Bank losses and mortgage debt forgiveness

John, Gregory
So, banks have made general provisions. That’s fine. Now, by the reductio ad absurbdum of your positions, they can never make or realise specific provisions to the amount of these. Or do they make the general provisions, bank the recapitalized money, and then go making specific provisions and come looking for more cash from the taxpayer when these exhaust the capital they have put in?

The fact that the houses, if repossessed, would have very little value helps push a little over to the right.
Sensible reform of bankruptcy laws would help too.
A “scheme” will be misused by banks and borrowers alike so that it becomes another bank bailout through a different conduit. I’m skeptical of the motives of the papers pushing for this – especially given the recent activity regarding BOI.

Testing

@ John

“the mortgage impairment-induced injection of capital is largely irrelevant to the question of debt forgiveness.”

It’s not at all irrelevant. Brian Hayes has been saying that the banks can’t afford writedowns on the order of €6 billion. Because of the recapitalisation, that is not true. The recapitalisation is what allows us to discuss the mechanics of how debt can be written down without having to factor in further cost to the taxpayer.

“Banks have a fiduciary responsibility not to forgive debt unless it increases the value of the bank”

Nobody is asking banks to forgive debts of people who are able to pay it back (well, almost nobody). The reality is that there are lots of people who will will not be able to pay it all back. And I believe the uncertainty associated with the current extend-and-pretend approach is damaging to the Irish banks. Both potential equity investors and bond investors are spooked by the absence of a workout model that they can see and understand. It’s time to get on with it.

Reform bankruptcy laws.

Largely unchanged management teams in banks that were managed so badly they had to be nationalised -> Have to love risk to invest in those banks 😉

Good, I seem to be in scope again, several of my posts didn’t make it through (they weren’t offensive).

@ Karl

The PCAR projections (I ignore bank provisions as irrelevant) are typical aggregate models. X% of people in this catregory will do this and Y% of that category other will do that. But PCAR does not give names and addresses and amounts.

A debt forgiveness scheme as discussed in the media and by some economists involves identification of distressed categories and subsidising them now in a blanket fashion. I am unsure whether you belong to this school or are merely discussing bank accounting.

@ BW2

Pretty clearly I’m not advocating a blanket write-down of debt. I’m also not just criticising bank accounting policies. However, the accounting numbers reflect the lack of actual action on debt writedowns, which are needed on a case-by-case basis along lines I have written about a few times.

Apologies if that confuses you but that’s my position.

@ John

AIB only received all that capital because they are sitting on such substantial losses. I can’t see anything wrong with Hodgkinson’s comments. I would worry more if I thought he was denying the need for “longer-term solutions to business and homeowners under stress”.

@Karl Whelan
“Brian Hayes has been saying that the banks can’t afford writedowns on the order of €6 billion. Because of the recapitalisation, that is not true.”
Perhaps it was not true at the time the recapitalisation was calculated, perhaps it is true now. Nah, it couldn’t be that the loss figures are headed higher for the mortgage banks, could it? That Anglo wasn’t the only poop on deck?

http://www.whichwaytopay.ie/admin/ADMINNews/templates/financial-news-article.asp?articleid=294&zoneid=6
INBS mortgage book worse than expected. Who else’s is worse than expected? Ranked against what expectations?

There’s a whiff of fear around the place.

@ Philip II

David McWilliams in today’s Sindo: Therefore, you have no wealth, just an enormous debt and interest rates are likely to rise rather than fall in the years ahead (according to the ECB). Your income has fallen and your taxes, direct and indirect have risen. The only way you can pay the mortgage is if you spend less on something else. So you stop buying things you used to buy.

Read the article, McWilliams is definitely advocating wiping out negative equity even if it is payable. Comrade Gurdiev has spoken similarly.

@ Phillip II

per you IT article…

“Two main problems exist: first, hundreds of thousands of people now find themselves in negative equity, where the value of their primary residence is less than the loan secured on it; and second, more than 100,000 also find themselves in difficulty paying the interest costs on their personal home loans.”

“If house prices fall by 55 per cent from the peak, half of buyers in 2004 and a quarter of those in 2003 would enter negative equity and 200,000 households would face negative equity of more than €50,000 and there would more than likely be 60,000 households in arrears.”

“Individual households in debt do not spend, they do not invest: they attempt to pay down debt when and where they can and they hoard cash. Arrears and negative equity lead to reduced entrepreneurship in the long run, as distressed households face both less wealth against which to borrow and more uncertainty about their income and safety-net savings.”

“These cumulative economic effects can be tackled through a debt forgiveness mechanism. Banks must allow private home borrowers to revert to pre-crisis debt burdens.”

“For persons in negative equity, or where the loan is so large that it is becoming distressed, we suggest some degree of individual debt forgiveness and restructuring.”

Does this not suggest a jubilee at least somewhat on the basis of negative equity as well as on arrears??

@BWII

Thanks for that, but I’m at a loss how you apply this concept where there is no bankruptcy (9 in 2005, 30 in 2010 doesn’t count), where there is no repossession (434 in 12 months doesn’t count), where there is a code of practice for arrears and where the pillar banks are supposedly not forgiving debt. There is no “to hell with it option” is there?

Apologies, I am probably being slow, but I don’t understand what John has written

“Second, the concept of the debt Laffer curve is a useful tool for thinking about the potential trade off. If we are to the right of the peak of the curve, so that reducing the debt actually increases the expected value of repayment, then the case for forgiveness is strong – indeed banks would not need much prompting. This is most likely to be the case where banks would suffer large losses if borrowers walk away or if the bank pursues repossession. “

@ Gavin

“and all people who took those loans should have some kind of relief.”

as previously described on another ‘debt forgivesness’ thread, i took out a rational, affordable, well considered mortgage in 2005 as a FTB, one which i can easily afford with my nefarious banker salary. Why on earth should i get some form of relief just ‘cos im in negative equity?

Can’t pay vs won’t pay vs ‘is it fair that i pay’ arguments here, and the money tree is pretty much tapped out already.

@ BW2

“somewhat more damage is done when an RTE commentator has similarly misinterpreted your argument. From this point on I am putting you down as not a true debt forgiver in the McWilliam/Gurdiev/Kelly school.”

(a) Morgan Kelly did not call for a “blanket debt forgiveness” scheme and I don’t know why the media kept saying that he did. He spoke to the Indo about this yesterday.

http://www.independent.ie/national-news/families-in-modern-ireland-skip-food-to-pay-the-mortgage-2859883.html

“Responding directly to the claim made last week by the Tanaiste Eamon Gilmore, amongst others, that he had called for a “blanket write-off of mortgage debt”, Prof Kelly stated that the “purpose of debt forgiveness is not to eliminate negative equity, but to deal with the risk of people defaulting on smaller mortgages and losing their family homes”.”

(b) If the RTE person did say “since the capital has already been put in we should go straight to debt forgiveness along the levels of the PCAR stress tests, why wait?”

then that’s a simplification of what I’ve said (I’m not advocating going straight to writing down the exact amount from the PCAR tests but rather putting procedures in place to allow case-by-case writedowns) but I think captures a key point — writedowns along the lines of the PCAR scenarios won’t require additional taxpayer money beyond that already put in.

Karl
Alas, for they often make v useful posts , brian woods2 and Eoin bond seem to be somewhat consumed with hatred, if that’s not too strong a word, for certain Irish commentators. Thus, they seem to me to be unable to go beyond their own views on people to debate the merits of a proposal, or as you show here , the facts , when said proposals come from a select few.
Most of us , me over 40years, have worked with people we dislike. Sometimes they are right in their proposals. And we have to suck that up.
There’s a massive crisis on mortgage repayments present and looming. Let’s look at any and all arguments on their merits not on how much we do or don’t like the person presenting the argument.

And, Eoin, I’m not Spartacus…

@ Karl

The bank provisioning/accounting thing is ludicrous so I am ignoring that aspect.

I am not sure but that the banks are already behaving exactly as you are advocating. They are presumably on a daily basis micro managing people with mortgage distress. Maybe they are even implicitly enacting Morgan Kelly’s recommendation.

The debate has however gone into overdrive, on the back of McWilliams, Gurdiev etc. and the media definitely think that some form of blanket one off forgiveness can be academically justified. I am glad that you are not in that camp.

@ Philip II

Consumed with hatred.

A bit OTT. I have to admit that McWilliam in particular does get up my nose. He is so full of his own importance and he has absolutely no qualms in headlining ideas which he must know are nonsense.

Wasn’t the capital injected due to losses, realised and projected? The effects you outline are consequences of that capital injection.
If we need to hoard the capital, as I agree we do to keep the banks at all afloat, then we have a problem with how to deal with the Losses tht WILL come. How do we fund them? Wilbur? Joe taxpayer?

Second, the concept of the debt Laffer curve is a useful tool for thinking about the potential trade off. If we are to the right of the peak of the curve, so that reducing the debt actually increases the expected value of repayment, then the case for forgiveness is strong – indeed banks would not need much prompting.

What? What is this? Laffer curves?! This is complete nonsense.

You do realise that Laffer curves were dreamed up by Dick Cheney and Donald Rumsfeld in 1974. I’m not making this up. The whole idea has no empirical validity whatsoever. In fact, there’s no accepted form or equation for such a curve. The concept is “not even wrong”. They are about as valid a predicting tool as horoscopes.

This is just unbelievable. We might as well be calling Psychic Suzy and asking for her opinion on the debt forgiveness schemes.

Surely the difficulty here is that if you have a policy of debt forgiveness, where do you draw the line? Two people on the same street with the same mortgage (common on new estates) could have completely different circumstances- one having blown the Tiger on decking, cars and holidays, the other built up savings which they are now having to dip into.

Is it fair the saver bails out the spender?

The banks have to address the individual cases (and each household is different) fairly and yes there should be interest only payments with banks possibly taking a share of ownership too. But a blanket rule would be inequitable and encourage people able to pay to decide not to.

@Karl Whelan

Pretending things are better than they are is not a good idea — it didn’t serve us too well in 2008/2009.

Is there nothing to be said for saying another mass?

Maybe it’s time to take the zombies behind the woodshed?

@ BEB

“Btw, if i use your real name this won’t get posted. Bizarre policy. You are clearly a subject of controversy.”

Bizarre policy — really?

Would you like people using your real name on this blog when replying to you? If not, then perhaps you might respect other people’s privacy.

Little bit of objectivity lads! Debt is a real bad entity – it grows exponentially! That’s the predicament – especially if you income is going in the opposite direction. Your in a silo; concrete boots; water rising. “Its the ripple that drowns you”.

The Biblical response is the Jubillee. Got a problem with that? I do not. Hold your nose and DO IT. There are consequences. But they do not grow exponentially.

The property asset issue is actually a virtuality – we had a 325% Ponzi bubble in res property. You cannot, in any circumstances deal with this unless there is a concommitant increase in incomes – which is a tad unlikely, for now. Though I would not rule this route out. Hence negative equity is with us for a while yet. Again, you cannot deal with this except you actually write-down valuations. All else is Hopium smoking.

The legislators need to act, but that is unlikely. Gilmore should be careful. He was warned three years ago, in no uncertain terms, that a res property mortgage predicament was brewing. Stuck head in clouds. Burton’s RTE contribution to-day was political optics – though I did get some sense that she saw trouble, but was being real careful to avoid making any comment that would leave her exposed.

This debt matter has to be tackled by the Dáil – on an all-party basis. Its simply too toxic.

@OMF: “What? What is this? Laffer curves?! This is complete nonsense.”

Thank you!

Brian Snr.

@ B_E_B

Please, please tell us who Philip II is. Use the following code: A-1,B-2,C-3 etc.

Brian woods second
Isn’t that “who you think” Philip second is? Who was brian wood the first?

@Brian Woods Snr
“The legislators need to act, but that is unlikely. Gilmore should be careful. He was warned three years ago, in no uncertain terms, that a res property mortgage predicament was brewing. Stuck head in clouds. Burton’s RTE contribution to-day was political optics – though I did get some sense that she saw trouble, but was being real careful to avoid making any comment that would leave her exposed.”
I find it facinating that the Labour Party (Gilmore) are opposed to debt forgiveness when historically the other party were generally regarded as representing the landed classes in society and could be classed as right wing whose natural constituency was maintaining the status quo.

@J McHale

“But for the issue at hand, it seems to me it doesn’t matter that much if formal provisions are made or a capital buffer is put in place to allow for potential mortgage losses. As I interpret Greg, the important point is that the mortgage impairment-induced injection of capital is largely irrelevant to the question of debt forgiveness. Banks have a fiduciary responsibility not to forgive debt unless it increases the value of the bank, and I don’t think this is likely under the current regime”

Mortgage debt relief is controversial and being muddied further as the discussion gathers pace. It can be helpful to revert to ethical principles to clarify things a bit.
From the perspective of borrowers in difficulty it matters little whether relief comes via the banks or the State. There are contracts whether tacit or explicit between the borrow and each of these parties. Joan Burton on Radio1 today seems to be saying that dealing with the problem is a matter for the banks alone. That is ethically wrong.
The majority of borrowers in difficulty paid substantial stamp duties directly to the State, in some cases at a rate of 9% which is very high in EU terms. This tax head was substantial and was used to artificially depress other forms of taxation, benefitting all taxpayers. The State however has failed in its duty of care to those borrowers (and indeed all its citizens) in various ways, and has engaged in explicit deception about the housing bubble and the economic outlook.
In view of this, it seems to be that there is a straightforward moral obligation on the State to make reparation to at least some types of distressed borrowers up to the value of the duties they paid. Whether this is done by mandating the banks to do so, or by manipulating MIRAS, or whatever is for the state to decide. But it must be done, and the State has a moral responsibility in this regard.

@Hogan/Eureka

“I don’t think it is a good idea for banks to hoard capital. It is precisely, in my view, the opposite of what the markets want to see. They want to see banks that have come clean about their losses….”

Cliff Taylor in the Business Posts today suggests that the Irish Banks have been buying up Irish Bonds and may have helped getting yields down. Liam Halligan also raises this issue in an article on why Bernake did not indicate QE3 was on the way in the US. He suggests they are investing in everything bar the real economy…
http://www.telegraph.co.uk/finance/comment/8727080/Ben-Bernanke-realised-printing-yet-more-money-would-look-desperate.html

So it seems nothing has changed.

@Karl Whelan

“My understanding is that Central Bank are unhappy with the slow pace of write-downs, e.g.”

Any thoughts as to why they might be dragging their feet? I would be interested in your views. Is it anything to do with stringing out tax write-offs on losses or being able to ‘present’ accounts in a certain way… or …. there must be something in it for them or they wouldn’t be doing it (I’m no accounting expert but I do know something about behaviours!).

I spent the afternoon at the Curragh so catching up on this thread is a useful relaxant after my unrewarding financial investments in the ring.

@OMF +1
Don’t you know that economics is a social science only but economists, in an attempt to give it an air of intellectual rigour and a simulacrum of verisimilitude, invent esoteric concepts such as the ‘Laffer Curve’? Better called the ‘Laughter Curve’ in my opinion.

On a separate note, but related to an earlier post on this thread, Anglo Irish Bank jobs are actually some of the safest jobs in the world (speaking as one with ‘contacts’ with that bank). The Government has invested so much money in it that it has to continually pretend that it is viable. Staff have not suffered any pay cuts and, indeed, have even got pay rises since the crisis came. Those who are made redundant will get very attractive terms.

@ Gregory Connor

‘Uxorious’ is the perfect adjective to describe your actions this afternoon.

Just trying to add to the vocabulary on this site.

@Bunbury
I was wondering what all those guys were doing in Anglo. As most of their clients are in receivership I suppose they talk to the receivers every day for the purpose of updates and thereby keep the accountancy practices going at 500+ per hour.

My LaGarde link is beginning to make a bit more sense:
http://www.telegraph.co.uk/finance/financialcrisis/8721151/Market-crash-could-hit-within-weeks-warn-bankers.html
It seems that there could be another major crisis in the offing.

It is apparently about liquidity. Is this really going to happen – surely the ECB will ensure liquidity. (sorry I can’t link it to this thread properly other than to say that maybe economists should be paying a bit more attention to this than to puerile name-calling).

@ All

Great thread. Thanks for all contributions. What are the chances of any of this getting communicated in the media?

@ Karl
Well, at least you didn’t have to watch Donegal and Dublin …
+10000

@ Sarah
Good job.
But – why not bankruptcy law reform?

@Bond Eoin Bond @12:28

You know they say the greatest trick the celebrity economist ever pulled was convincing the world he didn’t post.

Lets try and keep a space for pen names.

@Eureka

That got a fair mention, and I think Emmet, Seamus and Brendan, agreed it was the logical outcome. Actually on the previous night’s show Charlie Flanagan said that legislation was due by Christmas. I really think this is the only sensible route and the one that will ultimately be rolled-out.

No surprises from Trichet:

http://www.independent.co.uk/news/business/news/trichet-urges-eu-nations-to-work-together-2345671.html

Btw Eoin, ironically you have screwed-up by making a basic, fundamental error. You have carelessly assumed that 3 is the same thing as 2. Embarrassed, or are you going to try to persuade us that you got it right.

@Karl

You still seem to be persisting with the viewpoint that the recap money given to the banks is a sunk cost that cannot be recovered, hence a debt forgiveness scheme would be without “further cost to the taxpayer”.

On the matter of recouping taxpayer investment Hodgkinson said:

Mr Hodgkinson said the “vast bulk” of the €13 billion to be injected in the fifth bailout of the banking sector would be repaid to the State as AIB slimmed down.

Now I’m sure he’s being a little optimistic here, to say the least, but the principle is clear – the net cost to the taxpayer may be less (and maybe even significantly less) than the gross recap amount that has been injected. Furthermore the recap amount was deliberately high – as viewed by the Central Bank in the stress test report it covers “extreme and improbable” losses. So I agree with John McHale’s view that

the important point is that the mortgage impairment-induced injection of capital is largely irrelevant to the question of debt forgiveness

What matters is the long-term net cost, not the gross amount that was added to satisfy “the markets” and the ECB etc.

Taking a step back and flipping the argument around – why would a personal insolvency scheme (modelled on those that already exist in most European countries) not be an adequate solution to the problem? In effect it would turn an existing loan into a combination of a non-recourse loan plus a deficiency judgement to be paid over 5 years, say, taking income and assets into account. I see a number of benefits to this approach:

– It removes the decision making power from the banks themselves, otherwise they are in the schizophrenic situation of being required to implement a forgiveness scheme on one hand, and to maximize shareholder/taxpayer value on the other.
– The process would be more transparent. I am highly sceptical of a Joan Burton-style approach that banks should “engage” with customers (behind closed doors). As mentioned above there is huge scope for the well-connected barrister to do better than Joe the plumber.
– The process is independent of the type of bank (i.e. fully state-owned, partially state owned, or not state owned). All three classes of bank have significant amounts of mortgages in Ireland.

Why would such an approach, i.e. one based on a consumer insolvency scheme, not be adequate?

@ Shay, Mr Bond, Bryan G, and All.

Shay, I was shocked, shocked I tell you to see Mr Bond put up the numbers. So shocked I got a pen and paper to work it out. And then I was even more shocked.

But you’re right I think – where would we be without the Drapier’s Letter?

Overall, this one is set to run and run. From today’s ‘Irish Times’.

“A NEW agency with legal powers to enforce debt restructuring agreements between banks and struggling home owners is being considered by the Government to deal with the rise in distressed mortgages.

“The Cabinet is awaiting a report from an expert group, which is due by the end of next month, before making any major decisions in this area.

“However, a high-level Government source told The Irish Times yesterday it would avoid any measures “on such a scale that people feel they can abandon their mortgages”.

“Government sources also stressed yesterday that the banks had been “over-capitalised” last March “on the basis of a very severe stress test”.

“This was done so that the banks would have “a significant sum” for dealing with mortgage default.

“Monitoring would have to be carried out to ensure there was a common approach by the banks, sources added.

“They pointed out there were difficulties with debt forgiveness because taxpayers could take the view that they should not be expected to bear the burden, so it would have to be on a “case-by-case” basis.

“Central Bank figures out this morning will show that about 55,000 home loans, or 7 per cent of the market, were in arrears at the end of June.”

I’m afraid this still reads very confused.

Any offers on who this “expert group” is how they are going about their business?

http://www.irishtimes.com/newspaper/frontpage/2011/0829/1224303145680.html

@ Mr Bond

“Why on earth should i get some form of relief just ‘cos im in negative equity?”

In practice I expect that whatever comes – if it does come – will focus on people in financial distress, and if distress can be relieved, fair enough.

The point I was trying to make though, is not to do with negative equity, but more a consumer propection one: that anyone taking out a mortgage in a rigged market entering into a ponzi phase could be considered equally.

After that I do find it complex. There’s the issue of whether any and all of 6bn of taxpayers money is better off in the banks, being used to provide relief which may have benefits in the wider economy, sooner or later being passed back from the banks to the state to use in some other, hopefully productive way.

Actually, there’s a question. What happens to this ‘significant sum’ for dealing with mortgage default, if the mortgages don’t (fully) default?

Gavin kostik
“Actually, there’s a question. What happens to this ’significant sum’ for dealing with mortgage default, if the mortgages don’t (fully) default?”
That is exactly the question. Some seem to see capital as some drsgons horde never to be touched. Other see it as a buffer against loss. We have losses. W have a buffer….

@ Gavin Kostik

In the case of AIB something like 6Bn was supplied by way of “capital contribution” i.e. as a gift. This makes it legally easy for AIB to give the 6Bn back whence it came if it transpires that it does not after all need the money.

@ B_E_B

I know the guy, thanks.

“A NEW agency with legal powers….”

A familiar response to the latest crisis emerges

Step 1: Create a new agency, give them legal powers
Step 2: Employ cronies to run agency.
Step 3: ???
Step 4: Profit.

This is the model that has been used for years with ‘regulators’ such as for the financial industry, taxi industry, security industry etc etc etc…. and being expanded for with ever more agencies such as NAMA, credit review office etc.
The net effect of all these agencies is to keep the system running for the benefit of the incumbents as the regulators are ‘captured’ by the biggest players… and use their powers to block disruptive competition.

More bureaucrats, adding more cost which can be creamed off by the ‘professionals’ employed…. and more opportunities for corruption

Instead of a bankrupt state shrinking and prioritizing on maintaining essential services, the state is expanding to create roles for the connected…. an Irish version of communism

@shaun byrne

I agree with the suggestion. To me it makes a lot more sense than many of the ‘schemes’ which have been proposed and it also has the added effect of changing the long term rent v buy argument which many (particularly the lending banks) seem to have buried their head wanting to discuss partly because it demands a little bit of maths – which given the varied arguments in relation to this matter has us once again failing to understand the fundamental value of such an argument.

The rent v buy argument in a non recourse situation makes lending banks move away from ‘ability to repay models’ and more importantly has them valuing houses on a pure rental yield metric. The current model mixes this ‘ability to repay’ i.e. income driven techniques and credit supply to derive a house price – this sounds nonsense and as a model is nonsense.

In a non recourse situation house buyers would suddenly change their focus to the merits of one over the other. Equally for the last number of years this rent v buy test has been absent from the banks lending models for owner occupiers and in my view this has been the number one reason why the State is in the dire position it find itself today.

I disagree with Joan Burton and others saying that this matter can be solved solely by putting pressure on the banks to deal with it, whether that be throuh hcodes of conduct or otherwise.

People are entitled to a proper legal framework for dealing with mortgage debt. That way, they have some control over their situation and can bring matters to a head, even if it means losing their home and being left with a residual debt.

The idea that it will be left to the bureaucracy of the banks to deal with matters and that individual borrowers whose cases are neglected or mishandled have no real comeback is not good enough when people are suffering huge mental and financial pressure. Other countries have proper insolvency procedures to deal with these matters.

It is very inhumane not to have such a system. For somebody who pays a great amount of lip-service to the concerns of ordinary people, it is very disappointing that Minister Burton would leave borrowers at the hands of bank bureaucracies and their endless coffee breaks.

If there is a legal mechanism then banks will deal with matters more quickly and it will not be just a case of those who shout loudest or cause the most grief getting dealt with first. The banks all got their finger out and reviewed loans quickly when they thought they were going to lose a fortune on NAMA.

Something equivalent must be put in place to “inspire” banks to play ball on smaller personal insolvencies involving secured debt. If the bank do not put forward their view of the person’s income and financial prospects then the borrower’s version and an examiner’s decision should be final.

I think the capital provision argument is a red herring. The issue is how do banks value loans and what they can be sold for. If a loan is non-performing and the security is inadequate then it must be restructured so that it is sustainable over 25 years or so and so that it bears relation to the value of the security.

The banks want to revalue their loans themselves but to reserve the right to claim the rest of the debt later. It is like a landlord who says you can pay less rent but you will still owe the unpaid portion. It is aggressive, oppressive, duress-based and economically unhealthy.

Some people like Brendan Burgess thinks banks are doing people a favour by allowing them to defer interest payments. They are doing them no favours. They are reserving the right to cripple people for the rest of their lives instead of giving them a deal that most banks would consider commercially viable.

Borrowers need to get over their mental block about hanging onto their home. Just as the banks want to reserve the right to financially cripple them (and thereby do damage to the national economy) for the rest of their natural lives, many borrowers want to default on their mortgages and hold onto their houses. It is this greed, ego, and lack of realism and perspective that is enabling banks to screw them and their children to the wall. The best example of this is a man so reckless that he will pay his dole towards a mortgage while his children go hungry.

Zhou, The houses have been built………. all that is going on is arguing who pays the bill…. nobody need die sleeping at the side of the road this winter, theres plenty of empty houses around…..

I’d suggest rather than waste yet more money paying people to mediate on debts, there are much cheaper and simpler solutions.
Changing the tax laws so unoccupied houses attract a higher tax (can be framed so the owners are liable. (banks for possessed, developers for unsold)
Reduce landlords dole aka rent allowance, spend the savings on energy/utility/food vouchers
or even the nuclear option change laws on squatters rights … use it or lose it….

So there u go… 3 low cost suggestions which disrupt the system, resolve the issue of providing shelter…. without any need for more bureaucrats.

Anyways, the tipping point will happen soon enough when it will become fashionable to throw the keys back. the shame is some will go cold and hungry this winter in an attempt to sustain the unsustainable……….

it’s sad but understandable as people are mimicking the official response to this depression.

oh that was four. I always go on longer than I intended..

I love these acronyms

The FMP report tells us that AIB will incur losses of €3.1 billion on its Irish residential mortgages in the base case and €4.8 billion in a stress case.

So AIB has a projected loss of €3.1 billion- well FMePink !

Consuming without investment – isn’t that the Keynesian dream? Why blame Friedman?

Shaun Byrne’s idea of resetting all (PPR only, say taken out between certain years presumably) mortgages to non recourse is an interesting one. It seems a fair balance to offset the ponzi scheme run by FF – stoke up the market to release profits to their builder/developer supporters, use public funds especially stamp duty to buy elections, denude the tax system etc.

You can argue till the cows come home about what’s fair and how you measure it but there’s no doubt that an element of the price paid by anyone who bought their house in the noughties was rigged. How come we never hear of banks or estate agents being sued or challenged on the valuations they approved before mortgage drawdown ? did the people who did these valuations have professional indemnity insurance ? How about new beginning take some kind of class action suit to force the banks to fess up to their own part in the mess & adjust the outstanding principal. They do it every day for so called developers, I know I did consulting work for a non covered institution around loan collateral.

@ BEB\Bryan G

“you think that the capital should be pro-actively ‘used’ to write down debt in the hope that this fresh start will get the economy going again, while myself and others believe that, having endangered the solvency of the state in recapitalising the banks, this capital should be ‘protected’ at all costs. A fair summary? We don’t think it should “never be used”, we just don’t think it should be proactively burnt through either.”

An alternative summary — I’m in favour of recognising the reality that many of the mortgages are unsustainable and designing fair and efficient procedures for recognising this, keeping in mind that the banks have been recapitalised partly on the basis of large mortgage losses. You’re in favour of pretending their isn’t a problem because you want to protect capital.

To be honest, as of a few months ago, I didn’t even think the second camp existed. I thought there was a consensus that there were large losses on the Irish mortgage book, that they would need to be recognised, and that the banks had to be capitalised to deal with this.

I’m a bit depressed to see people disagreeing with this but hopeful on the basis that you guys are not running the government or the Central Bank.

@Dom K
Yes there was a strange synthesis of Keynesian trained economists exposed to monetarist thinking during the late 60s & 70s.

Paul Craig Roberts for instance was essentially a Keynesian who belived consumption was being held up by Goverment monopolies & high taxes.
But nearly any type of spending seems to work when you have a oil glut – me thinks the conservation measures of the 70s/80s/ ( especially oil power stations shutting down) combined with higher oil production created the conditions for higher spending – but this was expressed in higher debt levels which both producers of oil and manufactered goods held chiefly outside America
Combine Keynesian consumption levels with a monetarist lack of investment in the commons , with a lack of a final Austrian payment mechanism and you get the mess of today.

First off, who is this Government source?

http://www.irishtimes.com/newspaper/breaking/2011/0829/breaking3.htm

Government source also stressed yesterday that the banks had been “over-capitalised” last March “on the basis of a very severe stress test”.
This was done so that the banks would have “a significant sum” for dealing with mortgage default.

It was done to convince investors that if the worst happened, it could cover it. Saying it was done, so it’s ok to allow/help the worst to happen is a bit different.

Though I’m reassured by his/hers “case-by-case” basis comment. I can’t see any other way to do it.

Joan Brutons comment “they also have to concentrate on reaching out to the people that they lent to in the boom”. How is this suppose to work, banks trying to actively find people to give mortgage haircuts to on one side and maximize profits for their shareholders-‘the taxpayer’ on the other.

Enter the idea for a new agency. A referee. In an ideal world it could work. In a politicians wanting to be seen to ‘do something’ – ‘anything’ world it’s at a disadvantage.

I am pro the lets sort this out approach, but we have to thread softly. NAMA followed a crystallize losses fast approach, if this is done improperly and we follow another crystallize losses fast approach, chewing up lumps of reserve capital, where does that leave us with the current World/European bank drop.

As for the bankruptcy legislation, there’s no reason that can’t be sorted out asap.

@ Sahra C
Holiday, my other half is from there. Lovely country, containing lots and lots of trees and relatively quaint political and social problems.

@Zhou,

“Debt forgiveness does not necessarily involve allowing somebody to stay in their home. It may mean kicking them out, selling the house and agreeing a reduced residual loan burden.”

Okay, I hadn’t heard of this kind of option being on the table, but again, maybe I am missing details. If that is so, then it just sounds like the kind of debt negotiation that banks will want to be doing anyway. Why does the govt need to be involved in this?

But to me, most of the talk was about keeping people in their homes, which was my point about the housing market.

Karl writes:

“An alternative summary — I’m in favour of recognising the reality that many of the mortgages are unsustainable and designing fair and efficient procedures for recognising this, keeping in mind that the banks have been recapitalised partly on the basis of large mortgage losses. You’re in favour of pretending their isn’t a problem because you want to protect capital.

To be honest, as of a few months ago, I didn’t even think the second camp existed. I thought there was a consensus that there were large losses on the Irish mortgage book, that they would need to be recognised, and that the banks had to be capitalised to deal with this.

I’m a bit depressed to see people disagreeing with this but hopeful on the basis that you guys are not running the government or the Central Bank.”

I think that is a bit harsh as a summary of what is has been argued on this thread. It might be useful to sum up the purpose of the post in light of the useful discussion.

1. While clearly related, the processes of loss recognition/stress testing and debt forgiveness are distinct.

2. The concept of the debt Laffer curve is a useful device of understanding the implications of debt foregiveness for the size of the expected bank losses. Putting aside incentive effects, Karl’s position makes most sense in the context of being on a flat portion of the debt Laffer curve. In this case, debt forgiveness in line with accounting loss recognition does not affect expected bank losses; reality is being recognised. To the extent that debt foregiveness benefits the individuals concerned, there are benefits but no bank-loss related costs (again putting incentive effects aside). The concern is that debt foregiveness does affect expected bank losses (e.g. option value is being given up in the case where someone’s circumstances improves). We then face a trade off in terms the costs of additonal expected bank losses and the benefits to the individuals and the economy more generally of reduced debt burdens. Given the damage done by bank losses to the Irish economy, I don’t see how this aspect can be neglected.

3. There is a worry about a situation where banks are given multiple objectives, including broader social/economic goals associated with debt forgiveness. I think it is better that banks — including State-owned banks — have a clear value-maximisation (i.e. long-term profits) objective, especially where they are well capitalised. From a policy perspective, it is better to work on the constraints within which banks must pursue this objective, including the personal bankruptcy framework, forbearance rules, subsidies for workouts, etc.

Crushing debt burdens are a legitimate policy concern. But we cannot afford to take our eye off the potential implications for bank losses.

Gregory,

I think it is too late -the feline is already out of the sack. An increasing percentage of punter know that their is limited upside in keeping a good credit record since there is no credit and they won’t be borrowing again for the forseeable future. Bank managers are probably playing the extend and pretend game as well since they are now bureaucrats with not profit motive ….in AIB anyway so they routinely wave through forebearance requests. There is no sanction over a strategic default since you won’t lose your home.

Why anybody would pay their mortgage now I don’t know since there is a deal to be cut. I will be off to my manager to discuss going interest only now. Next conversation after that will be to move the few bob I have offshore so that there is no prospect of being haircut.

@ Grumpy

i think you’re right. This initially started out with some people calling for “blanket relief for negative equity”, and has only in the last few days taken on a more nuanced “use of capital/losses already provisioned to allow for appropriate write-downs” argument. While the like of Karl have been consistent and genuine in that position, there’s a fair few bandwagon members who have actually suggested something far more wide-ranging and aggressive when left to their own devices.

@Karl

I note that whenever faced with questioning on your “no further cost to the taxpayer” position, or acknowledging the trade-off between different bank debt management policies and their corresponding costs to the taxpayer, you simply run away and ignore the issue.

“You’re in favour of pretending their isn’t a problem because you want to protect capital.”

This is a bizarre statement – did you actually read my post? For a start my concern is not to “protect capital” per se but to protect taxpayer funds, but more significantly I did propose a solution to the problem and asked why this would not be adequate. Again this question was simply ignored.

So again – this time slightly expanded (I won’t repeat what I wrote above or in other posts such as this one on the essential elements of such an insolvency scheme.

– Use as criteria for an “unsustainable mortgage” those defined by the Mortgage Arrears and Personal Debt Group
– If a mortgage is deemed unsustainable the borrower enters a personal insolvency process, based on those that already exist in most European countries, as described in my other posts.

Why would such an approach not be adequate?

@Jagdip

Important question. Though it is probably naive to think that the existing levels of net debt will not affect the design of the personal bankruptcy regime, such long-term legislation should put the current balance sheet situation aside as much as possible, hopefully instead drawing on best international practice for a steady state regime. While again it is inevitable the balance between debtor and creditor will be a central design focus, I think another (debtor-focused) trade off is just as important: the benefits of a humane regime that allows people the chance of a fresh start versus the costs of a more lenient regime in terms of everyone’s creditworthiness.

@gregory – perhaps the correct term is “earned debt forgiveness”. “Improved resolution” is a term suited to banks and not their indebted consumer borrowers.
Given numbers on financially vulnerable consumers with mutiple lender relationships it’s been obvious for some time that some form of national debt management programme was needed. One that sits between debtor and creditor.

The proper design of any programme should allow its manager to objectively assess repayment capacity, weed out the free-riders and establish a settlement agreement with mutiple-lenders. And probably monitor and administer the agreements which could include a payment system.

In the case of unsecured debt it’s relatively straightforward – in the case of OO/PDH mortgage debt the manager should have a range of options at their disposal, similarly with BTL debts.

This process cannot be left with the principal lender (in most cases the mortgage holder) given the inherent conflicts and lack of trust in banking.

I am of the view that in the absence of a proper debt management process which is an intergal component of a modern personal insolvency regime, strategic default risk is amplified.

@donogh

The ‘worst’ presumably being that those who overcharged for houses and are suffocating with debts which bear no relationship to the current asset prices, primarily as a result of the excessive supply of which they had zero contol over and which is sitting idle and financied by the banks, finally stop paying their mortgages?

Explain to me why this would be such as bad thing?