Lack of Debt Forgiveness Not Realistic

In theory, debt forgiveness sounds like a good idea but I have yet to see any practical suggestion as to how it could be feasibly implemented so as to avoid moral hazard.

At the moment there are a large number of people in Ireland currently paying their mortgage in full who are struggling to get by month to month. If they feel that were they stop paying their mortgage they can get a win-win situation of extra disposable income at the end of the month and a writedown in their debt balance, then what incentive do they have to keep paying? Instead of having 10% of mortgages in default, you might end up with 20% or 30% which would sink the banks without further large capital injections from the government.

In the article, you say that a well-designed programme needs to deal with mortgages on a case-by-case basis, but is that not already what the banks are doing?

Are there examples from other countries that we can look to where a similar debt-writedown scheme has been put in place successfully?

@ Carson

You beat me to it.

The figure being quoted by the Sunday Times is 37 billion euro of debt forgiveness for developers and speculative.
It is amazing that no Irish newspaper has bothered to follow up this story. We are truly being led up the garden path by NAMA…every red cent” will be paid back etc. if the ST have their story right.
On a related issue I see that E & Y have been appointed to examine issues relating to financing of Battersea power station in the UK being developed by REO. Did I read a while ago that NAMA have advanced many millions on this speculative development. It now looks like the English bankers will get there first with a huge amount due to be repaid to them by the 31 August.
So yes Mr Hayes..moral hazard for householders… Millions for developers.

Why not wipe out ALL mortgage debt and tax before we experience inflation ?
Nah – we can’t do that , it might work.

The last post should read
‘but to make sure that no mortgagee has an incentive to milk the system’

Brian Hayes and the rest of us need get used to the concept of debt forgiveness.

We don’t have a bankruptcy regime at present in this country (one which sees just nine people a year processed doesn’t count in my book)

A necessary part of a bankruptcy regime is debt forgiveness because it is normally debtors whose assets are worth less than their liabilities that qualify. And the difference between liabilities and assets is somehow written off. Or forgiven.

So could Messrs Hayes, Noonan and Shatter get a move-on and deliver the IMF required personal insolvency framework. Because a lot of problems might be solved with such a mechanism eg if the bank knows that bankruptcy will last 12 months, not 12 years then the bank loses a lot of leverage over borrowers and is more inclined to cut a deal, and hey presto in a perfectly natural and capitalist fashion, you have debt forgiveness.

If this is the problem:
“At present, however, the banks are preferring to write these losses off as slowly as possible. ”

Then a solution might be that the owner of the banks (currently the Irish state) used the control that comes with ownership and simply told the banks management to get on with it and promptly recognise the losses. He who pays the piper etc

Surely the current system is near optimal for the banks and their creditors, the biggest debts have already been moved from individuals to the public while a good percentage of people are also owned by the banks.

it makes sense to have as diversified a portfolio as possible.

As Eoin says “You could keep them is a life of massive debt servicing, but they may still have kept paying”

Surely given the overall numbers the optimal strategy for the banks is to keep as many as possible in a life of massive debt servicing. The talk of debt forgiveness is useful though, these people need hope.

@ Karl

Let’s just say I misunderstood you. Your point now seems to be more one of criticising the banks’ loss recognition process.

I believe that Brian Hayes, Noonan, Morgan Kelly, Gurdiev etc. are refering to a much more radical concept “debt forgiveness” which implies a process which would set aside debts many of which, although in current distress, may ultimately be payable.

Debt forgiveness along these lines definitely increases the projected losses for the reasons given by Carson, B.E B, myself and others.

I am in favor of debt forgiveness for first time buyers who bought from 2004 to Sep 2008. As far as I am concernced they were victims of clear collusion and pricefixing in the housing market. I would like to see an investigation into pricefixing by banks, developers and real estate agents during that period.
Instances such as developers who reduced their prices having their entire stock bought up by groups of developers to maitain high prices were commonplace.
The circumstantial evidence of hundreds of thousands of empty units, very few sales and yet continuing high prices during this period is pretty strong.

There is too many assholes calling the shots,

Anyone with half a brain knows there will have to be mortgage debt forgiveness,

the banks lend the money in a inflated economy so they will have to take the loss same as the people who lost money in shares,

very simple you dont need a degree in finance to work it out,

there is too many people in charge who are suppose to be well educated,

BUT the big problem is the lack big time in COMMON SENSE, you can not teach that, its a skill very few have unfortunately,

the mortgage crisis is a tsunami waiting to erupt,

people are under severe pressure which will have serious negative effects long term,

No human being should be crucified like that the vast majority through no fault of there own,

ITS time for the irish people to stand up to these bullies and demand what there rights,

And maybe they should listen to MORGAN KELLY, he is one of the few who is living in the real world.

IF the people dont get mortgage write down, they should all pull together and go on mortgage strike.

get real…..

@Karl

What about a scheme i have seen suggested elsewhere where some negative equity mortgage holders get the excess written off and the bank gets a share of any future increase in price?

I know there is probably complications, but do you think that, in principle, that might be a good idea?

Karl,

I’m not clear on your position.

“What this means is that the banks are sitting on mortgage losses that will be around €6 billion even if the economy recovers in line with the government’s projections.”

This 6bn is expected losses (i.e. you have current non-performing and model future defaults among performing loans to get your foreclosure frequency. On the loss severity side, your recoveries offset principal owed, unpaid interest and foreclosure costs. I expect Blackrock would have assumed recoveries only coming from property disposal. Though it’s likely the Irish banks may have lobbied for some additional recoveries to be included).

Do you think this includes any element of debt forgiveness for performing mortgages? I’d expect it does not. Reading your post gives the impression that there is money in excess of expected losses.

I would caution against any principal forgiveness scheme that leaves the beneficiary with the underlying asset. Every debtor would be motivated to take advantage of such a scheme and the costs could rocket. Let’s face it; we’d all consume a lot more if we didn’t feel obliged to pay the credit card bill. The cost of servicing the mortgage isn’t affected by negative equity, so I’m a bit bamboozled as to why NE is being linked to debt forgiveness. A car loan is in negative equity for most of its term, but that’s no reason to reduce the borrower’s debt.

I agree with changing bankruptcy laws – a graduated time period should be introduced. In most cases 2yrs discharge should apply, but longer periods should apply to limit strategic defaults.

Mortgage modifications (excluding principal forgiveness) should be looked at to help those at the margin. Extending loan terms/ deferring interest, liquidating pension funds, etc.

@ Grumpy,
Re your comment/query on a different trend. Forgiving principal has the potential to open the floodgates to huge losses. If paying becomes optional, you’ll find plenty of people with reasons not to pay. I was thinking of a different example to yours: if some borrowers had 100k principal forgiveness to cover negative equity. Say another person with 60k remaining on their mortgage lost their job and had no other assets (except a 300k house), is it fair that is person lose their home? It mightn’t take too many steps before mortgages can’t be enforced etc.

I was struck by the point that debt forgiveness is “not realistic”.

The Irish property boom was sensible. Bank regulation was prudent . Guaranteeing the banks was logical . NAMA was the epitome of common sense.

@ Chris

I’m a 2005 FTB. A modest enough house, but not a shoebox 25 miles past the M50. Cost a bit but nothing eyewatering. I thought long and hard about whether to buy, what to buy, where to buy and how much I could afford. Did a lot of the DIY work required on it myself. Never considered trading up even after 150k or so of increased value was on it by Q2 2007. Didn’t buy a flash car or go on bizarre 5* holidays. IE I was the prudent buyer, not the naive market chaser, bought within my means and used my head when doing so. From that point of view, i’m as deserving of debt relief/foregiveness as anyone.

However, here’s today’s reality – had then and have now a decent job, had some decent savings at the time, had a bit of family cash to help in the process too. Can easily afford my mortgage right now despite the recent increases (on a variable, not a tracker), and am not so indebted that I’m particularly worried about the long term implications of that debt. Why the hell should i get some debt forgiveness? People should be outraged if someone like me got debt forgiveness, but I’d be outraged if someone reckless enough to buy crap for ridiculous money, and all the while living the high life, got a bailout on the back of my taxes.

@ All

In the light of the comment by BEB, I rest my case.

Debt forgiveness will never work as it is totally unfair to people who are paying their mortgages JUST AbOUT. I,m saying this from experience in my house hold. We have cut out all the fat even the foodbill has been curtailed. Our wage is public sector which has been slashed by 14%. The yearly increment has been slashed by 68%. So going by this cuts I should be looking for some cut in my mortgage as we took it out 6 years ago. I used my common sense taking out the mortgage and did,nt go for a 40year mortgage or 100%. Our mortgage is not relative to our incomes anymore.

I would be surprised if the DoF has not considered a series of debt forgiveness measures already. The stress testing exercises held in the central bank should provide a high resolution guide to which classes of mortgagee are at risk, and where they are on which banks’ balance sheets. Adequate resolution of the data should be there already, so understanding likely costs of write downs should not be a hand-waving exercise, Writedowns of existing debt, perhaps not just mortgage debt, should take place in a court setting where tests for solvency can be run quite easily and quickly on a case by case basis. It would be fraud to lie to such a body, with appropriate penalties during and after the process, thus reducing the moral hazard part of the problem. The court should be able to discover ‘can’t’ from ‘won’t’ pay with alacrity. The eventual workout for each household doesn’t need to by a 100% debt write off by any means, nor does it mean everyone would stay in their homes after having such a write down applied to their debts. The point of the exercise is to work out a reasonable level of repayment where possible, recoup the underlying asset if necessary, remove the unfair and excessively harsh bankruptcy regime that exists at the moment, and as a by product bring clarity to the ‘pillar’ banks’ balance sheets.

Again, before running off and saying ‘I didn’t go mad in the boom’ or ‘why should my taxes pay for these guys’ 5* holidays’, perhaps reflect once more on the points raised in Karl’s excellent post.

Debt forgiveness of one kind or another is, in my view, both necessary and sufficient for a large class of silent, miserable households in Ireland at the moment. Most of the people I speak to who are going through repossessions and court processes at the moment are not those who splurged during the boom. They bought a house because that’s what you do (or did) in Ireland. They didn’t think about the long term consequences of buying in a bubble, because not many people do. They just wanted somewhere to live. Should they bear the costs of that decision? Of course they should. But should they be crushed by their mistakes by a set of outdated rules and regulations? No, they shouldn’t. I take Eoin Bond’s points, and in fact I subscribe to them at one level. But at a more realistic, human level, the argument doesn’t hold water. Eoin’s future taxes are already gone, the only thing that remains is to use the money in the banks to best effect, and change the bankruptcy laws accordingly.

Re ‘moral hazard’,’debt forgiveness’ etc – in relation to our so-called ‘pillar banks’ – where has moral hazard/debt forgiveness come into play from the pov of the ordinary citizen in relation to these ‘pillars’?

http://www.imf.org/external/pubs/ft/spn/2009/spn0915.pdf

@ Stephen Kinsella

Why do the lawyers always win?

@ All

Some of the underwater mortgages were presumably what Americans would call liar loans; deposits provided by family and income falsified.

Ireland still has one of the highest rates in Western Europe of owner occupier homes without mortgages and there is €100 charge coming these folks way.

However, as the Government would be giving one group €6bn , it would be identifying others for the hatchet.

Whether it’s merited or not to spend, the amount should be seen as a cost.

There are other deserving groups as well – private sector pensions are not likely to recover for many years; 5,300 company collapses by the end of the year and many people have seen years of effort going down the drain and little opportunity to fight back because of the credit situation and the legal process of winding down an operation.

@Karl

The good news is also that it’s already happened, i.e. implementing a debt relief programme won’t involve any additional costs to taxpayers over and above those already announced.

You seem to be mixing up the gross and net cost to the taxpayer for bank recapitalization. The net cost will be a function of the recoveries made, and a general debt forgiveness program over and above current policies will by definition decrease the amount of recoveries. Since the banks are overcapitalized I am assuming that at some point if the banks return to a normal mode of functioning with retained earnings etc., that some of the taxpayer equity can be sold/withdrawn and spent on something more productive. If this is incorrect I would like to be corrected. Implying that a debt forgiveness scheme has no further implications on taxpayer cost is disingenuous.

I do not know why you characterize Hayes’ comment on fairness “as if nobody has ever thought about it before”. Simply just saying that a debt relief scheme should be handled on a case-by-case basis, with a spectrum of options ranging from both extremes to everything in the middle, is not addressing the issue of fairness, it is avoiding it.

Nobody would argue against moving the bankruptcy laws from the 19th century to the 21st. If done right that should be all that is needed. There are plenty of models that can be used. This is where the focus should lie, and perhaps there is not much difference between “debt forgiveness” as proposed by some here and a half-decent bankruptcy law.

However Hayes is right (and I am quite sure both Hayes and Noonan have actually spent some time thinking about it) – there will never be a generalized debt forgiveness scheme since one cannot be introduced without triggering a nationwide flood of B.E.B-like comments.

I agree with those above who propose protection of owner-occupiers and that that some home equity will have to be put in play. People in this scheme would essentially revert to a similar status to those who bought out council houses.

One potentially problematic snag might be the impact on the State’s ownership on a nationwide basis of large numbers of home equity loans on stuff like national planning policies, since the State has a higher chance of recouping its part of the deal if fewer new houses are built than local councils might want.

Just a few random observations, not a thesis, especially given the quality of contributions.

1. I think a 180 day + situation is irretrievable of the mortgage in 180+ arrears was taken out post 2003. Therefore I suspect the banks have already written those off to an extent and the foregiving is done. We recaitalised some of that writeoff back into the banks ALREADY if the 180 day threshold was reached by end 2009 ….as many were.

2. The current level of debate in the media…especially the near hysterical flip flopping of the Sunday Independent as it tries to guage the public pulse…will inevitably lead some to go into arrears on the grounds that proof if stress will be required to avail of this scheme. Some who could pay ( albeit with difficulty) will now wander close to that cliff edge…some will catch a crosswind as they totter.

3. What has not been discussed properly is that many of those with too high a mortgage are also endowed with too much of every othe rclass of debt too. The Plastic, Term Loans, Mortagages and the Never Never piled upon each other. For them we need to sort out Bankrupcy Lite and sharpish…..of course that forces banks to realise writeoffs as yet unrealised and unaccounted for does it not ???

@Bryan G
“However Hayes is right (and I am quite sure both Hayes and Noonan have actually spent some time thinking about it) – there will never be a generalized debt forgiveness scheme since one cannot be introduced without triggering a nationwide flood of B.E.B-like comments.”

A nationwide flood of comment did not prevent NAMA going ahead to bail out bankers and speculators.

The idea of forgiveness is sweet, but ridiculously naive, hard heads and soft hearts indeed – more populist bunk, the opportunism that such a scheme would invite would rival any gold rush of historical repute. Write downs are necessary but the asset must be disposed, more modern bankruptcy laws would indeed offer greater leverage for those in genuine longterm default. The application of the capitalist doctrine requires a return to equilibrium, credit and asset prices must settle togther, the more forgiveness the less credit as banks will have greater write downs, therefore the lower asset prices will go. Unless of course we get a QE holiday and perhaps thats the plan?

This circle is closed, the more money we waste based on bleeding heart economic populism the longer the economy will fall – explain to my ketone soaked brain how this is helpful economically

I should add that in the absence of a structured approved scheme, bank executives will be (probably are already) deciding which mortgages to write off. It is not unreasonable to suggest that both political and executive influence with be factors when it comes to decision making. And it will be done behind closed doors.
Just like NAMA at present who, per @ceteris, have or are deciding to write off €37 billion. €37 billion. Gone. I wonder what the criteria were.
Surely a write off of this magnitude is a matter for a Dail Eireann vote? But maybe I kid myself.

The term “written off” is being used above in two different ways and this is confusing issues.

Write off: accounting term for when conservative accounting principles require that the expected market value of the loan asset is set to zero on the asset side of the lending institution’s balance sheet. This has no implications for the firm’s debt management policies. The accounting decision cannot be seen to affect debt management policy since this infringes on accounting impartiality. The debt is still due, but it is the accountant’s best guess that it will not be paid in likely circumstances. That is not a textbook definition but how I remember it.

Write off: Lending institution decides to forgive a debt and not chase the debtor for any payment.

The second definition implies the first, but the first does not imply the second. Accounting and bank balance sheets are only about the first definition. They have nothing to do with the second definition. The second definition is a political or debt management decision not tied to accounting balance sheets.

@Karl

What should a well-designed mortgage write-down programme look like? Brian Hayes raises the issue of fairness as if nobody has ever thought about this before. In truth, a lot of thought and effort has gone into dealing with personal debt problems around the world and there is a lot to learn from. We’ve also been discussing it on this site for a long time, e.g. this post I wrote eighteen months ago.

You accuse Hayes of being mistaken in his view that fairness is a problem, and imply that if he had read this blog he would find some fair schemes that he could implement. That is not the case. Your own post from last year raises more questions about the practicality of any such scheme than it answers.

Also you say

A well-designed programme needs to deal with mortgages on a case-by-case basis. In some cases, this can involve modifications of mortgages in bilateral deals between banks and their customers. In some cases, those who get modified mortgages will get to stay in their homes. In other cases, they will not.

This is what I meant about your post sidestepping the fairness issue that Hayes raises. It is very easy to talk generalities from the sidelines and say that all possibilities should be on the table, decided on a case-by-case basis. If a government were to legislate on this it would not have that luxury, but would instead have to put in place hard limits/thresholds etc.

The way to prove Hayes wrong is to produce a detailed template of what this debt forgiveness scheme should look like, and then evangelize that. Until that occurs I would agree with the Leon Nova post above – “This article left me wondering whether there was any substance beyond ‘you know the government should just like write off those mortgages because they’re never going to get them back. NAMA for the little guy.”

My suspicion is that the distance between some of the more conservative debt forgiveness proposals and a global-best-practice bankruptcy scheme is not that huge, but in the absence of detailed proposals for both approaches it is impossible to tell.

@ Joseph Ryan

The story on the 37 billion debt forgiveness programme for developers and speculators is per the Sunday Times. I understand per PR Guy that they have been running it for a number of weeks. I haven’t seen it anywhere else. Amazingly no Irish newspaper has commented on such big story.

As for a Dail vote.. I seem to remember the Minister reserved major powers onto himself. So presumably the current Minister would have veto powers on a decision of this magnitude.

It must be the silly season with Irish papers ignoring major stories relevant to Ireland such as the Battersea power station site/ REO which the Telegraph reported few days ago.

@ Bryan G.

“I would agree with the Leon Nova post above – “This article left me wondering whether there was any substance beyond ‘you know the government should just like write off those mortgages because they’re never going to get them back. NAMA for the little guy.” ”

Honestly Bryan, my role in life is not to convince every punter that reads the IE blog so think that if you want. Still, I think that’s a really bad characterisation of what I’m saying.

The main point of the post is simple. Brian Hayes is free to say that the banks can’t afford six billion in debt relief — but it’s worth pointing out that our bank recapitalisation policy is based on assumed losses on mortgages of between six and ten billion.

I agree fairness is an issue but it is in every time when there are large-scale debt writedowns and to produce it as a rationale for doing nothing was weak, in my opinion.

NAMA for the rest of us is not a new concept , here is a January 2009 iteration.

http://www.thepropertypin.com/viewtopic.php?f=4&t=17948

The last post in that thread has an instructive graphic.

http://i137.photobucket.com/albums/q225/thebatoneffect/rangeofincomesofborrowers.jpg

I suppose closing a few credit unions down will sort the poorer echelons of society out with their NAMA too.

@Ceterisparibus
The article said up to E37 billion. Enforcement actions etc mean it will almost certainly come in below that, but the figure is correct as the top level that could be reached.
I too am surprised at the lack of follow up in newspapers – it got huge coverage on the radio – but I can say that when I wrote originally last November that debt forgiveness was being offered by Nama to developers it didn’t receive follow up either. I’m sure it’ll probably be the story of next year when the deals are being signed off.

There seems to be widespread unstated assumption that the distribution of wealth between the classes must be frozen as of September 2008 and that any transfers are justified, no matter how regressive, so longer as they serve this goal.

Saving the bank bonder holders is a simple transfer from society in general to what we were once allowed to term ‘the ruling class’. All the talk about pension funds etc. cannot disguise the fact that transfer is between the generality of taxpayers and the top 5% , since they own the vast bulk of the bonds in question. The details don’t matter.

Likewise we are given the plausible ‘pragmatic’ argument that most of these big mortgages will never be paid in full, so recognise reality, forgive the debts and move. Of course the unstated consequence is that people who bought houses they couldn’t afford, (disproprtionately upper middle class people) get to stay in the houses they thought they could afford, instead of trading down, which is the fairest solution. Of course the banks are still out of pocket, but the moral hazard dssapears. It is simply not true that the moral hazard cannot avoided, upper middle class people who have made themselves insolvent, can actually actually live in cheaper houses, just like members of other classes.

Petty snobbery is so pervasive in this banana republic, that even an economist like Morgan Kelly cannot conceive of a solution that involves barristers handing in the keys to their semi-D in Glenageary so as to take up something closer to their current means, say in Clonsilla.

It is not a choice between forgiving mad debts and putting children on the streets as the Sindo melodramatically pretends. It is not the responsibility of the tax-payer to provide people with the lifestyle they believed they deserved in September 2008.

@Tim
That is exactly what is going on…and it’s going on across the world..it is in the nature of human beings I suppose to expect that position is permanent and that the upper classes have done something to deserve their position. These classes will fight to their last breath to protect that status too, and when they feel the danger has passed, they will again assert their privilege on the basis of moral superiority.

The Blanket bank guarantee was a mistake, NAMA was morally abhorrent yet both were sold as unfortunate but necessary, avoiding disaster that would destroy the ordinary person…well I suppose what is actually happening to the ordinary person could be worse, but not by much. Today, the only Real benefit we can see are that the managements of the banks, the developers and the politicians got themselves a free pass to hide the collusion (politicians) write off losses (developers) or transfer losses (banks)….and they get to sit in their positions of power as if they did nothing wrong…oh Yes, and these people are so trustworthy, they can be counted on the manage a programme of debt restructuring/forgiveness/forbearance without question, when we all know that the manner in which both the guarantee and NAMA were conducted was obscure and corrupt….are we fools?

@Karl Whelan

(I am not an expert on anything.)

It seems (amirite?) there are (or have been) roughly two kinds of uncertainty about future losses at the Irish banks. One is opacity in the loan books: outsiders not knowing how badly loans are already in arrears, or what the debtors’ current capacity to repay looks like. (Not that even the banks themselves are necessarily well-informed on the financial situation of their debtors.) The other uncertainty is uncertainty about what the future course of the Irish economy will mean for the future performance of the banks’ existing loans (as well as their prospects for new business). Clearly even full insight into the banks’ books (plus a good idea of what their debtors’ accounts look like today) would not be nearly sufficient to settle that question: it’s an economic, not an accounting question, and moreover the answer may end up having as much to do with ghost estates in China as those over here.

Then writing off and forgiving clearly bad, “can’t pay, won’t pay” mortgages several months in arrears should ease the type-1, opacity-related uncertainty a bit by (let’s cheerfully assume) giving assurance that the present proportion of debt in that hopeless category is about in line with current estimates. But it can’t do much for investors’ type-2, growth-(etc.)-related uncertainty, because that’s almost wholly uncertainty about the future performance not of hopeless “can’t pay, won’t pay” debt which can be safely wiped clean precisely because everyone knows that it’s toast*, nor of safe “can pay, will pay” debt which (fingers crossed) will remain good even in a future downturn, but of the middle “may pay” debt which is current (or just about current) so far, but which could easily go into serious arrears if the debtors’ fortunes worsen (or don’t improve) and/or they choose some kind of elective default.

So if (amirite?) the Irish banks’ uncertainty problems are to a large extent a matter of type-2 uncertainty these days, then forgiving the hopeless cases will come at a low cost to the banks* but can only reduce the uncertainty that clouds them to a limited degree. A different, more generous debt-forgiveness scheme could do a lot more for that uncertainty – by targeting “may pay” debt, it would give the banks a further cushion against the consequences of “unexpected” bad economic news – but would cost public authorities a lot more: beyond a certain point you’re getting what you pay for here. Would you agree?

\* Completely glossing over for the moment that barring repossessions, etc., would indeed reduce what the banks recover.

@ Tim/Bklyn_rntr

Yes. There are always two processes going on on in Ireland. One is the official debate in the dail and the media. That’s for consumption by the small people. Hard decisions for hard times etc.

The other is the insider debate between various stakeholders and their busy lobbyists. That is all about papering over the bubble stuff, letting sleeping dogs lie, and and preserving the existing systems of privilege insofar as possible. Business as usual.

@ Anonym

It is incongruous to hear a discussion on the equity of transferring wealth between people whose ambitions, and mortgages, are in different states of repair, in circumstances where much more massive transfers have been made without any discussion whatsoever. A point made above by several commentators.

Transfer of wealth to the very powerful, it seems, does not have to be justifed on equity grounds. It’s different you see, because they are not like us. That’s just how the world works, what the economy requires. Get used to it. Creditors rule OK. Always was and always will be.

I recommend reading Yves Smith’s Econned, and Michael Hudson’s Trade Development and Foreign Debt. Then we can begin to talk about what is equitable.

@paul quigley

I’m confused – there has been a massive amount of discussion about the transfer of €64bn from Irish taxpayer to bank creditors, thanks to the bank guarantee and the ECB. The current zero-sum game exists as a result of those previous battles having been lost.

Paul quigley
And so it is in this world…to he who said there was huge discussion about the 64bn, I can only point out that this was AFTER the fact.

One of the easiest ways for the insiders to maintain their hold is to sow dissent and nothing could be more divisive than a badly thought out or executed forgiveness program. When Fred who has one three bed semi and lost his job as a plumber goes to get his debt redone, he’ll be shown a series of impossible hoops to jumpy through by some jumped up prick who is only in his job cos his dad knew the manager. But when mick goes to get full forgiveness on his 5 bed detatched and the three BTL apartments cos he can’t afford all that and the lease on the BMW too, he’ll get the wave through cos, you know, he’s a great man and he always looked after his mam.

Nama was a joke, the bank guarantee was criminal act of treason. Now the PR campaign to save the lower order insiders is in gear, we can look forward to many mean and nasty stories of woe…but be careful….people will only put up with so much….

Remember that the original Tea Party revolt in the USA didn’t start over taxes — it started over mortgage debt restructuring. Use the Google for Rick Santelli’s original rant and the HAMP fiasco to confirm.

It would be useful to have firm data on what kind of restructurings are currently taking place — covered banks vs non covered, “sub-prime” vs standard etc.

@ Bond Eoin Bond

Eoin – I am a great admirer of your postings here so I am not taking the mick when responding as follows re your comment…”but I’d be outraged if someone reckless enough to buy crap for ridiculous money, and all the while living the high life, got a bailout on the back of my taxes.”

Is’nt this exactly what we have done for bankers and developers?

The report from the Mortgage Arrears group can be found here.

Having looked through this I am more convinced than ever that a general debt forgiveness program would not work and that the problem should be handled by means of a proper consumer insolvency scheme. The group could not find any mortgage debt forgiveness schemes anywhere else in the world (except for some in the US but the landscape is completely different there due to non-recourse loans). This would imply that any such scheme in Ireland would be a new “Irish solution to an Irish problem”. Who has confidence that Irish public administration has the capacity to design a scheme from scratch that won’t lead to a raft of scenarios like Fred the plumber losing out to BMW Mick. Even worse the very design of the scheme could be subject to capture by certain interests.

On the other hand nearly all other European countries already have consumer insolvency schemes. Only Ireland, Greece and Spain don’t – what a surprise. Hence it should be possible to simply take common/best practice and adapt around the edges for Ireland. This is probably within the competence of Irish public administration. Unsustainable mortgages result in a forced sale. The shortfall becomes unsecured debt and a payment plan is put in place for 5 years, with all assets/income on the table, but with debtors living a normal lifestyle but in reduced circumstances – no Marshalsea concepts are involved. After 5 years the debtor is discharged. Those with really large shortfalls due to uncontrolled mansion buying would have a longer period before they are clear. There is no need to reinvent the wheel here.

There are a few major problems with this debt forgiveness plan

In summary I would recommend the following and there is supporting detail listed below.

• People who borrowed 90 per cent + mortgages should not be considered for the scheme – other than to be able to hand back the keys and not get another mortgage ever – the should be able to walk away and continue life as a tenant.
• Any restructuring of the loan – the amount written down needs to stay as a debt against the asset – to be realised at such time as the ownership changes – prevents profiteering at a later date – as was the scandalous case with both social housing and corporation housing during the boom.

Some possible questions which would arise.

• Take an area of Dublin where couple A and couple B bought townhouses for 400K – couple A borrowed 400K 100 per cent and couple B 250K – Couple A both employed in the financial area have lost one or both jobs and are now unable to make the monthly repayments. Couple B are working in IT and Pharma and their circumstance has not changed both properties are now selling for 180K. A debt forgiveness scheme is announced from 01.01.12 to 31.12.12 and couple A one person working can make repayments on 180K of a mortgage – debt written down and they are on the road again. 05.05.2014 e.g. – changes in corporation tax and couple B are now both unemployed and have a remaining mortgage of 160K – property value has increased and the house is now worth 250K – couple B have to sell at 250K as they cannot support the mortgage – they leave with 90K a loss of 60K on their initial investment – couple A with kids now decide to sell as they want a bigger place circumstances changed more disposable income – they walk away with 70K profit on the investment. (Which is fair? – is this realistic)
• People who are servicing mortgages now of 400K – their circumstance can change in 4-5 years from now and they are in the position of people who are currently being talked about for debt forgiveness – what happens for them in 4-5 years? In short the difference between a performing 400K loan and not is by and large overall chance.
Aside from the current retail and construction collapse – overall the economy is attracting inward investment and exports are growing – its probably not reported but to maintain the position we are in currently we will be doing well!!!!
• What about people who bought in the commuter belt and are now facing doubled transportation costs – who bails them out?
• What about people who invested their life’s worth in bank shares?
• I know a person who works in mortgage arrears in Bank of Ireland – he is calling people who are up to 10K behind in mortgage repayments and calls are being answered from Spain and Italy where they are on holidays. People are meeting him wondering what to do and they still have full Sky packages and dual gym memberships. So just have a chat with some of these people who are working for the lenders and see the real picture.

So in short albeit commendable to promote a solution please be aware that this problem is not restricted to the 30 or 50,0000 non performing mortgages – its anyone of the 400K plus mortgages which are now in negative equity and whose circumstance financilly has not changed but may change over the next 30 years!!!!!!!!!!!!

Very productive thread.

I think Debt relief scheme would be messy and would increase the losses to greater than 6bn taking other economic factors constant. However the benefits of a scheme for the wider economy would exceed the marginal losses to the banks in implementing it. It must be done carefully, minimising extra losses but it must be done.

For anyone interested the following link to some UK academic research on the question of lender policy in the context of repossession and arrears may be of interest.

http://york.academia.edu/AlisonWallace/Papers/325206/Limiting_Possessions_Managing_Mortgage_Arrears_In_a_New_Era

@ all
The reason Brian Hayes said “To introduce debt forgiveness totalling €6 billion at a time when the Government is bringing those banks out of the A&E wards would be very difficult to justify”
Was because if he said
“To introduce debt forgiveness totalling €6 billion at a time when the Government is bringing those banks out of the A&E wards would be very easy to justify” It would be true.
Also in fairness if he said the second thing it wouldn’t be a 6 billion debt forgiveness anymore. it would be a lot more. People would start getting strategic about default. Are the CB projections of 6-10 billion not based on the laws as they currently stand? If the Bankruptcy laws changed to favour individuals wouldn’t they revise these figures up?

@ Gavin

I would add regulation of land banks to your list. My understanding is that the building land around Dublin was controlled by less than 10 developers during the boom.

So you had a scenario where land was plentiful but zoned land was like gold dust and the players in the middle made windfall profits.

The whole planning process and that of how land is recategorised from agricultural to residential is a mess.

A ‘what-if?’ scenario…..

What would happen if all owner-occupier mortgages were made non-recourse loans overnight for a limited duration of, say, one month? How many people would walk away from their family homes during that month – send in their ‘jingle mail’ letter – and what impact would it have on the lenders?

Is that idea any more insane than doing QE for a third time and hoping you get a different result?

@Paul Quigley +1

It is incongruous to hear a discussion on the equity of transferring wealth between people whose ambitions, and mortgages, are in different states of repair, in circumstances where much more massive transfers have been made without any discussion whatsoever. A point made above by several commentators.

I think that many of the usual suspects are against some form of selective mortgage debt forgiveness because they instinctively side with the financial sector (or large investors) in any conflict of interest. Moral hazard is only for the weaker party.

While a lot of people here are arguing about this Scheme and that Scheme the facts on the ground are that in relation to Commercial Debt the Courts are accepting payment plans supplied by MABS (Money Advice Budgeting Service) to clear creditor balances. All of the Banks apart from AIB and B of I are negotiating deals on mortgage debt based on reality on the ground. Few of them want to get into the Courts except for the lenders who were lenders of last resort i.e. Smart, GE etc. What would speed up the process is a modern Bankruptcy Law and Voluntary Arrangement Scheme that dealt with the reality on the ground. Shatter is away with the Fairies worrying about the sanctity of the Confessional when he should deal with this problem now that is tearing peoples lives apart. Debt Forgiveness as a policy across the board will not work but make it worse. Resolution on a case by case basis within a new Legal Framework will allow both borrowers and lenders to sort the mess out.

@TRP/ Others.

There are a number of facts that need to be understood.
1. Banks have always written off debts and decided not to pursue the debtors.
2. Those ‘ not to pursue’ decisions have been made behind closed doors and if there was any criteria involved, it was the criteria of the Chief Executive and Board of the bank.
3. The IFA, for example, have operated as a very effective lobby for many years, ‘negotiating’ on behalf of often quite large and reasonably high net worth individuals.
4. The banks have now made ‘provisions’ against bad or doubtful mortgages to the tune of €6 billion.
5. This does not mean that these amounts are written off as uncollectible yet.
6. The amounts are clearly now large enough that the new AIB chairman, quite properly, wants a written criteria for dealing with this issue. He has probably asked for the existing written policy, only to be told there is none, and that such decisions were left in the hands of a mysterious group inside the bank, that cannot be located at the moment.
7. These debts are banks debts. There is no need whatever of a seperate State agency to deal with them or to pick up the tab for dealing with them.
8. There is definite need of of a State approved bank policy for dealing with these issues, and to lay these policies on the line for the banks. Otherwise people should take Morgan Kelly’s advice and join FG or Sinn Fein or whatever, and wait for the mysterious groups within banks to re-emerge for these little issues. The higher up the food chain the debtor is, the more sensitive the issue will be dealt with.
9. There is the alternative policy, quite Irish you might say, of do nothing. Then when the banks have been nursed back to the health the doctor ordered and the banks have been reprivatised, the nasty little issue of mortgage write offs, with all costs, can be dumped onto the State as per normal. Not a bank problem any more. Tough. It is now a social issue. And we will be told the ‘new pillar’ banks don’t do social issues. This is the current road we are on.

@ seafoid

‘The whole planning process and that of how land is recategorised from agricultural to residential is a mess’

It’s a rigged market for development options, a fine example of regulatory capture, a Celtic casino, and a sad monument to machine politics. God save Ireland, because the planners didn’t.