Mortgage Arrears: June 2011

The latest quarterly report on mortgage arrears from the Central Bank is available here. The report shows the fastest increase yet in the fraction of mortgages that are more than 90 days in arrears. This fraction rose from 6.3 percent in March to 7.2 percent in June, compared with increases of about six tenths of a percentage point in the previous quarters.

55,763 mortgage accounts have been in arrears for more than 90 days, of which 40,040 are in arrears over 180 days. In addition, 69,837 mortgages have been restructured with 39,395 mortgages that have been restructured but which are classified as performing and not in arrears and 30,442 again in arrears. These figures raise questions about whether the type of light restructurings that the Irish banks have been applying to distressed mortgages are sufficient to deal with the problem.

108 thoughts on “Mortgage Arrears: June 2011”

  1. @Karl

    “These figures raise questions about whether the type of light restructurings that the Irish banks have been applying to distressed mortgages are sufficient to deal with the problem.”

    I wonder how many of these restructurings have involved forcing vulnerable lenders off tracker mortgages to standard variable rate mortgages?

  2. I wonder how many people are allowing their mortgages to become delinquent deliberately in order to be first in the queue for restructuring and forgiveness.

    I wonder how many of these delinquent mortgages are on investment properties.

  3. Joan Burton T.D., Minister for Social Protection today (28th August 2011) outlined supports of €542m available under the Department’s Mortgage Interest and Rent Supplement Schemes in 2011.

    97,260 people are in receipt of rent supplement.

    The Mortgage Interest Supplement Scheme aims to provide short term support to help people repay interest on their mortgage on their home.

    The number of families receiving help under the scheme has increased by almost 340% in the last three years.

    There are currently 18,679 households benefiting from the Mortgage Interest Scheme and the Department has provided €77.2m for 2011 an increase of almost €12m from 2010.

  4. If 30,442 of 69,837 are in arrears again then it does not look like realistic terms are being agreed.

    One would like some transparency on restructurings.

    The figure of 69,837 seems astronomically high. There is no anecdotal evidence to support this. I suspect that deferring interest or putting people on interest only is being classed as “restructuring”. This is not real restructuring in the sense of reducing capital and agreeing a new term with payments according to a new amortisation schedule.

    This flexible use of the word “restructuring” would fit in with the banks practice of saying they are doing one thing (e.g. lending) and doing the opposite (e.g. not lending).

    If an when real restructuring becomes commonplace, then publishing metrics would allow investors and policy makers to assess whether restructurings would be effective.

    It would also give borrowers an idea of what they can expect and would introoduce some fairness. It would be socially beneficial if borrowers were treated fairly as compared with how other borrowers are treated by the same institution.

  5. @KW

    As you put it on previous thread – ‘Time to get on with it’ i.e. sorting all those in impossible positions, similar to Morgan Kelly’s pragmatism.
    To start, reasonable legislation on personal bankruptcy/insolvency for those so far under water that they are effectively drowned. Law mediates the relationship between the dominant systems of Money and Power … and the Lifeworlds of people. Thus far, Law has been solely on the side of Money/Power …… not a sinlge big boy/gal in influential position in either dominant system has been sacked over the past few yrs …. Law ensures that these cowboys are well rewarded and protected … Tab sent to Joe and Joan Citizen ….

    Having;Doing/Making; Being

    On this troika we are suffering from a massive Having/Property Fetish …… the real economy is about Doing/Making i.e. capital accumulation and enhancing welfare for citizens; on Being_we don’t appear to have a clue …

  6. Karl I think you killed the Central Bank website, it’s down at the moment.

    But, we have good information in the the report on those loans now going through the court system–just over 10,000 at various stages, and those would correlate to the homeowners in >180 day arrears quite well.

    I agree with Zhou, the ‘restructuring’ label is a bit misleading, but any information in this area is to be welcomed.

  7. Christine Lagarde, Head of the IMF, has called for more reductions in principal for US householders. If its good enough for the yanks…

    http://www.imf.org/external/np/speeches/2011/082711.htm

    “Micro-level policy actions to relieve balance sheet pressures—felt by households, banks, and governments—are equally important. We must get to the root of the problem. Without this, we will endure a painful and drawn-out adjustment process. Structural reforms will surely help boost productivity and growth over time, but we should take care not to weaken demand in the short term.
    ….
    Second—halting the downward spiral of foreclosures, falling house prices and deteriorating household spending. This could involve more aggressive principal reduction programs for homeowners, stronger intervention by the government housing finance agencies, or steps to help homeowners take advantage of the low interest rate environment.””

  8. The further deterioration in mortgage arrears are largely as expected and the acceleration in the numbers falling into arrears is a concern.

    The March 2011 release showed that there was €115,958 million owing on owner occupied mortgages. For June this is down to €115,089, a drop of €869 million.

    The mortgage data from the Irish Banking Federation show that at least €350 million of new mortgage lending was issued in Q2.

    Combined these shows that about €1.25 billion of capital repayments were made in the second quarter or an annual total of around €5 billion.

    It appears that, up to June at any rate, those who can pay are paying. As has been repeated ad infinitum at this stage we need to start dealing more quickly with those who can’t pay.

  9. @ Zhou

    “I suspect that deferring interest or putting people on interest only is being classed as “restructuring”. This is not real restructuring in the sense of reducing capital and agreeing a new term with payments according to a new amortisation schedule.”

    They provide figures on this

    http://www.centralbank.ie/press-area/press-releases/Documents/RESIDENTIAL%20MORTGAGE%20ARREARS,%20REPOSSESSIONS%20and%20RESTRUCTURES%20STATISTICS%20END%20JUNE%202011.pdf

    You are right that basically none of the restructurings involve reduced capital.

  10. So-called ‘restructured’ loans quickly falling back into arrears… that’s worrying.

    It would be interesting to find out the link between unemployment over the past 2-3 years and these specific mortgages restructured/in arrears.

    Is unemployment the main driver (in which case, a positive – not that there’s anything really positive in that sense – take on it is that it may be ‘contained’) or is it more widespread (in which case it’s more than just a human disaster limited to the unemployed and could be a really bad sign of things to come)?

  11. @Seamus,

    Interesting, and presumably there would have been interest of what? 4%?on the €116bn or just over €1bn for the quarter or over €4bn annualised, so indeed perhaps €10bn annualised still being repaid.

  12. @ Karl (or anyone)

    bit of a technical one – the “restructured but in arrears” figures, some of those are also part of the ordinary arrears figures, yes?

  13. The headline fiigure of 7.2% mortgages in arrears is misleading. It takes no account of a futher 30,000 motgages that have been restrucutred on all kinds of reduced payment terms but are not again in arrears.

    The true ‘arrears’ percentage should include these. The true arrears or in difficulty figure is approx 11%.

    Maybe if Ireland ignores the problem, just like we did with the boom, we may get a soft landing on this issue. On the other hand….

    @Michael Hennigan

    There are currently 18,679 households benefiting from the Mortgage Interest Scheme and the Department has provided €77.2m for 2011 an increase of almost €12m from 2010.

    This is a direct subsidy to the banks. I hope the Minister realises that and sends the bill. Plus the bill for the last few years.

  14. Actually got it, its at the bottom of the second link that Karl posted (yes they are included in the headline figures, though it doesn’t tell you how many of these there are). Ta.

  15. @ Jagdip

    I’d guess the average interest rate would be a little lower than 4%. About half of mortgages are ECB + x% trackers. Even with recent ECB rate hikes they would still generally be between 2.25% and 2.75%. Fixed and Standard Variable Rates have been going up by more but I don’t think it would be enough to bring the average to 4%.

    Still, as you say the level of repayment is very large. I wonder will the recent debate have an effect on this.

    There were 6,154 households who moved into mortgage arrears in the second quarter. In the same period around 5,500 households became mortgage free.

  16. Breaking Newz

    The ‘Can’ has disappeared into thin air – probably metal fatigue from all those kicks – all we have left is an Andy Warhol impression somewhere on what is left of our brains that even Soma or Panadol cannot reach: furthermore, there appears to be no more ‘road’.

    Legislators – LEGISLATE.

  17. It’s unusual to quote mortgage arrears on a count basis. The arrears rate (90+ days) is 9.4%.

    The average balance of different categories is significant. Performing mortgages avg balance = 144k; non-performing avg balance = 194k. It’s likely to be down to year of origination.

    Are these stats supposed to exclude investor mortgages?

  18. @ Ahura

    “Are these stats supposed to exclude investor mortgages?”

    Yes — owner-occupied only.

    “2. Residential Mortgage Loan Account:
    Means an account which records loans to individuals for house or apartment purchase, renovation, improvement or own construction of housing fully or completely secured by a mortgage on the residential property which is or will be occupied by the borrower as his/her principal private residence.”

  19. I’d like to see the stats for how many mortgage holders behind on their payments are on antidepressants.
    And the Sindo still venerates Johnny Ronan.

  20. @Karl Whelan

    Thanks for pointing that out.

    Only 33 of the 69,837 “restructured” mortgages don’t fall into the area of faux-restructuring. We don’t know if these 33 fall into the category of real restructuring.

    I count a total of 95,158 mortgage which have been in trouble. This includes all those in arrears plus those restructured but not in arrears.

    So it looks like the banks, whom Joan Burton is relying on to write down borrowers’ debt in a commerically reasonable way, have done what Ms. Burton thinks they are good at in 0.035% of cases.

    I find it quite scary that Joan Burton, people’s champion and enemy of fat-cat bankers, is so wildly over-estimating the ability and willingness of the banks to act properly.

    Ms. Burton is a Cabinet Minister and an eleceted legislator. Perhaps she should considering exercising the powers she has instead of wishing upon a star.

  21. @zhou_enlai,

    “I count a total of 95,158 mortgage which have been in trouble.”

    It is not clear how many of the recipients of €77m of mortgage interest supplement from the Dept of Social Protection, are in the arrears/restructured figures – it might be 100% but I’d be surprised. I think that about 17,000 mortgages are in receipt of this benefit.

    Whilst these mortgages might not be in trouble, they’re not exactly trouble-free either.

  22. If people working for the banks either can’t or won’t deal with the borrowers that are in an impossible situation then the ones controlling the banks need to remind the people in the banks that it is part of their job.

    Refusing to do his/her job is grounds for dismissal. Does the state really have the money to pay high salaries for people that are not doing their jobs?

    Or alternatively a quango can be created to do their job for them. A quango doesn’t cost anything, right? 😉

    Just do the bankruptcy reform already.

  23. @PR guy
    “So-called ‘restructured’ loans quickly falling back into arrears… that’s worrying. ”
    But not really surprising. The economic situation in the domestic economy is still deteriorating.

    I suspect that many think that modifications are a “once and done” process. I suspect that many within the banks think this too.

    Alternatively, you could see it as a process of “we’ll try this and see how it goes; okay that didn’t work, let’s try something else”. I don’t see much evidence of the “trying something else” as Jagdip points out with the low figures for actual relief.

    PS I agree that mortgages on MIS are troubled…

  24. I suppose I should have said 95,158 “home loans mortgages which are or have been in arrears” or alternatively “home loan which are not being honoured in accordance with their original terms”.

    I feel a tiny bit bad attacking Minister Burton in this way. I think she is genuine even if I don’t think she is that fantastic. The same goes for Richard Bruton.

    The one consolation of FG/Lab coming to power was that at least the DoF policies would be tested against the principles espoused by Richard Bruton and Joan Burton, even if some of their wackier plans would not be implemented. As it is, Joan Burton and Richard Bruton have been marginalised and the stale thinking of the failed mandarins continues to prevail.

  25. On a general point, this issue highlights the contrast between the conditions of about 500,000 people on the public payroll (public service, commercial bodies and staff pensioners) led by the retired political class who have been collecting their bonanzas in recent months and the large number of victims in the private sector.

    After the attention on mortgages woes, maybe underwater pensions for the minority with a stake, will get attention.

  26. @Michael Hennigan

    There does not appear to be a differentiation between public and private sector workers in these figures. We hear of many Gardai and others in trouble with their mortgages. People seem to have borrowed on the strength of wages before cuts and overtime as well as betting on a rising property market. Is there some other was the figures tell some tale about the public sector?

  27. @ Karl,

    Thanks. That definition also suggests holiday homes get exluded.

    I’d expect a portion flagged Owner Occ are really BTL. One of the bubble tactics for Trade-Up purchasers was to retain and rent previous primary residence and release equity to fund the deposit for the new property. It’s likely the records for the initial property weren’t updated.

    It would be useful if the CB produced some strats. Even something high level like originator/year of origination/loan amount bands/loan term/repayment type/OLTV & CLTV (indexed) band/ region etc.

    Does the 5/6bn capital for mortgage losses include BTLs(/ holiday homes)?

  28. @ zhou_enlai

    Unless people in State-guaranteed employment took out huge mortgages on their main homes or likely in some cases, bought investment properties with interest-only mortgages for a number of years (BoI was offering 10-year interest only mortgages), the historic low interest rates since late 2008 would have been a boon.

    So if an individual cannot pay the main mortgage because of commitments on investment properties, should such a case merit a write-off?

  29. Unless I am missing something isn’t the real problem, from the perspective of the banks, is the 9.4% of the book that is in arrears rather than the 7.2% of cases they are in arrears.

    Also does the level of arrears in the 180 days plus category make sense at 10.8% of the loan value? Or do we have a substantial chunk of the book that is several years in arrears?

  30. @Ahura
    “It would be useful if the CB produced some strats. Even something high level like originator/year of origination/loan amount bands/loan term/repayment type/OLTV & CLTV (indexed) band/ region etc.”

    I think that would be useful.

    I suspect we have lots of old small mortgages performing as expected and a very high proportion of the newer larger mortgages not performing.

  31. @MH

    One could be in trouble if one got a 90% or 100% mortgage with a variable rate rather than a tracker as a young teacher or hospital pharmacist or army captain, especially if you or your spouse had a child since you took on the mortgage, or if your spouse was in the private sector and you borrowed on foot of two incomes. You have now suffered a substantial tax increase, a substantial mortgage rate increase, a pay cut, increased utility bills and you face local authority charges.

    With that said, many people borrowed to buy investment properties. A lot of Gardai, the profession of serial landlords, are in particular trouble. Those with a sense of entitlement want to hang on to their homes despite being up to their neck in hock. Those with an outsize sense of entitlement want to hang on to their investment properties.

    I don’t think that anyone should be entitled to a statutory home lone resolution unless all their assets are on the line.

    At the same time, I think the banks should be encouraged to act commercially, and where an investment property loan is unsustainable the bank should foreclose and/or restructure as soon as possible. What banks should not be allowed to do without the borrower’s consent is to string the borrower up for the rest of their life.

    A new insolvency procedure would allow a borrower to threaten to pull the plug and give the bank the option of behaving commercially or taking the secured asset and participating in an IVA style arrangement over 2 years.

    Of course, the entitlement-types will want their cake and eat it and so will allow themselves to be strung along with bad deals like interest only and longer terms.

  32. In particular, the proposals for reform could be a useful starting point for more detailed discussion of “what’s to be done?”

  33. @ Karl Whelan

    “Yep — I’m on VB with Ivan Yates tonight and I presume we’ll be discussing this.”

    Best of luck.

    In that case, trying to clarify comments from the other thread, some questions:

    Aside from an improved workout system for all – to use the phrase that arose – to whom might (mortgage?) debt forgiveness extend?

    Is this debt forgiveness limited by the monies in the bank? How would that work?

    Is this debt forgiveness a matter of human decency and/or economic sense?

    Is this debt forgiveness time limited? IE Just to people who are in trouble now, or to people who were in similar trouble but dealt with it, or to people who are ok now, but find themselves in a similar position a year or two down the line?

    Why should the state take partular care over people who cannot maintain their mortgage payments over people who, say, rent, who are in similarly dire straights? Or over making the banks set up a New Enterprise fund or similar?

    One (for John McHale):

    At a time when Irish banks, due to being restructured after the most severe stress tests, are finally distinguishing themselves from EZ banks with their flim-flam tests, plus with their attractive interest rates for depositors are finally looking like a good thing: with all that, would it not be completely counter-productive to destabilise them once again?

    And @ Sarah

    On the previous thread I was arguing for co-responsibility if you look further up.

    I was niggling after that if a group of people deserved some sort of collective action from the state (big if there) and there was money around to have a go at something, then maybe there’s other groupings than people who are in trouble with their mortgage now, eg, people who were missold under a ponzi scheme – but there could be lots of other groups: children for example.

  34. @ Karl

    Please, please when your on tonight can you mention the samll fact that seems to have been lost on most commentators. Because of the excessive supply sitting on the market the average consumer in dire straits is not afforded the normal out clause being a disposal of the property – the broader question is why? The answer we know is because the banks screwed up in financing development after development after development and now with a saturated market everyones effectively stuck. Supply matters in any market why does nobody believe this to be important?

    Only a fool would believe the problems in this market are because of stupidity on the part of consumers. Banks price property – in a leverage driven market those in control of the leverage control the price and equally those in control of the leverage control the supply.

    These are banking errors. Banks lending into a market where net yields had fallen to below 1% in Dublin in early 2006 is a banking error – they always have the opportunity to say NO with a NO means no deal. Where does pricing normally go in that envirnoment – you guessed it – lower.

    The law as it currently framed in allowing banks to exercise their charge takes no account of their lending effects on the wider market – in other words the law is blind to the banks actions outside of the individual case. This is clearly illogical.

    How can we entertain the situation where one party is trying to enforce its legal right is securing full repayment of its loan when by their own crazy lending decisions in the wider market they have ensured the normal route to achieve this i.e. a disposal on the part of the individual is no longer available because of the banks actions in the wider market outside of the individual case?

    I disagree with the broader commentary. I believe the more equitable way to get to the heart of this problem is to see it for what it is and that’s an asset mis pricing error on the banks behalf for the past decade. No amout of fast tracking bankruptcy will cater for this banking error. In the property market the banks hold all the keys – we can clearly see today what happens to pricing when they are marked absent – prices fall to cash buyers only levels.

    Fix the error and then worry about the aftermath. The error fixing is across the board and that means all mortgages still in existance since c2000 need to rebased against correct property values. The only long run method which has stood the test of time in relation to property valaution is basing it off the cash earning capacity of the asset and thats off a rental yield metric. All other metrics are inferior.

    Re price the property using suitable rental proxies at mortgage origination dates – reclculate the correct mortgage using origination LTVs and compare ‘model’ mortgage to actual. Write off the difference and tell the unguaranteed bank bond holder to piss off – that’s how you finance it.

    What’s the aftermath – property pricing is now in the real world i.e. off a cash earning metric. If the mortgage holders still can’t afford to pay well allow bankruptcy to proceed. The bank can afford to rent the property back into the maket as the loan is now priced to be covered by the rent.

    We’re getting dangerously close as far as I can see to making a pigs ear of potential solutions based on affordability whereby people will start to game the system. Lets avoid that by an across the board fair long term metric which nonone can really quibble with i.e. long run rental yields.

    Given the way the numbers are trending surely to God it doesn’t take too much arm twisting to indicate to the ECB that paying unguarnateed bond holders and allowing families to suffer the indignity of a bankruptcy through absolutley no fault of their own is completely and utterly insane.

  35. @Karl – could you try to stress “improved resolution” rather than “forgiveness” when talking about proposed changes in the workout regime for troubled mortgages. I am sure that you will be excellent.

    I hope it does not clash with the highlights show for the Dublin – Donegal match.

  36. @Yields or Bust: I think you may be having a dialogue with the deaf on this one. Sentiment is in the driving seat and all and sundry are proposing “dis-dat-and-‘tother, absent any meaningful intellectual engagement with the substantive issue: personal insolvency.

    1. We had a least a decade of unfettered credit and low interest rates.

    2. We had directors and senior officers in financials who were untruthful with their shareholders and some were engaged in fraud.

    3. Financials actually ‘cooked’ their books. They were basically insolvent but were able to conceal this.

    3. We had mortgage policies for res property (and other stuff as well) which were designed to capture market share and which were grieviously mis-sold to irrational and exuberant customers.

    4. We had incompetent and feckless regulation and legislative oversight.

    So what in God’s name do you expect the outcome of these activities will be? Yes, a massive negative solvency and equity position. And how do you solve this? Imprudent companies and individuals file. What in fact have we got? A reprise. It beggars belief. But it is what I expected.

    The res property bubble achieved a high of +325%!!! from 1995ish levels. Whereas, it should have been approx +50% at the most. Now that is some distance to decrease, and we have barely made half-way yet. In the name of God, would people please try to get real about this res property mortage predicament. Absent aggrergate economic expansion of 7% for a decade, we cannot handle the debt levels we have (personal, corporate and state). An aggregate level of +3% for two decades might just keep our nostrils above the water-line. Anything less than this – we drown!

    As I said. Please get real, real about this mortgage debt predicament. Its messy, its toxic, and God protect us; our elected representatives will have to deal with it. Did I head correctly? They will have an ‘expert group’ to advise? Advise on what?

    Please run a ‘stress test’ on all current res property mortgages (the principal private reses that is – ignore the seconds) for an interest rate of 7%. How many skittles will be left standing when that nice bowling ball trundles down the lane, I wonder?

    Brian Snr.

  37. The growh of the percentage of mortgages in arrears adds a further destabilising element to the pysche of the general public, I know I am one of them and it scares me, expected or not. In the context of the current recession/depression/torpor are there comparartive country examples in time of similar levels of distressed mortgages? (accepting the comparison probably dealt with the arrears with bankruptcy/jingle mail) and where does the distress end with a further €10-€15 bln to come out of the economy?

    Is it possible that between oo and btl that another €50bln could be added to the National debt by 2014?

    will this be the coupe de grace for our battered economy?

  38. My understanding, from long conversations with the Central Bank press office, is that ‘restructured but in arrears’ does not necessarily mean ‘restructured and fallen once again into arrears’. The figure includes all restructured loans with arrears. In other words, if you had arrears and then restructured, you’re in that basket. Many loans are restructured to pre-empt arrears. In my opinion, this makes the data harder to understand, but there you go.

    One thing this release suggests to me is that once you go 90+ days, there is little stopping you from going to 180+ days.

    One thing that isn’t captured in this data is how much banks are actually losing on mortgages, a figure that would have to included average losses on tracker funding mismatches. This what blindsided PTSB in the PCAR results.

  39. @Yields or Bust
    Where do you propose to get the 60 bn from?
    BTLs too?
    Remortgagers?
    People who bought and worked like dogs to repay their mortgages in full?

  40. It’s clear that there’s a tsunami of mortgage problems beginning to hit the banks, and the government are suggesting the Market will provide life rafts and life preservers. Oh for a plan…..any plan….thatdidnt involve cans, roads and boots

  41. @hogan

    Get it from exactly where it should be got namely the financiers of the banks aka the equity holders, the bond holder and lastly the deposit holders (net of Guarantees).

    In particular the unguaranteed bond holders (Honohans nods and winks aside).

    I don’t understand why the vast majority don’t see the logic and fairness in a blanket forgiveness scheme. Every citizen in the country is paying the penalty for this banking screw up why should those whose income timing is a bit off as Gavin Kostick above notes, be compensated today when tomorrow the situation could be very different. This should not be about income timing it should be about asset pricing.

    The problem is the mis pricing and the related mis seeling to support it. History will show that the years 2000 to 2007 will represent not only a credit binge but a massive mis selling scandal inflicted on the consumers in Ireland. We already know given the numbers that this is proving to be the case – why pretend any longer. Fix the problem and that problem is the assets were mis priced.

    This is nothing to do with new bankruptcy schemes – that allows the banks off the hook, it suggests the consumers were to blame. Wrong. The banks caused the problem let those who financed them take the pain. I appreciate this is old ground but with the ever increasing disaster surely even the idiots in the ECB can recognise that ongoing implementation of the ‘plan’ is just going to make this wound fester.

  42. @yield or Bust
    In any market the buyers ultimately set the price. A house is sold to whoever will pay the most. buyers drove up prices.

    Sure you can blame the banks for lending to them (Irish regulated banks) but ultimately they have to take personal responsibility.

    It is a sad indictment of the people of this country if the amount we borrow is only limited by the amount others are willing to lend, and not based on our own judgement as to what makes sense.

  43. @SAM

    Nonsense.

    The banks will always dictate to whom and how much credit they release. Always – that’s their job.

    In a normal cash market an asset is only worth what someone is willing to pay for it – but this is not, I repeat not a cash market, its a leverage driven market. In 98% of transactions in the RoI residential market its requires a 3rd party lending bank to get the deal over the line. So when it comes to property its not what the consumer is willing to pay is completely driven by how much a lending bank is willing to extend which dictates if the deal completes. So understand this point the bank either allows you to buy or not and ultimatley they determine the price.

    My point has always been that since c2000 the lending metrics on which the banks were extending cash was out of quilter with long run net rental yield averages. Net rental yields are the only long run metrics which work in relation to property valuation and the banks overlooked the fact so much so that by 2006 the deals which they say fit to extend cash were yielding less than 1% net. The risk free German 10 year bond at the time was about 3.5% i.e. take no risk and pick up 3.5 times the return for taking on funding risk, market risk, liquidity risk etc etc. This was clearly crazy banking practice and in all these deals the banks could have simply said to the customer No- please go away. But they didn’t. Its the banks job to know when to say no.

    Equally in this period from 2000 to 2007 with housing supply entering the market at a rate of c3.5 times market requirement house prices were still going up. In a normal cash market do you believe this would be happening? Quite correctly you would have your suspicions especially by 2007 this over supply had been a factor of the market for c4 years. Why could this be happening? – Simply because new build land prices dictated that for a developer to return a profit he required a minimum price of x per unit – this x bore no reality to cash yields on the ground.

    You had in many instances the same bank seeing a monthly rent roll for a house coming in at €700 and the same bank selling a mortgage for the house next door based on a ficticious house price to a property novice costing them €1,500 a month. This situation went on up and down the country aided and abetted by mortgage tax breaks.

    How can the cost of putting an almost identical roof over one house be twice the price of the other. It seems the banks believed it made sense at the time.?

    So please don’t fool yourself leverage markets live and die by credit availability. We are now experienced the dark side of the credit moon – and the Allsops auction prices are telling you where cash is pricing these assets at c11% yields about 3% above the Irish 10 year and about 8% above German 10 year. Some turn around – but we feel it unfair because of bank ownership issues not to allow a fairer debt relief scheme which gets to the root of these problems. I don’t get the logic.

  44. Here’s a blind man with an abacus forward view: On current trends by the end of the year the total stressed volume will reach 115,000 of which 70,000 will be over 90 days in arrears or more. Now the CB stressed recap allowance for OO and unsecured personal + BTL + SME is €16bn (Most sme stuff morphs into personal debt one called in thanks to personal guarantees). This is only for four banks – what if the others and credit unions had been stressed? You might think of adding another €7bn. The blind man’s figures work to €25bn in stressed three year losses. Of course not all these will be realised but whatever the number it represents one hell of a mountain of individual multi-lender relationships, write-offs and settlement agreements. So how do you ensure that banks act to realise losses and borrowers act to repay what they can? Seems to me that a debt forgiveness programme becomes a national debt management system than brings reluctant parties to the table and hammers out binding agreements.

  45. @yields or bust

    ”So understand this point the bank either allows you to buy or not and ultimatley they determine the price”.

    Nonsense yourself! I decided not to buy and I continue to do so. I have often been offered credit but have never borrowed.

    The housing market is indeed driven by the banks and limited by the amount they will lend. I never denied this.
    But this is only the case becuase we stupidly allowed this to be the case.

  46. @ Gregory Connor

    I was watching the Donegal match and the Donegal team are very like the banks. They break down and demoralise the opposition to the point where the game is suffocated and no progress appears possible. And that is their goal. The only problem is that they can’t score themselves.

  47. @Sam

    That was your decision – the point I’m making is that where house buyers wanted to buy the banks always had the opportunity to say no to such a request.

    You correctly calculated that the numbers did not make sense – unfortunately many consumers were either ill advised or couldn’t compute. Had the banks being doing their job the metrics should have been telling them to stop back in 2000 until sanity resumed they had a responsibility to say no but they decided to hunt for further short term profits and oversize their bonus driven renumeration as a result and towards the latter end of the mania entered into the ‘wanna be like Anglo game’.

    The ‘we’ in your last comment may refer to a Royal ‘we’ but many thousands would argue that it doesn’t refer to them. The lending officers and the Directors of the banks make these day to day lending decisions nothing at all to do with ‘we’ the citizens.

  48. At what point does the economical rational actor begin to cut their losses?

    For the 180 day+ mortgage/debt owner they must understand that all the money they’ve poured into a depreciating asset is lost – and the best thing to do is walk away and start again. If that means emigrating because the bankruptcy laws force them too, then so they must.

    For the 1000 day+ bank guarantor/debt owner they must understand that all the money they’ve poured into 6 zombie banks is lost – and the best thing to do is walk away and start again. If that means liquidating the insiders because the needs of the many outweigh the wants of the few, then so they must.

  49. Wow Sam
    Very insightful.
    Most people stupidly follow the crowd.
    Who would have believed it.

    In general (excluding genius’s like yourself) most people were told in 2004-2007 that you need to get on the property ladder before its too late! Also most mortgage brokers were recommending that people go with the lender that offers them most, the rates and periods of repayment were secondary.

    When it comes down to it, a lot of legislation is there to protect us from our own stupidity.
    In the area of finance the people were let down by our politicians, economists and the regulators.

    Most people are sheeple, that is just the way of it.
    It doesn’t mean they deserve to have horrible lives for the next 20-30 years for exhibiting very human traits.

  50. @ Zhou

    Pat Spillane was a branch manager in AIB in Gneeveguillia in the 1980s and it was all very different.

  51. It’s no great surprise that the media and some economists are giddy at the prospect of mortgage debt forgiveness.

    Some economists have suggested there is a pot of c.6bn to write-off residential mortgage debt. What is missing here is that this amount has been identified as a likely loss scenario; it is not money already spent by the taxpayer. Should losses be 3bn, then the taxpayer (as shareholders) would be better off.

    Given the interchangeability of phrases like write-off and forgiveness, it’s worth referring back to what the CB’s Financial Measures Programme report (/Blackrock) based their analysis on. It should be no great surprise that write-off refers to the expected losses from their scenarios.

    From page 20 of http://www.centralbank.ie/regulation/industry-sectors/credit-institutions/Pages/FinancialMeasuresProgramme.aspx :

    “Residential mortgages

    BlackRock lifetime losses including the impact of deleveraging for residential mortgage portfolios are 9.9bn in the base scenario and 16.9bn in the stress scenario. The total residential mortgage exposure analysed across the banks is 140.7bn. More than 95% of losses in the residential mortgage portfolio are expected to be generated from Ireland residential mortgage loans, which represent only 69% of notional balances (the remainder is in the UK).

    As there is a maturity tail of up to 30 years associated with residential mortgages, only a portion of these lifetime losses is included in the Central Bank’s three-year projected losses. The Central Bank three-year projected losses derived from BlackRock figures amount to 5.8bn and 9.5bn in the base and stress cases, respectively.”

    And

    “Losses are defined as the principal loss amount crystallised at the time of property liquidation.”

    The only mention of assessing programmes to assist distressed borrowers relates to Forebearance, which they identify as a factor that increases losses

    “Implicit in the model is the assumption that forbearance of high LTV loans moderately increases losses by increasing time and expense to recovery, while impairing property value through accumulated disrepair.”

    Debt forgiveness programmes have not been factored in!

    Table 9 shows residential mortgages loan loss assessment results (m). Of importance is it clearly shows the c.6bn includes BTL losses:
    CB three-yearProjected losses
    Total: 5,684m
    Owner Occupied: 3,465m
    Buy-to-let: 2,219m

    So on the Owner Occupied there’s 3.5bn – though this might not solely relate to Irish foreclosure losses. Blackrock suggest 5% (of all) losses relate to non Irish. Possibly of greater importance is “lifetime losses including the impact of deleveraging for residential mortgage portfolios” if some deleveraging is planned for Irish assets.

    Given the latest arrears statistics, it’s possible that not enough capital has been set aside to cover losses as defined in this exercise. And this doesn’t include exotic forgiveness schemes.

  52. @ Ahura

    Lost of confusion over this — will come back with a full thread but only time now for a quick response.

    The recap was based on three-year stress losses of €27.7 billion. However, an additional €5.3 billion capital buffer was factored in.

    So they are recapped well above the Blackrock baseline lifetime losses on the whole book of €27.5 billion.

    Meaning they are recapped to deal with baseline lifetime losses on OO of €5.7 billion.

  53. Peter Mathews says the banks ‘need a fire put under them’ regarding mortgage arrears on RTE News at One. My sentiments exactly. Unfortunately, Peter Matthews has been marginalised along with all the other prominent opposition spokespeople on finance and banking (Richard Bruton, Joan Burton, Kieran O’Donnell).

  54. @ Karl,

    Hopefully Table 9 will form the basis coz that’s what I’m looking at. I didn’t realise you wanted to use the buffer! I’m using the Base case as the expected over the next few years. As mortgages have long durations, it’s not conservative to blow everything up front. For Owner Occ the difference between CB scenarios is 2.2bn.

    Even in the CB 3YR stress case, the losses are a little below the Blackrock Base case.

    If you have insight on the difference between the CB’s Base and Stress loss scenario, please share. I can’t see anything on debt foregiveness programmes.

    Looking at the ratios of Base:Stress by lender; they are quite similar. My guess is the CB are allowing for post 3yr losses in their stress scenario. I had expected that ILP may have had a higher stress due to potential deleveraging costs. It’s hard to identify how much has been set aside for deleveraging.

  55. @Karl Whelan
    “Lost of confusion over this — will come back with a full thread but only time now for a quick response.

    The recap was based on three-year stress losses of €27.7 billion. However, an additional €5.3 billion capital buffer was factored in.

    So they are recapped well above the Blackrock baseline lifetime losses on the whole book of €27.5 billion.

    Meaning they are recapped to deal with baseline lifetime losses on OO of €5.7 billion.”
    I’m very confused clearly.

    I thought the main portion of the losses attributable to all the loan categories was the cost of deleveraging – i.e. the cost of actual default when it happens, net of recovery costs baked into the sale price of the loan category in a securitisation.

    PS and a little unrelated: Does the fact that PTSB’s mortgage book is going to the IRBC change things a bit? Not least because the recap of BoI seems to have been on the basis that it would absorb lots of losses from PTSB. PTSB is no longer being merged into it, so now there is oodles of capital in BoI?

  56. @ Hogan

    “PTSB’s mortgage book is going to the IRBC”

    huh?

    “recap of BoI seems to have been on the basis that it would absorb lots of losses from PTSB”

    Again, huh? PTSB has been individually recapitalised, not recapped on the basis of a potential merger, no? Or am i missing something here?

  57. @ Hogan

    4bn requirement per PCAR/PLAR.

    2.3bn via govt equity, 0.4bn via govt contingent capital, 1.3bn via asset sales and burden sharing.

    Skeptical about PTSB being closed down, for competitions reasons alone, and don’t know how useful IRBC will be in winding down 35 year, relatively well-performing assets. I suppose its cost of funding, being completely via ECB or ELA, would mean that all tracker and variable rate mortgages would be profitable without anyone caring about the stygma of central bank liquidity.

  58. Minister Noonan said on Morning Ireland that the output of the new inter-departmental expert group will form the basis of Government policy. He says that they are due to report in 3 weeks time and they will take action then.

    It sounds like he deferring to an expert group (and thereby abdicating reponsibility for policy to the roulette wheel of other people’s ideas) but it could also be that he has given them a policy prescription he wants to follow and asked them to implement it.

    We may as well give him the benefit of the doubt and wait the three weeks.

    Personally, I think that the fact that the DoF and the DoJ are at the pin of their collar to draw up new personal insolvency legislation within six years (2007 to 2012 inclusive) of starting the process indicates that we won’t see any real substantive reforms on mortgage debt from them this side of armageddon. However, let’s see what they can do.

    One solution might be to provide borrowers with a mechanism to bring things to a head to force the banks to turn secured debt into unsecured debt and therefore subject to the insolvency regime.

    I also just thought up another BRILLIANT solution. A law could be passed to say that a mortgage/charge cannot secure more than the value of the underlying property and accordingly any loan amount in excess of the value of the property shall be deemed to be an unsecured debt and subject to the new personal insolvency regime.

  59. @zhou: “… he (is) deferring to an expert group (and thereby abdicating reponsibility for policy to the roulette wheel of other people’s ideas)”

    Political cowardice, pure and simple. This is the sort of cute hoor chicanery that got FF trashed. Maybe FG are hoping Lab will get the same treatment next time. “We tried our best, but those pesky Trotskyites with their socialist ideologies … … !!” 😉

    Like your solution. What we are experiencing is a totally unprecedented situation wrt res property mortgages. Needs some very imaginative, innovative – and courageous thinking and actions. Think the neutered Tomcats of the ‘expert group’ will rise to the occassion? 8)

    Brian Snr.

  60. @Gavin Kostick
    No idea. Unless it is part of the move to make it possible for BoI to take the whole lot without damaging further its loan to deposit ratio?

  61. @Eoin
    Thanks for the reminder of the figures. Outwardly it seems enough. I can’t see the logic of keeping PTSB open in competition to its new parent.

    “I suppose its [IRBC] cost of funding, being completely via ECB or ELA, would mean that all tracker and variable rate mortgages would be profitable without anyone caring about the stygma of central bank liquidity.”
    Yeah, don’t PTSB have a lot of trackers?

    Could we be moving towards IRBC setting up a mortgage purchase company? Like FNM or FRE? A standalone company, properly capitalised might be in a position to secure interbank funding cheaper than the existing banks.

  62. @zhou_enlai
    You’re not the first to think of such a scheme. My preferred one is that each person has a maximum recourse loan limit based on the amount of taxable income they declare, so salaryx4 or some such. Anything above that is unsecured lending.

    This would mean that every tax-compliant person has the same terms of access to credit.

  63. Noonan’s performance was quite something – he seems to believe the 35,000 restructured mortgages are being “fully serviced” and that Blackrock’s stress tests were used to capitalise the banks. Having dissed the Cooney group report in its manifesto he is now saying the report forms the basis for the work of a second inter-departmental group that includes CB and industry people (no sign of anyone representing indebted consumers). The cherry on the cake was the news that Richard Bruton is looking to do something to help out family businesses that engaged in “property plays” as a job protection/creation measure.

    @zhou the law reform commission report included for treating net/residual mortgage debt as unseceured debt and also said revenue liabilties should not be treated as being priority debt. Apart from short-selling, cramming down mortgages would leave the balance as unsecured debt to be dealt with through a personal insolvency regime.

  64. @hogan

    I suggested above that we’re getting dangerously close to making a pigs ear of this and zhou’s suggestion above and your latest offering is confiming my suspicions. Whilst they may read as ‘BRILLIANT’ they are in fact avoiding the structural issue of mis pricing. I’ll say it again this is not about affordability its about pricing. The initial prices were wrong and the related mortgages were wrong.

    In many repects the consumers hold the upper hand here as they haven’t paid in full for the product being the house. Where a consumer in a cash envirnonment can prove categorically that he/she was over charged they have recourse. Whilst this is not a cash market the banks cannot rely on caveat emptor (CBI Regulations are very clear in this regard) consumers have a case where PTT prices are likely to see falls between 66% to 80% – surely price adjustments of these levels is indicating something very wrong was going on with RoI residential house prices.

    As a result can someone please explain to me what’s so wrong with effectively right sizing ALL mortgages to a valuation based off a long term reliable rental proxy – compare model mortgage to actual and the difference is effectively the banking mis pricing error and is required to be written off across ALL mortgages.

    This is a cleaner method, it does not involve pitch battles between one section of the community against the other, it’s logical, it gets to the heart of the issue being a mis pricing mistake and fixes it, it’s unfair but less so than current proposals which will lead to system gaming, it finally corrects the daft affordability valuation nonsense and can be paid for by not paying for unguaranteed bond holders who are not covered by the EU/IMF agreement other than a nod and a wink scheme between JCT and Prof. Hon.

    I’d suggest we dispel with the nod and the wink scheme and tell unguaranted bond holders to go away and seek returns elsewhere give the cash back to ALL the citizens who were overcharaged for these pups.. oopos sorry houses.

  65. Yield or Bust,

    If you do that, the hole in the banks is much much bigger. LEt us speculate that 30% of the mortgage debt is written off at an instant. Then the liability side has to be written down. This involves i) govt equity going to zero ii) more money going in from the taxpayer or iii) write down the deposits and the seniors. Domestic politcs dictate no deposit write downs. International politics dictate no bond write downs. Absence of money tree indicates a further recap.

    I am not saying your proposal is without merit or immoral or anything of the sort. It just ain’t going to happen.

  66. @bill hobbs

    As far as I can see, the LRC report only envisaged mortgage debt being treated as unsecured debt after the security has been realised.

    My proposal is that the negative equity should be treated as unsecured only if the person is insolvent (i.e., cannot meet debts as they fall due rather than debts greater than assets).

    In that event, the bank/borrower would not be forced to sell into a non-existent market but rather a valuation would be obtained and agreed and the balance would be treated as unsecured.

    I think the bank should still retain the right to foreclose at that stage (in which case the balance will be converted into unsecured debt in any event), but if the bank doesn’t foreclose they must accept part of the loan being converted into unsecured debt. They will have to decide whether to do the job or get off the pot.

    If they foreclose, they will of course incur legal costs and estate agents costs and face an uncertain price. Therefore, until the market picks up, there is good reason for them to accept the valuation.

    @Yields or Bust

    You are talking about writing off negative equity. I would make a fortune out of your proposal despite being able to service my debts. Don’t fool yourself that such a solution is possible.

    “Where a consumer in a cash envirnonment can prove categorically that he/she was over charged they have recourse.” This does not apply in the sale of houses. It is irrelevant in the case of mortgage loans as the banks sold cash andnot houses. It is hard to misprice cash.

    Apart from that, your solution is unaffordable, politically unacceptable and economically reckless.

  67. @zhou

    Cash is priced by way of an interest rate – all commodities including cash cost, cash is no different.

    On a mortgage by mortgage basis there may or may not be mortgages in negative equity, until the exercise is conducted this remains very unclear. Your making the error, like many that negative equity is not a problem until one goes to sell the property. Sadly that is the problem – many want to sell but because of the crazy credit driven oversupply this option is no longer open to consumers – correct your are in a ‘normal’ market. We don’t have a ‘normal’ market with c100,000 units sitting idle.

    Explain to me in detail exactly how my solution is ‘reckless’ – where for instance the NAMA €34bn write off seems kinda dandy oh?

    ‘Polictally unacceptable’ – well I suggest you listen to todays RTE 1 Lunchtime News where Independant TD (i.e. a polictican) Simon Donnelly has indicated that a solution along the lines that I’m proposing actually seems grounded in basic common sense.

    ‘Economically Reckless’ well explain why so it seems perfectly fine to repay c€15bn in unguaranteed bond holders who invested in now dead banks and now look forward to 100% of their cash back when I’d safely suggest if the same bondholders were hanging out looking for their loot from a manaufacturer they’d be left waiting? For some reason it seems polictically acceptable to compensate insolvent (Michael Noonans description – another politican) banks’ bondholders. Why exactly?

    So its politically unacceptable to compensate house buyers who were clearly overcharged (all housing metrics show this to be the case) but acceptable to repay the financiers of the banks who flooded the market with excessive product, brought the county to its kness and the small matter of having being bailed out to the tune of €70bn (€100bn according to others). Get real.

    So zhou I’m sorry your ‘BRILLIANT’ idea has been shot down but please one must do better than go home with the ball.

    Think before you comment – houses are priced by banks because housing is a leverage driven market and the holders of the leverage in such a market control the underlying prices. This is as true today as it was when the Medicis starting the banking businesss many moons ago.

    I never suggested the banks sold houses the banks price the deals – there is a subtle but plainly obvious difference. The deal prices were wrong – unless of course you believe c80% falls from 2006 highs is normal where rental costs are back by c25%. Go figure who got the prices wrong.

  68. @tull

    I disagree – until the exercise is conducted nobody can speculate one way or another. As indiacted above Stephen Donnelly has suggested a scheme along what I’m proposing earlier today.

    The beauty in what I’m suggesting is that overnight the daft Croke Park agreement can be set aside, the fear about ongoing austerity can be lifted for many and we should in theory be able to return to the markets sooner than anticpated as the growth genie will return very quickly. (Assuming the figures are in line with my estimates)

    There is no easy answer to this issue I admit but I’d also suggest just because mortgages are being repaid is not a sign of economic well being as Brendan Burgess seems to suggest. Housing as we know is not a productive economic pursuit so we need to move the debate forward from the narrow affordability argument i.e. its only effecting less than 10% of mortgages so deal with these and problem solved . Not so – pensions, education and health go unfunded as cash is directed to liabilities which bear no reality to asset values. This process just stores up much bigger problems longer term.

  69. @ Hogan,

    “I thought the main portion of the losses attributable to all the loan categories was the cost of deleveraging ”

    ILP seem to share your view that a portion is to cover deleveraging. Though they don’t say how much. From their interim report: “The FMP identified a total gross capital requirement of €4.0bln for the group’s banking business in order to: (i) achieve a core tier 1 capital ratio of 6% (plus an additional buffer) in a stressed scenario by 31 December 2013; and (ii) cover losses associated with the requirement to deleverage the bank’s balance sheet to achieve a loan to deposit ratio of circa 122.5% by 31 December 2013.”

    (fyi..”The loan-to-deposit ratio at the end of June was 227% (2010: 249%)”).

  70. @Yields or bust
    Thanks for your contribution.

    Do you think your proposition would hasten, slow down or help avert Sovereign default?

  71. @Eamon

    I don’t know, but proceeding the way were are I believe default continues to be a very real possibility because growth will remain absent for a lot longer than expected.

    I believe we need to stop pretending that the austerity measures, which are likely to get a whole lot worse than we’ve seen heretofore, are going to make this problem any easier to solve in the future. Can kicking is not working nor will it.

    My view is that its simply illogical to expect people to continue to pay for an asset class (whose prospects of recovery per the CBI at any rate are virtually non existant at least for the next 29 years) and at the same time pay for Govt and bondholders who are effectively benchmarked against the asset class still at bubble valuations. A breaking point will emerge and a Michael Davitt figure will equally emerge and a mass default could quite easily be the next stage of the process.

    We’re all sensible enough to realise that with exports back to near record levels and unemployment still rising then the liklihood of an export driven recovery delivering us to the economic oasis that others had expected, is a pipe dream.

    The domestic economy is in dire shape and ongoing measures will likely suffocate any possibility of employment growing in such an envirnoment. Therefore I believe we need a radical solution to get ahead of the problem.

    Where solutions in any walk of life are to be found its normally best to confront the real problem head on. The problem we know is property and all the damage that has been done because of the Govts reliance upon it, the banks bet against it and the consumers belief in it. All have turned out to be wrong. We need to rectify the wrong.

    The basic wrong is the price – all damage follows the mis pricing of the asset class. We therfore need a radical solution to fix the price and as a result to reprice the associated debts against it and allow the fallout to proceed accordingly.

    Unless and until we do that basic step my belief is recoovery will be utterly time driven and the Japanese will explain to us in great detail how that process works; extremely slowly by all accounts.

    That’s why we need a process which fixes the pricing problem – the affordability issue is secondary. What’s currently being proposed is putting the cart before the horse.

  72. Yields,

    I take it you disagree with my premise that your scheme won’t be adopted. Whether Deputy Donnelly proposed it is irrelevant as he is a totally powerless independent in the Dail sitting on an ABFF seat. He is thus likely to be a one termer and not the Davitt character which you seek.

  73. @tull

    I’m not suggesting for one minute my scheme will be adopted. What I’m suggesting is that my scheme attempts to solve the underlying problem. Other proposals don’t do this they’re overly concerned about who deserves a write off over who doesn’t – to me this is a recipe for disaster and out of that disaster a figure such as Davitt may very well emerge.

    Much easier I would have thought to solve the actual problem.

    I agree Donnelly is a voice in the wilderness but a voice thus far that I have to say impresses me insofar as issues such as these are concerned.

  74. @zhou

    If a bank decided to foreclose, I think the plan you describe is similar to the one I proposed on a previous thread, but I agree that the additional flexibility of giving the bank an option to foreclose, rather than requiring it, is an interesting idea and one worth examining closely.

    At first sight it seems to me, however, that if banks had a general policy of not foreclosing it would provide a strong incentive for many ‘won’t pays’ to enter the process, on the basis that they would be better off with a 30%-50% write-off, say, of their mortgage principal in combination with a deficiency judgement under the personal insolvency scheme, compared to their starting position. Income & assets could be hidden or “sold” to family members, utility bills left unpaid etc. in preparation for giving the appearance of a ‘can’t pay’ household. As a result I would think that banks would in general have a policy of foreclosing in order to keep the bar at a high level to prevent these strategic defaults.

  75. @ Yields or Bust: Thanks for your useful and informative contributions. Cleared up some confusing points.

    Brian Snr.

  76. Yields,
    A scheme that won’t be adopted because of it’s implications for the banks, taxpayers and relations with the troika is by definition a flight of fancy and not worth the intellectual effort. Best to work up something that is pragmatic.

  77. @bryan g
    Having the banks police the system against gaming would be an added attraction. There would be little or no bureaucratic or legislative overhead on top of an IVA style personal insolvency regime.

  78. @zhou

    Well I would certainly not have the banks be solely responsible for detecting those trying to game the system, for two reasons. Instead I think the Debt Enforcement Office (using the Law Reform report’s terminology) would need to have a key role.

    The first reason is the nature of the bank’s capitalization. The banks have been stuffed with taxpayer capital. When this was done concerns were expressed that there would be all sorts of proposals to use up this “excess” capital. Noonan has made clear that any surplus capital can be redeemed by the State when banking conditions have settled down. However the banks do not have a huge incentive to generate/preserve this surplus – for a given portion of capital they can use it all on write-downs, or use some of it on write-downs and return the rest to the State, but in either case they won’t be able to keep it long term. In a sense it is “Fr. Ted” money – it is ‘resting’ in their accounts, but it really belongs to somebody else.

    The second reason is that I would never trust banks to look after taxpayer money without oversight and verification from a State agency. Certainly in the USA the local authorities responsible for property tax do not trust the banks when calculating the value of a property.
    They will not take the sale price or a bank valuation and use that directly. Instead they analyse and validate all transactions and if they think the sale price is significantly below market or otherwise suspicious they will declare their own valuation and base the tax on that.

    All in all I think any scheme that provides large write-offs and allows borrowers to remain in the property can generate bad incentives, and if the whole scheme starts to look complicated at the start, you can imagine that by the time the actual legal procedures are put in place it will get very complicated indeed. Rather than generating the bad incentives and then trying to put in place a complicated process to police them, I lean strongly towards not generating the bad incentives in the first place.

  79. @tull

    A scheme that won’t be adopted not because of the sole reason that the Govt has for some inexplicable reason decided that paying €16.4bn of unguarnateed bond holders is something worth doing. I’m still at a loss because its not in the EU/IMF agreement and the Govt and no obligation towards these people other than relationship building with the ECB.

    Why not stand firm and do the right thing. As indicated previously when you end up with academics and career civil servants doing the negotiations on our behalf expect a bad outcome. qed.

  80. @Bryan G

    I don’t see where the bad incentive. As Mike Soden said on the Vincent Browne/Ivan Yates show on Monday, it is in a banker’s nature to grab every penny he can and to give nothing away.

    I think the proposed solution is elegant, simple and builds on the private debt resolution infrastructure which will have to be implemented in any event.

    The people gaming the system would be individuals who try to enter into the insolvency procedure primariily to secure a mortgage write down.

    There would be two safety mechanisms to catch out the “won’t pay” (as opposed to “can’t pay”) types.

    Firstly, the Debt Enforcement Office would have to assess that they are really insolvent.

    Secondly, they risk that if the bank thinks the home-owner is successfully gaming the system then the bank may elect to put them out of their home to punish them for their behaviour.

    The fact that people risk losing their home will be a major disincentive to gaming the system.

    This is not complicated. The Debt enforcement office will already be dealing with personal insolvencies. The banks will already be assessing values.

    The main cost will be the cost of a mechanism to certify valuations. This could be done by legislating for a valuation clause analagous to existing common contractual provisions where the value is agreed, or in default of agreement a valuer decides on it, such valuer to be agreed between the parties or in default of agreement to be appointed by an independent body. This way no additional state bureaucracy needs to be created.

    If the bank think the value is too low, let them foreclose.

    If the borrower thinks the value is too high, then perhaps they should be given the option to voluntarily surrender the property to the bank, at which stage the bank will accept the property or agree a lower value.

    It may be appropriate to tweak the system to say that the amount secured should be 110% of the value.

    The only danger would be corrupt collusion between a borrower and individual bankers contrary to all incentives for the banks. This would involve a banker defrauding his bank. If that happens it happens. You cannot legislate crime, corruption or fraud out of existence.

    I suggest that such matters should be left to the banks (and the gardai if a complaint is made) to manage as they will be the losers. We want the banks to be part privately owned so the state will not be reponsible for managing such risks. Therefore, it would be inappropriate to introduce a layer of state bureaucracy to manage such risk.

  81. @ Hogan,

    It’s hard to say if there’s enough money. This in itself is concerning as the point of the recap was to remove all doubt.

    One thing to bear in mind is that a by-product of foreclosures is deleveraging. Pages 6-8 of the document linked by Eoin B gives a lot more detail than I thought would be available. One thing which I don’t see addressed is tracker mortgages vs funding costs.

    @ Eoin B,
    Very useful link, thanks. I’m surprised that ILP provided that level of information. I didn’t think providing an indication of the haircut would be in their interest. 25% on UK mortgages kinda sets an upperbound for any potential purchaser. Capital Home Loans originated via brokers and offered some ‘non-conforming’ products. Even allowing for a low-ish quality UK book, you’d still expect it to perform better than their Irish mortgage book (at present).

    Given the relative sizes of these books, it seems an odd strategy to dispose of the UK when the cost of deleveraging the UK is so much greater than the cost of working out the Irish book.

    Regarding Northern Rock proposed deposit sale to ILP, I stumbled across this article linking NR to a possible purchase of CHL: http://www.marketwatch.com/story/northern-rock-eyes-capital-home-loans-report-2011-07-16

  82. @zhou. A mortgage cram down option would have the effect of rendering the negative equity unsecured – to be forgiven outright or dealt with through an earned debt forgiveness/ debt management regime. We should not forget that for every troubled mortgage there are any number of other debts that will also have to be dealt with.

  83. @zhou

    While it is normally true that banks will grab every penny they can this is not necessarily the case when the bank is taxpayer owned. This is because in the normal case bank executives will personally benefit from increases in bank equity/share price, either through direct stock ownership, stock options or bonuses related to their value. This is not the case with nationalized banks. There is a notable difference between AIB/Hodgkinson’s statements on debt forgiveness compared to BOI for example, which I think reflect this.

    The threat of a bank taking repossession would be a disincentive to game the system, at least in some cases (in others borrowers may just want to get out of negative equity, and are prepared to move to another property). However the effectiveness of this really depends on how the banks implement the schemes in practice. It could be the case that some banks (e.g. AIB) generally do not foreclose, and others (e.g. BOI,Ulster Bank) do due to the differing incentives for managers and ownership structure. It is hard to tell in advance. The real disincentive would have to be the Debt Enforcement Office doing an exhaustive analysis of previous financial transactions (not just reviewing the current financial state) to determine insolvency. This would have to extend to all assets and income, not just property related ones.

    “I suggest that such matters should be left to the banks (and the gardai if a complaint is made) to manage as they will be the losers.”

    If the banks were privately owned I would agree. However I certainly do not trust taxpayer-owned banks to steward taxpayer money in the same way that they would as if they were in private ownership.

  84. apart from Noonan’s flippant sardonic commentary on debt forgiveness he did say that R Bruton was looking into helping family firms that had lost money on property plays – seems the idea is to help family owned firms that would otherwise viable had their owners not gambled on property.

  85. Now imagine for a minute – a well known family firm owner and blueshirt stalwart who banks with AIB, looks to have himself “helped” on the basis that he employs people and might employ some more.

  86. @ bill hobbs

    I am not sure what you mean by “mortgage cram down” but rendering the negative equity unsecured is the only thing that will incentivise the banks to reduce capital for unsustainable mortgages.

    @Bryan G

    The banks are not behaving less commercially because they are state owned. If they were they wouldn’t starve the market of credit, lie to the market and refuse to write down any principal anywhere. I think your fear is misplaced. In any event, the any resolution would also be subject to the insolvency regime and the input of other creditors in my proposed [minimalist] solution.

  87. @zhou

    Remember that these are Irish bankers we are talking about! Even cabinet ministers on TV say they cannot be trusted. The last time they were entrusted to steward capital they lost 100% of it (plus about €75bn to boot), and most of the same people are still there. Per capita I think they were the worst in the world, if not in world history. They have not exhibited any past behaviour that would warrant any trust.

    As such I think their scope should be narrowly constrained within detailed guidelines to prevent abuses at both ends of the spectrum – i.e. taking advantage of unsophisticated sub-prime borrowers and being unduly lenient with the brother-in-law barrister.

    I think that the simpler scheme (repossession followed by personal insolvency scheme) should be the starting point. Perhaps after 18 months if the banks could make a case that they were losing money due to repossessions the guidelines could be altered to allow it. In any case it would be a huge improvement over what is there today.

  88. @Bryan G

    They could already write down the brother-in-law’s morgtage if they could get it through credit control in the bank. The fact of the matter is that they are not doing so.

    As I pointed out above we know form the Central Bank figures that only 33 of the 69,837 “restructured” mortgages don’t fall into the area of faux-restructuring. This means that principal has been written down in a maximum of 33 cases. However, it is possible that principal was not written down in those cases. They may have forced asset sales or taken an equity share int he house.

    Also, as I have said above, the borrower would be subject to the supervision of the insolvency regime. This fits in with what you were saying that you could not leave it up to the banks alone.

    The idea that we would not introduce a scheme to force (and thereby incentivise in other cases) banks to engage with insolvent borrowers to write down unsustainable mortgages because they might write them down too much does not make sense to me. This is especially so in circumstances where Mike Soden of the Central Bank has indicated that the Central Bank thinks the banks are failing to restructure mortgage properly.

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