk of green shoots lately?” Nope, but I saw plenty yesterday. Rode out West-Dublin way. Lovely sunny day. Great day for the bike. Spent about an hour touring around several ‘business parks’, ‘industrial estates’ and the like. Lots of green shoots around the padlocked entrances and empty parking lots. They’d be weeds I reckon.

    The Golden Rule of Mortgages: 20% cash down; 28% of gross income on home repayments; 36% MAX on all repayments (car, card, mortgage, insurance and residential taxes). Stray outside these limits and you risk insolvency!

    Ever wonder why repossessions were so low when the Golden Rule was obeyed? About 1% I believe. Residential lending model was structured around the Rule. The outrageous lending practices of last 7 years trashed the Rule. Repos are heading for …? – double digits? That’s a Boom – as in Bust!

    ‘In the Long Run the possible is inevitable’: (Karl Popper). I believe we are approaching the beginning of the end of the Long Run. Hope I’m wrong.

    B Peter

  74. @: BO’H: There is an axiom about residential property: it is your home, where you live your life, raise your family, and possibly grow old in. It is NEVER EVER a tradeable asset. Tack this onto the Golden Rule.

    If a person believes a nanogram of the asset-twaddle peddled by ‘public-private pirates’ in respect of residential property – homes to raise your family in, not to be ‘flipped’ for investment – then they are an utter fool.

    B Peter

  75. For instance, I commented above:

    “As Elizabeth Warren has said in her reports on the middle class family in the United States: families are not buying homes, they are buying schools.”

    That is something much more sensible, to assist the plight of mortgagees I would imagine – building those schools.

    Are we getting too hung up on NAMA-like work outs, and all kinds of fidgety financial gadgets?

  76. Brian,

    I am absolutely against bulldozing houses.

    The capital may have been misallocated but nevertheless it has been allocated.

    The logic of bulldozing houses surely also applies to office blocks and shopping centres.

    All that will do is drive rents and prices up.

    The last thing we need.

    We need price discovery.

    We need to utilise the capital even if it has been misallocated.

    The whole purpose of NAMA, and now the NTMA and NPRF, is to hinder price discovery.

    Who benefits?

    Not the Citizen/Taxpayer.

  77. “We need to utilise the capital even if it has been misallocated.”

    Thanks Greg, for that economic point of view.

    The theoretical argument (if you read the l-o-n-g Dust Bowl blog entry I linked above) I tried to present was one strictly framed by urban and sustainable design theories – not by any kind of economic insight into the problem.

    One of the old Sept ’09 blogs of mine I dug up was this one.

    http://designcomment.blogspot.com/2009/09/ghost-towns.html

    (It is weird reading one’s own blog entries – you go, kind of, did I really think that?)

    Reading about the ‘ghost towns’ and the hairdresser I told of, in that blog, it made me realise something. In the Celtic Tiger, with home prices rising in Dublin, the Dublin inhabitants raced out into the hinterland with their money bags.

    It made me think of the traditional rural-urban divide in Irish society, and the un-supress-able desire of country cute hoors to get one over, on their city based cousins.

    I don’t know how that fits into your ‘use-of-capital’ based arguments, but I said I would mention it. To me, many ghosts towns, still don’t qualify as capital, but rather as booby trap devices for un-knowing Dub’s to fall into.

    BOH.

  78. BTW, it goes the other way too. City folk doing-for the country folk. I have been around the building industry in Ireland too long. I remember my building construction teacher at Bolton Street was a man called ‘Mick-the-Masher’. He was a fabulous teacher, and orginated way back in the dim-and-misty past, from the Coombe area of Dublin. But a brick layer, who worked a lot with Mick years ago, told me of one of Mick’s favourite expressions. When they would be having tea on the site, they would throw sods of turf into a burner. Mick-the-Masher would say, go on, throw another culshie on the fire.

    In one on my classes at Bolton Street, I remember Mick boasting about the builder in Co. Kerry he put out of business, when he made a mistake in the building’s design (a parish church). So my point is, there is something in the Irish mentality, which has been going ding-dong like this for ever and a day. BOH.

  79. Brian,

    I have a difficulty with this “sustainable” / “green” / “smart” meme.

    It seems like one gigantic excuse to forgive one gigantic misallocation of capital.

    Why should a ghost estate of 50 complete houses in (say) Longford not be sustainable if they can be bought for €50,000 each?

    The people who buy them will have no debt.

    What is “unsustainable” about that? The people have skills (or can acquire them). We are in the age of nanosecond information transfer. We are told by are Dear Leader that we need to “move” to a “smart economy”.

    OK, they don’t have solar panels and woodchip central heating. But hey, if you can buy one for€50,000 you might just have €10,000 to finish off the sewers and “save the planet”.

    The suppression of price discovery can only lead to another misallocation of capital.

  80. @ Greg,

    Apologises for the length in advance, I’ll attempt to be specific and to the point.

    You do make a very compelling argument Greg, indeed. I suppose, the danger I feel in our discussion here, is that we mind find some way to forgive the builder(s) of these schemes. Does that make any sense? To let them off the hook. I mean, even if it was only to symbolic-ally level a few estates and provide the photos for the newspapers, it might be worth squander-ing the capital. Maybe a couple of estates at various parts of the country?

    Okay, on the sustainable/green meme – lets blow it up to the scale of Ireland as an island, and see what the real planners and thinkers are doing (not guys such as me). The Futures Academy at DIT, Bolton Street, is one such collection of academic thinkers, who pose an interesting counterpoint to things such as the national spatial strategy.

    Conor Skehan in particular has advanced some study that I know about, which talks of a need for the spatial planning in Ireland to move, towards an eastern and western corridor. As opposed to the de-centralisation plan introduced several years back. I think the problem, it was felt by a range of land and construction professionals, was the de-centralisation thing – was a political scheme – rather than a fully tested spatial planning concept.

    Twice The Size, Imagineering the Future of Irish Gateways, is the document (downloadable pdf) which received most publicity. It can be found at thefuturesacademy dot.ie website. Even the diagrams in the report, sort of give one an idea of what it is about.

    (Mike Davis’s essay at Tomdispatch dot com, Mike Davis, Casino Capitalism, Obama, and Us, is about this too – in olden days, settlers had no analogue in their previous experience to deal with the Grand Canyon, they had no idea how to deal with it. So to with spatial planning in Ireland as driven by politics)

    I guess the point I am making, is that in Ireland we always seem to be fire-fighting. Some way to keep momentum going behind, longer term strategies needs to be found. Even when we go through the doldrums. Hence, why I wrote those recent blog entries about Dust Bowls and Embryonic Economies and so forth.

    The trouble is, I can’t grasp the overview of the situation in the way a George Lee, or a Constantin Gurdgiev, or a Colm McCarthy can. But what I can certainly grasp are things to do with project management, program management and human resources. (Those are problems that constantly come at you, when dealing with construction) If you like, I am like a canary when it comes to identifying urgency in those matters.

    The whole green/sustainable meme strikes me as having a strong – motivational, lets start doing something, kind of slant to it. Indeed you are right, its insight in any strict economic sense, might be extremely shallow.

    It reminds me of a book I once read – the researcher on a US military project, spent a lecture trying to explain his solution (to why the military’s helicopters kept crashing) in terms of basic mathematics and statistical functions. He was getting nowhere. But then the light bulb went off, and he said, he was solving the problem with ‘Fuzzy logic’. Instantly the review board approved his funding, because they had attended some conference, where it was proclaimed ‘fuzzy logic’ was the future. But of course, it is only a fancy label, on what are fairly fundamental maths principles.

    BOH.

  81. Qualification:

    “I suppose, the danger I feel in our discussion here, is that we mind find some way to forgive the builder(s) of these schemes.”

    The builder(s) will sometimes maintain, it was planners in their local area who insisted the follow densification guidelines etc. The planners in turn will maintain, they followed national planning guidelines. We can’t lump it all on builders. Under pinning my blog entry ‘The Shoe Box King’ was a philosophy, which hopes to deal with the ‘who is to blame’ problem – but creating actual built prototype(s) which builders, local planners and national planners (and construction economists, surveyors etc) could all go and visit.

    http://designcomment.blogspot.com/2010/02/shoe-box-king.html

    You see, I have thought about this in multiple dimensions, the policy ‘vacuum’ we create in Ireland, and how to combat it. BOH.

  82. The Oz govt has withdrawn its guarantee to lenders to banks. Deposit rates on 3yr terms are now above lending rates for 1st time in 30 years. MacQuarrie dropped 6% in last few days.

    Does the panel think that interest rates are on the up? What effect will this have on the Yen?

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