Household Debt Restructuring Post Number 4012

The household debt restructuring (I’m not going to use the ‘f’ word) debate rumbles on. From the blanket coverage in the Sunday papers, Colm McCarthy’s Sindo post and Stephen Donnelly’s pieces were, I think, the best. For context, earlier in the week Seamus Coffey looked at the numbers in arrears from the Central Bank. From Colm’s article:

It would be wrong to dismiss the ‘forgiveness’ campaign as just a silly season space-filler revved up by a woolly-minded media. There is a real problem for many people and some mortgage debt will have to be written down. You cannot get blood out of a stone.

The danger is that the campaign will encourage everyone in negative equity to disguise themselves as stones and to lobby politicians for relief from debts that they are able to service. The politicians need to understand that debt relief, beyond the minimum necessary to acknowledge that some people simply cannot pay, comes at the expense of a bankrupt Exchequer. Do they really want to go to the IMF/EU looking for a further loan to recapitalise the banks yet again?

The best way to proceed is for all banks to be treated equally, regardless of ownership, and encouraged to write down mortgage debt that cannot realistically be serviced. The process will not be left entirely to the bankers, in whom public confidence remains weak, and it makes sense to have active oversight from the Financial Regulator to ensure, for example, that there is no preferential treatment for favoured borrowers, such as bank staff.

Debt write-downs should be expedited where these are unavoidable and extra staff assigned to the task. A modernised personal bankruptcy code would help and legislation has been promised.

I agree with Colm’s assessment of the situation. With the date of the expert group’s report hurtling towards us, it might be useful to consider a few worked examples of debt restructuring as and when they become important to us. Here is a google spreadsheet considering those cases.

I chose just one restructuring instrument, a debt/equity swop, although there are many others. See appendix 2 of the MARP report for worked examples internationally. The headings of the spreadsheet should take you through the logic of the examples.

First off, these are archetypal cases made up to make some points about types of mortgages in difficulty, so they are subject to a series of assumptions I detail in the spreadsheet. They are not meant to be anything other than exemplars, though they are driven by real life cases I’m familiar with. Anybody wishing to improve the ‘reality’ of the examples, by including interest and arrears for example, or another debt restructuring mechanism, please have a go on google docs and I’ll link to your examples in the comments.

Second off, it’s pretty clear from the spreadsheet that very few cases actually qualify for some kind of restructuring. Of the 6 cases, only 2 mortgages are deemed ‘sustainable’ when the bank takes a 45% equity stake, and only 1 is sustainable when the bank takes a 35% stake. So, under the present set of arrangements, the rest of these mortgages would most likely end up becoming court cases, with the attendant stresses on household and society, and the possibility of the bank recouping only the secured asset. If, and it’s a big if, these examples are any guide to reality at all, an efficient personal insolvency mechanism is clearly the first step towards resolving the debt crisis, with a subset receiving some form of restructuring.

It’s clear there is a need for an efficient filter to decide, based on individual circumstances, which mortgages aren’t sustainable, which are, and which might be, given other considerations.

In practice, here’s how I see such a filter working.

1. The process is done through the banks but supervised by the regulator. Another quango or NAMA we really don’t need. Banks are best placed to work things out with their borrowers, but they should be supervised–especially the uncovered banks and subprimes but most importantly the ‘pillars’. A metric agreed by both sides on the debt profile of the individual lender and borrower should be constructed.
2. The implementation should be a menu of options available to the bank, one of which *must* be used depending on the outcome of a series of tests for income, etc., applied in stage 1. The penalty for misrepresenting yourself to the bank should be fraud charges. Cute hoors need not apply in other words. This will reduce the moral hazard element enormously.
3. This menu will include: straight out bankruptcy, debt/equity swops, repayment rescheduling, debt writedowns in cases where the banks have clearly acted inappropriately, giving the house back to bank in full and final settlement but renting the same house again, and more.

The principle, I feel, should be means tested income streams plus arrears rather than negative equity. Each menu item (a, b, c, etc.,) will come from an individual pot of money in the banks (e, f, g, etc.), all overseen by the regulator in a monthly report to them.
4. The objective is to be fair to both parties (lender and borrower) while allowing people to get on with their lives. The perspective, in some sense, is social welfare rather than letting banks or borrowers off the hook. Understanding you’ll never get this just right is key.
5. The guidelines should have the force of a directive on the banks from the regulator, eg it should remove a lot of the discretion from the banks and add clarity to the process while differentiating between ‘can’t pay’ and ‘won’t pay’ and ‘might pay’ and ‘will never pay’.

Update: Karl’s Business and Finance piece this month is excellent on this issue.

By Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

54 replies on “Household Debt Restructuring Post Number 4012”

Its so sad to see economists who think private debt contracts is the physical economy – its what happens I guess when the money supply is tied to bank balance sheets and their absurd “assets”.
All further efforts to save these assets will further destroy the already devastated and mutated physical economy.
PS Allistair Darlings extracts from his new book yesterday on the Sunday Times are quite illuminating if they are to be belived.
It shows a chancellor of the exchequer wanting to protect banking interests and the Governor of the BoE giving them a cold shoulder.
Truly amazing if true.
If the banking interests turf out poor Mervyn can we give him a job ?
The vision of Eddie George sitting in a room Gordon Gecko like looking at pointless financial indices go up & down was quite scary but extremely funny
The man may have been mildly retarded…………….

The people who took out mortgages in the boom were largely the victims of a predatory banking-property complex, which effectively defrauded them.

Bank managers giving loans had a duty of care towards their victims, or “customers” as they were known. People taking out mortgages did not have the expertise or experience in financial matters to accurately gauge just how much money they could afford to borrow. Irish bank managers, whose official job title was to be the good custodian of other people’s money, should have looked after these people.

Instead, a generation of house buyers was thrown to the wolves, their futures and homesteads cast onto the fire to fuel the greed of the banks. The banks conned people into lending more than they could afford: they conned them in the media with false advertising, they conned them in academic sphere with experts bought and paid for, they conned them in the bank manager’s offices up and down the country with sweet talk and reassuring words.

Most of these borrowers weren’t greedy. They weren’t property magnates, or buy to let lenders, or speculators. They just wanted a roof over their head. They just wanted a place to raise their children, park their car, and keep a dog or a cat.

Now the banks which tricked them into a poverty trap want to tighten the noose, take their home, and still hound them for their debts. The same banks which viciously grab the life savings of 70 year old women and then ask for more. Is Ireland a modern country or the setting of a Charles Dickens’s novel?

The mortgage debt must be restructured. The ordinary home-owners and their families are the real pillars of Irish society, and if we must topple a rotten “pillar bank” or two to save these households then it is a price worth paying.


I had a brief look at your spreadsheet. A few points:
1. The mortgage / income criteria is very high at 55%. Far too high?
2. The debt/equity % criteria should based on the net debt remaining in the house (ie 400000 less paid down 52000 in example one), not on the original purchase price. This may bring a few more into the net.
3. I would have thought that the equity taken should either be 100%, 50% or zero%, for simplicity is nothing else.
4. Your cut off percentages appear low at 35% or 45%. Your system, using these low percentages, would entail a disproportionate number of bankrupcy ‘solutions’.

Overall a welcome start at defining some kind of criteria.

As you are a high profile member of New Beginnings, I’m a little confused.

All your examples seem to jar with the examples David Hall gave in his Guardian article:

His chosen innocent victims were:

There are a lot of people from all backgrounds who are in difficulty. Professionals who are and were on large salaries. They were coaxed into investment products and had equity-release on their homes. They included business people, solicitors, barrister, doctors.

So is it Ross and Majella and the off-plan Bulgarian duplex they were coaxed into buying or John and Mary and their cardbaord rations?

Also – why are economists not discussing the 800lb gorilla in the economy?

Ireland has just had, what may well turn out to be, the world’s largest property bubble.

Asset bubbles are generally driven, in the final period, by rampant fraud and mis-selling.

Why not start at the end of the problem?

Where are the calls for bankers to be jailed for illegal activities?

Why not call for proper procedures to be put in place to allow consumers to seek redress for mis-selling?

Are the banks so immune to the rule of law?

@ Stephen k,

On column I of your spreadsheet: “Equates to 20yr mortgage @3.5% of”

Are you saying the monthly mortgage payment for a 20yr mortgage at 3.5% should equal the amount shown in column H? Maybe I’m wrong, but I don’t see an adjustment for the interest rate (e.g. the monthly payment on 211k is 1.2k rather than 880).

They may have been a deeper strategic reason for the credit hyperinflation we have seen over the past 4 decades.
Even seemingly “nice” men such as Mervyn had a monetarist philosophy.

This essentially meant they used interest rates to control inflation when previously it was chiefly about controlling the money supply pre 1960s.

This credit meant western powers could drink oil before others could get their dirty little hands on the stuff – its better to burn the stuff first under the western Central bank war model.
The Credit based assets were merely the other side of Arabian oil coin – nothing more – they are just sophisticated caves , beside providing shelter they have no real wealth generating function.
Burn baby Burn.

@ Stephen k,

Your calculation for column L “=IF(J2<0.35*B2,”Yes”,”No”)”. Why are you basing the equity stake off the purchase price? Shouldn’t it be the current market value (column D)?

To counter some of this, I don’t see where you’re adjusting for the amount paid down (column C)

1. The process is done through the banks but supervised by the regulator. Another quango or NAMA we really don’t need. Banks are best placed to work things out with their borrowers, but they should be supervised–especially the uncovered banks and subprimes but most importantly the ‘pillars’.

No. Never. Never, never, never, never, never!

This issue is too vital, too sensitive, too critical, and too central to the very future of the country to be left to the likes of those car salesmen come loan-sharks in the Irish banks. They have botched every single issue and challenge they have been presented with for the last 20 years, if not throughout their entire existence. To believe that they will handle this issue appropriately is the height of folly. To let them do so would be rank lunacy and the ruin of us all.

1. The penalty for misrepresenting yourself to the bank should be fraud charges. Cute hoors need not apply in other words. This will reduce the moral hazard element enormously.

You’re completely misjudging the situation. The cute-hoors have already had their debts written off, have left the country, and/or have transferred assets to their wives or other such shenanigans. The remaining debtors are largely those people who were misrepresented to by the banks. Adding the threat of fraud charges to these people is only going to make an explosive situation more volatile.

Anyway, there are existing fraud laws on the books, so this point is moot. As for moral hazard, these people are in danger of losing their homes; the problem of moral hazard is also moot.

3. This menu will include: straight out bankruptcy, debt/equity swops, repayment rescheduling, debt writedowns in cases where the banks have clearly acted inappropriately, giving the house back to bank in full and final settlement but renting the same house again, and more.

It’s important to outline how items from this menu will be offered, and to who.
I foresee three categories of distressed borrower, and three optimal methods of dealing with them

1. The subprime buyers: Given loans by predatory and fraudulent lenders, they have no hope of paying back their colossal debts, even with write-downs. The long term unemployed may also slip into this category. In these cases, the solution is “jingle-mail”; Non-recourse default where the borrower would lose the home, but would be free of any further debt. The reckless bank would cope with the monetary loss.

2. Average, boomtime buyer: Forced to pay an inflated price by the banking-property complex. In serious trouble, but would still have the capacity for paying if the loan was reasonable. Here, the solution is a debt for equity swap. The state writes down a percentage of the debt in exchange for some or all of the property, to be redeemed on any future sale, or the death of the owner. The borrower may end up paying rent instead of mortgage payments if the state takes full ownership.

Here, the borrower loses full nominal ownership of their home, but continues to live in it (and importantly continues to invest in it). The imprudent bank takes a partial hit on its partially fraudulent loan, and the state stands to make money on the home later down the road. This is the best good long term option, but will need to be financed by bondholder burning(preferred option) or other source of income.

3. The buy-to-letters, speculators: These are the clerical professionals, civil servants, and other petty-magnates who bought 3-10 houses and who should never have gotten into the property game in the first place. These are the people who gambled in the property casino and lost.

The solution here is a bankruptcy term of no more than three years. These people would lose their investment properties, but not their residential homes–no matter how nice those homes might be. They would be forced to sell any significant personal assets they might have, cars, paintings, etc, but would be allowed to return to their days jobs, work off debt for a 2-3 years, and then go back to their lives, a lesson well learned. The bank takes a substantial hit for giving out such ridiculous loans.

There should also be amendments to bankruptcy legislation to view their children as special interest creditors, whose education cost must be taken into account, otherwise this group will sour and–many being members of the mandarin class–will end up scupperring the entire restructuring plan for everyone else. (Remember, this is the group whose debts are as we speak being written off entirely by the banks under the current status quo)


Why do you want to make everything complicated ?
This debt problem can be solved easily.
The money in your pocket is only given value by the tax raising powers of the state – not the private debt contracts , thats just internal accounting and rentier / class dynamics.
Just divorce the money supply from bank assets and tax the hell out of waste , especially private transport.
Huge efficiencies would emerge from the debt ether as people would be free to move into other caves.
But its not going to happen I guess – so we must complicate things further with strange new debt contracts , rules and social mores – this will be a mad laugh of a thing.

Your proposal seems to be on the right track. But there’s no doubting that many in the media and political worlds are seeking something much more generous.

They seem to imagine debt-forgiveness as a way of allowing the indebted to hold onto their assets while having their debts reduced -sort of middle-class welfare. It is vital that the message is communicated clearly; debt forgiveness means doing a deal with your bank, giving them something of value in return for reducing your debts. Commentators seem to be greedily fixated on reducing debts, but gloss over the quid pro quo of surrendering equity/ownership/assets or lengthening terms etc.

Above all, we must make it clear that entering this process can (and probably in many cases, will) end in bankruptcy. There is nothing shameful in bankruptcy (the main debt forgiveness instrument), but the thought of giving up all assets and starting from scratch will deter some would be fraudsters.

However, i do not share your belief that the threat of fraud charges will deter people from misrepresenting their situations. The rewards are too lucrative and proving misrepresentation is too difficult for this to be a real deterrent.

What physical wealth does a debt contract produce ?
Just tear them up and seperate money from the “assets” – its that simple baby.

Why re-invent the wheel?

Just reform the bankruptcy laws and the ones in need of debt-forgiveness will get debt-forgiveness through a bankruptcy.

How will workers who declare bankruptcy afford to move into a more suitable house if the house prices remains too high due to credit hyperinflation remaining on the books because solvent mortgage holders continue to pay low interest rates on credit hyper inflated assets.
The entire ecosystem of private debt contracts must be defaulted on if you are to get a efficient exchange.

@ Jesper

In fairness, Stephen is not proposing much more than that, except to commend the use of alternative settlements that are of mutual benefit to the lender and the borrower.

I repeat, there is nothing shameful or evil about Bankruptcy, we must not use State assets to preserve people from it. Bankruptcy is a normal and healthy process of exiting unsupportable debts. It is not the State’s responsibility to preserve the lifestyle and postcode of the heavily indebted. To avail of forgiveness they must sacrifice their assets.

First day of term so not much time right now.

@ Dork, I really don’t know where to start tbh.

@Ahura, I’ve fiddled with the google doc columns, hopefully it’s a bit clearer. The DE formula is from the bank’s point of view. They may choose to value from either price, obviously, but in their own interests (and because the upside is all on their side in any upward equity revision, I’d say they’d value it that way. But naturally it’s another assumption to factor into the spreadsheet.

@OMF, good points, you’re in the Shane Ross camp on most of them. I guess we’d have to look at the costs of creating some new mortgage asset management agency–MAMA–with all the problems that might entail, and a new agency. The oddness of the situation is alluded to in Colm’s piece, where the banks might end up taking their own employees to court, which creates all kinds of perverse

@What goes up, as of last Friday at 5pm New Beginnings has 1848 ‘clients’, I guess you’d call them, so really all types of homes in difficulty can be described and represented. I don’t see the conflict, and I’d like to see some bankers, if they are found guilty, jailed for their crimes.

@All, thanks very much for the comments so far.


I’d agree for the most part. My opinion is that bankruptcy is to be seen as the least objectionable alternative, i.e. if no other agreement can be had then bankruptcy will be the agreed upon option.

If the borrower and lender can agree on some other solution then let them. There are numerous different options and agreements, prescribing how, when and for who by legislation seems, due to complexity, impossible.

If they can’t find any negotiated solution then the remaining agreement is the bankruptcy. Current legislation makes that option impossible, therefore I believe the first step is to reform bankruptcy laws. After that has been done, then further steps might need to be taken but that cannot be evaluated until after the bankruptcy reform.

My faith in (some) economists almost restored. Colm McCarthy’s contribution is pure common sense from beginning to end.

@ Karl

I know your current hobby horse is that since we have put in enough capital to meet €6bn losses, as suggested by Morgan Kelly, let’s go ahead and recognise these losses through write downs. My understanding is that MK was talking about an extra €6bn of taxpayer money whilst you seem to be arguing that there is no extra cost.

@ Stephen K,

I’m still not there with the spreadsheet. I’ll work through the ‘most likely candidate’ – the loan no.2.

100% mortgage
Property Purchase price: 220,000
Principal repayments: 28,600
Current Property Value: 127,600
Negative Equity: 63,800

It’s reasonable to assume then that the Outstanding loan balance = 191,400. If I follow through to “Equates to 20yr mortgage @3.5% of”, the value shown is 211,200. This looks a little wonky – I don’t think the sustainable mortgage amount should be greater than the outstanding loan balance for the purposes of this spreadsheet.

Secondly, a monthly payment of 880 on a 25yr repayment mortgage @ 3.5% will get you a loan amount of 153k. I still don’t get where the 211.2k comes from. As 3.5% is a bit too low, a (non-conservative) 4.5% will get you a loan of 140k. 191.4k minus 140k gives a shortfall of 51.4k.

The equity share: 51.4k of the asset’s value (127.6k) = 40%. I wouldn’t use the purchase price.

@Brian Woods II
Penny wise Pound Foolish more like – I cannot understand why every Irish economist is not calling for a monetory revolution of some sort or another.

The epic waste of potential wealth by saving these banks is truely spectacular.
A complete inversion of the economics discipline really.

Why do all the solutions have to be so complicated.

All we are doing is allowing a certain type of person (access to good lawyer/accountant) to have a better deal than Joe Bloggs.

what we need is a simple idea that anybody can understand, can walk into their bank and say “I want this”.

I still think the simplest solution is to change all loans to non-recourse. If you can pay you will continue to so you do not loose the equity you have already built up and if you can’t you hand back the keys, people will have to be told that if they take this option that they will have a terrible credit rating for 5/10 years.
All new mortgages will be non-recourse with rises in interest rates to suit.

@Stephen Kinsella

If we leave aside Anglo achieving the unenviable record of being the worst bank in the world EVER (which is some achievement when you look at the competition it had to beat). If we ignore AIB being right up there with it in terms of bailout funds. If we ignore the fact that INBS is even worse than Anglo with relation to the level of impairment on it”s loan book.

If we just look at Bank of Ireland…

Mike Soden on Bank Of Ireland:

I can’t believe it took 221 years to build up a
balance sheet of 100 billion euros and only four years to make
it 200 billion euros.

And how do you achieve this amazing feat of financial engineering?

Bill Black on control fraud:

… it was overwhelmingly the lenders that put the “lie” in “liar’s” loans. The “recipe” for a fraudulent lender to maximize its short-term (fictional) accounting income has four parts.

1. Grow rapidly by
2. Lending even to the uncreditworthy at premium yields
3. Extreme leverage
4. Pitiful loss reserves

If you stop assuming that the practices that went on in the banks were “normal” and that the results of those practices now need some sort of resolution, and instead start from the perspective that what went on in the banks was fraud and the fraud needs to be rectified – then you get to a point where the solution present itself through existing legislative channels without having to re-invent the wheel.

All this is a lot more grounded in the economic realities and doesn’t require an appeal to morality or some other vague term of emotional blackmail.

It also means you will get people to buy into the idea of “debt restructuring” – as the real culprits will have had justice administered to them first.

It’s not debt forgiveness if the loans were fraudulent in the first place.

I repeat, there is nothing shameful or evil about Bankruptcy,

Bankruptcy is head lice. Anyone can get them, particularly if they’ve been playing rough and tumble with some over-active types. But there are creams and shampoo treatments which you can get which usually clear the thing up in short order. The worst thing you can do is ignore them problem because it won’t go away on its own, and you can even end up passing it on to those around you.

Also, it helps not to go for a tumble with the tumbling types again once you’ve cleared it all up.

Karl Whelan says:

For example, consider the case of a family that cannot afford their current mortgage but who can afford a mortgage equal to the current market value of their home. The bank will lose more money by kicking them out of their home and selling their house (thus incurring various fees) than it would by renegotiating their mortgage down to the house’s market value.

This is totally unrealistic. Anything along these lines would give rise to huge moral hazard as well as highly inequitable treatment across our society. The main reason people pay their debts is to avoid the pain of not doing so. Any prospect that mortgages merely get market to market (when falling) would undermine the whole basis of our banking and morgage financed owner occupier culture.

Honohan has suggested a more realistic solution whereby the house is repossessed by the bank but the mortgagee can continue to occupy on a commercially based rental basis.

@Brian Woods II
A family not paying a mortgage can pay more tax and if a sensible consumption tax it can avoid this and make their lives more efficient helping the domestic economy enormously.
If you consider mortgages just a private Rentier tax the solutions become pretty obvious.
As I have said since I started blogging here its either the state or the banks – not enough wealth remains to service both and since the banks cannot operate without the consent of the state I would suggest it must be the former.

@ BW2

“This is totally unrealistic … Honohan has suggested a more realistic solution whereby the house is repossessed by the bank but the mortgagee can continue to occupy on a commercially based rental basis.”

Although I see now that I didn’t mention it in the BF article, when I have suggested this elsewhere I have made it clear that the bank would take an ownership share in exchange for the debt writedown. I tire a bit of the “appeal to the authority that is Honohan” arguments but if you’re going to play that game, here’s what he actually said

“It may be possible to arrange that, even very stressed, owner-occupier borrowers who must surrender ownership could stay in their house on a rental basis, and there could be intermediate shared-equity type solutions.”

In other words, immediately after the buy-to-rent proposal he also suggested a writedown with shared equity.

@ BW2

“I know your current hobby horse is that since we have put in enough capital to meet €6bn losses, as suggested by Morgan Kelly, let’s go ahead and recognise these losses through write downs. My understanding is that MK was talking about an extra €6bn of taxpayer money whilst you seem to be arguing that there is no extra cost.”

Honestly Brian, I have no interest whatsoever in what your understanding of Morgan Kelly’s comments may or may be. I’ve explained myself at pretty great length on this topic. If you don’t agree fine but lets not get into what MK may or may not have said and whether you have or haven’t understood him correctly. Life’s too short.

Also, to be honest, I don’t really such much difference at this point between what I’ve been saying and what Honohan and Elderfield have said.


I find The Dork amusing. He’s like a Magic Eight ball only the answers are a little different; fiscal, leverage, gold, monetarist, oil, debt contract etc etc.

Karl you are a central banker – you think the physical economy is a series of private debt contracts.
You can eat paper but it is not very nutritious.
Your brotherhood of debt has destroyed western civilisation – your just not prepared to admit it.
A 5- 6 billion debt forgiveness scheme will just not cut it – its a joke.

If thats the best you can come up with then indeed I am a better Dork then you – which is not saying much for the brightest and best in this poxed country.

“you think the physical economy is a series of private debt contracts.”

Do I? I don’t even know what that means and yet apparently I think it.

Still “brotherhood of debt destroying western civilisation” sounds like an interesting movie. Touch of the Da Vinci code there.

Well Karl prove me wrong…. I would love to see it – it would restore my damaged faith in Humanity.
Come on lets say it together now.
The State is not the banks the state is not the banks the state is not the banks…………

Karl you disappoint me – engage with the substance of the argument – do you consider the money power a tool of the state or the banks ?

Credit contracts / deposits is not money.

@Karl Whelan.

Good article in Bisiness and Finance. Whatever the final cost of mortgages not paid, the banks must be made to use their reserves and get on with it.
I would have concerns about the prospect fo each individual having to ‘renegotiate’ their mortgage, if that is how you envision this happening. [taken from your comment below]. My concern is that left to each individual to do his or her own renegotiation, those least adept at such negotiation will come off worst. Your proposals need to consider how to deal with this aspect of restructuring.


The bank will lose more money by kicking them out of their home and selling their house (thus incurring various fees) than it would by renegotiating their mortgage down to the house’s market value. In other cases, best practice should be to let people walk away from their homes and their mortgages, leaving the bank to sell off the property.

“deposits is not money”

Last I checked, deposits work just as well as cash when acquiring goods and services.

Ok, off for me dinner.

Honestly Dork, for everyone’s sake but most of all your own, give it a break.

A term deposit is a loan to a bank – it is not money.
Even Eddie George knew this – you are digging a bigger hole for yourself.

@ Karl

That’s some ommission from the B&F article, perhaps you should publish a clarification. I am glad that you would require some sort of ownership transfer for this sort of debt forgiveness.

I do not in fact subscribe to the Infallibility of the Governor dogma, I was simply comparing Honohan’s realistic proposal to your (misrepresented as it turns out) B&F proposal.

Only MK and his analyst know exactly what he means. However, the media have interpreted it as a suggested further taxpayer cost of €6bn whereas your own recommendation does not, on your own assertion, imply any additional costs. Therefore I was surprised how the B&F article gives a clear impression that you agree with MK.

@ BW2

The article makes it clear it agrees with Morgan Kelly’s ballpark figure on mortgage writedowns. And it also makes it clear that there does not need to be additional cost to the taxpayer

“For those who oppose mortgage relief on the grounds that their money should not be used to help write down other people’s mortgage debt, there’s bad news and good news. The bad news is that it’s already happened.”

That addresses the key points. As for what the media think about Kelly’s comments, some understand the PCAR process, some don’t. I have given up a lot of my free time to try to explain this issue as best I can so ease up on the snarking.

Ha probally – but its been a bore this past year or so – I think I dragged down the standard of discourse……
Despite what I say about Karl sometimes – I think he is a decent priest trying to stop abuse , I however just simply don’t believe in the Creed anymore.
Whatever illusion of a contract that existed under a Sovergin money system – it has been broken now.

@Dork, I’ve had enough-this debt restructuring issue is really important, and your posts are not adding to the sum of the discussion. I’m prepared to indulge a lot on this blog, but give it a rest for the rest of this thread please.

@Karl, Business and Finance article is excellent.

@Ahura ” I don’t think the sustainable mortgage amount should be greater than the outstanding loan balance for the purposes of this spreadsheet.”. Thanks for engaging. That might be another constraint on a set of rules banks might employ. I’ve changed the spreadsheet now to take account of take a look.

@BWII, there isn’t an appeal to emotion, at least not deliberately, but I certainly have an appeal to morality within my post, and I guess within my thinking.


I like questioning the core articles of faith in religious institutions – I like to see the defensive & irrational reactions.
Central banks are effectivally modern tabernacles – it is claimed the bread & wine is turned into the body & blood but we dare not look or question the very basis of the irrationality.
I think its quite instructive that the previous drivers of reformation & republicanism (The CBs) have now become the very church they had fought.
The monetory system ain’t working baby – you can deny the reality of the physical world through elaborate rituals or you can engage and understand it.
These debt contracts are reducing our ability to provide physical goods for our continued life support.
Its like as if the 19th century CBs endoursed private banks ability to print private currency – it led to complete chaos but it was shut down.
These contracts are null & void – its time to call last drinks at the bar.

@ Karl

Everybody who contributes to this debate does so of their free time, with rare exceptions like David McWilliams. I apologise for any “snarking”, though my Google didn’t really help me understand the term, I think I know what you mean.

@karl good article – cram downs and short selling with or without rent back would probably deal with the bulk of seriously distressed loans. I’m unconvinced of many of the debt/equity share proposed solutions. Surely a settlement deal should be final and not bound by some future unknown event. Leaving settlements to banks and borrowers may not work given the risk of disparate treatments or customer cherry picking. In which case it may be necessary to work solutions through an independent process rather than rely on compliance with codes of business conduct. Regulators are known for running into emptied stables demanding shiny new shovels.

It would be wrong to dismiss the ‘forgiveness’ campaign as just a silly season space-filler revved up by a woolly-minded media.

Alas that this was written in the Sindo of all places – the gutter of silly Dublin middle-class pandering in this country (stamp duty, stalking enemies of the property ladder like Morgan Kelly, etc.).

I’m sure there was a piece in the paper not far from this one urging more Gestapo tactics on the unemployed, for example (no ‘forgiveness’ there, boys).

I am surprised at the somewhat muted reaction to Colm McCarthy’s piece which well and truly nails the “debt forgiveness” bandwagon. By contrast Karl Whelan’s piece is receiving rave reviews. I wonder is that because some are misreading Karl as a “debt forgiver”. He has assured us in this blog that he is not a debt forgiver. If that is the case then I fully endorse the following quote:

the debate that we should be having is about how, and not whether, Irish banks should be writing down parts of their mortgage portfoliosIf I may paraphrase this. There is no issue about what the banks should right down. They should write down those loans which can’t be paid. This is the stance of McCarthy, Burgess, Honohan, even Noonan and my own humble self. This is far removed from say David McWilliams or Stephen Donnelly and, I think, Morgan Kelly who are advocating debt forgiveness beyond the “can’t pays”.

So, continuing the paraphrase, Karl agrees with the non-forgivers that we should only write down “can’t pays”. He questions whether the current slow process is correct. And so do most of the other non-forgivers. That is why we have another expert group to consider such things as easing the bankruptcy laws or mortgage for rental swaps.

There are no silver (or is it magic) bullets.


I think the CMcC Sindo piece falls into another long list of those in the economic field who are providing comment in an environment where the thought process is in the here and now, rather than where the process is actually evolving to.

In a RTE ‘Frontline’ programme some months ago I think Matt Cooper suggested a NAMA type of arrangement for the little guy i.e. a debt relief scheme to ease the burden on the consumer. The same CMcC sitting on the platform dismissed the idea outright and indicated as far as I can recall as ‘wishful thinking’ – or words to that effect.

Move on 9 to 12 months and we now have CMcC suggesting that there is a requirement in circumstances where it is patently obviously where mortgages will not be paid for a scheme of some sort to be put in place.

The point I’m making is along the lines of what DMcW has been making for the last number of years and that’s the notion of what’s originally dismissed as pureile nonsense sometimes morphs into sensible policy. In this debate we have seen one of Ireland’s foremost economists, having to change his mind, because the information and evidence is so overwhelming that common sense demands it so.

I suggest that we move the story on another 12 months from here after the Dec 2011 budget and the effects of same have been in the system for a year or so and we’re now gearing up for Budget 2013 when an additional €4bn is required to be found. Greece has defaulted and the turmoil is ongoing about an Italian, Spanish and Irish default and Euro survival etc etc and the ECB has been steadfast and base rates are now at 2.5%.

Now given that likely backdrop, I’m firmly of the view that CMcC and others who have suggested schemes such as those on offer here will finally realise that the only real solution to this issue is to go back to the route cause, and that’s simply a mis pricing of an asset class for a decade and a mis selling scandal of financial products in support of that valuation fraud.

I do not agree with CMcC regarding his analogy to car loans. Car loans are priced according to the risk inherent in the asset they are financing. We had a situation where banks were lending into a risky asset class i.e. property at net rental yields 200 bps below, yes below, the risk free German bund yield. The banks obviously decided this pricing was okay, because house prices only ever go up – that’s right isn’t it?

So I predict, for what I actually believe to be a much fairer solution, is a matching of the debts to the true long run value of the assets will eventually happen. Simply because it’s logical, it’s fairer to all, it gets to the root of the problem and allows the austerity measures (all of which I agree with) to proceed against a backdrop of a country where a huge cohort of its citizens can actually afford to take the pain. Proceeding as we are will not work despite what the ESRI believes because even for many of the normal working folk getting blood from a stone will prove a task too far.

Just on a point which I believe has not been mentioned at all and that’s the cosy assumption from most commentators that ordinary folk will happily continue to finance an asset worth 10% to 20% of its purchase price- because that’s where prices are going. I’m not suggesting mass default but what I’m suggesting that there will likely come a time where sensible folk will begin to ask the obvious question – what’s the point?

In addition many commentators on this site and elsewhere have indicated they are currently is a position to cover their mortgages and questioned why should they benefit from any scheme, given their incomes. Its seems as far as I can gather that many of those here and elsewhere making such suggestions are of an academic persuasion where salary levels in a European context relative to working hours et al are on the generous side of generous. I’m wondering what will the situation be if growth disappoints (likely) and Croke Park is binned (likely) and a 25% cut in salaries is demanded. In that environment I’d refer applicable readers to paragraph one above.

@ Stephen K,

Cheers – me own column! However I’m still going to nitpick on the “Equates to 20yr mortgage @3.5%” calculation. If you calculate the monthly payment using the returned value its a lot higher than ‘Sustainable mortgage payment’ ( E.g. the monthly payment on €211,200 (20yr @ 3.5%) is €1,218 which is 76% of the monthly income for Loan no2. A rough formula I’d suggest for cell I3 is =PV(0.035/12,240,H3,0,1).

You’re right to suggest an equity cap above which level a different workout method is required. I’ve done some rough calcs on ‘taking equity’ scenarios, and I mostly got results showing the bank would take (pretty much) all the equity. Note that I always use current market value to calculate equity share.

I’m not sure if an adequate number of borrowers would qualify to make this scheme workable (especially when you factor in potential for subsequent defaults post-restructuring). Equally from a banks perspective; how would they value portions of homes that generate no income/ would property maintenance costs be shared?

Perhaps other schemes like rent-back for set periods might offer a better solution.

Any scheme needs to factor in what impact it may have on future mortgage lending. Both in terms of the availability of credit and the cost of credit. Attracting new lenders won’t be easy if they fear borrowers repaying is somewhat optional.

There’s too much energy being wasted on the ‘debt f….ness’ issue. Allow debt forgiveness and the stampede will bring us back to square one. Bring in a sensible bankruptcy regime and individuals will make informed choices; either hand back the keys, rent one of the many empty houses, and start again from scratch, or stick it out because you have the means to eventually come out the other side.

Even with a shortened period, bankruptcy is the nuclear option for both lender and borrower, and not taken lightly by either. It allows you to walk away from your debts, but you lose control of all your assets. I think you’ll find that many of those making the most noise possess plenty of both.

I think the can’t pay vs won’t pay criterion is not a particularly useful one for classifying different debt forgiveness proposals, since many, if not most of these, would claim that they only target ‘can’t pay’ borrowers. I think there are significant differences among these ‘can’t pay’ proposals, and that other criteria can be used to classify them. In particular the following can be used

i) are the rules related to loan modifications mandatory or optional, as seen by the banks
ii) who has final decision making authority on loan modifications (e.g. bank, financial regulator, insolvency administrator)

A first category is one where there are mandatory rules for loan modifications formulated by the financial regulator (e.g. as proposed by Stephen Kinsella in the OP). This would seem to be ruled out based on Honohan’s testimony to the Oireachtas committee last week. Honohan’s comments on debt-for-equity schemes, for example, were within the context of voluntary schemes that the banks would ‘explore’. He explicitly rejected that there should be any standardized criteria or methodology used by the banks.

A second category is one where an insolvency administrator or judge has the right to impose loan modifications (e.g. secured debt written down to market value) while allowing a borrower to remain in the property. This is known as cramdown in the USA. While short-sales and foreclosures are very common in the USA, cramdown is not – a bill proposing this failed to get through (a Democrat controlled) Congress. It is possible, though I think unlikely, that the latest review group in Ireland will recommend this. One reason is that while there is a group of borrowers for which cramdown may increase recovery rates, there are two other groups of borrowers for which cramdown (or its possibility) may reduce recovery rates (strategic defaulters, and borrowers who default anyway even after a cramdown). Thus the overall impact can be net negative.

A third category is one with no mandatory loan modifications, but where banks are allowed to accept short-sales and to foreclose. Any shortfall is bundled in with other unsecured debt, and subject to a workout plan under the control of an insolvency administrator. In effect this forms a baseline, and could provide an incentive for banks to make voluntary writedowns, if they thought they could recover more money in certain cases. I think this approach is both the most workable and the most likely.

While everybody is entitled to a roof over their heads, I see no reason for someone to be entitled to the particular roof that is over their heads today if they cannot afford it and need taxpayer subsidies to remain there. Renting something more affordable, or living in local authority housing if that is not possible, are reasonable alternatives. In the USA, for example, many distressed borrowers actively seek short-sales, since they can generally rent a similar property for much less money than their monthly mortgage payments, often closer to work or in a better area. Investors buy the foreclosures, and in many cases make improvements to make it easier to rent out the properties, so that the overall quality of the housing stock goes up. Of course this process is greatly facilitated by a functioning property market where property values and rents are allowed to drop as necessary, with full price transparency for all transactions, which is not the case currently in Ireland.

@D Duggan

I’d safely assume your own position is not one which is currently effecting thousands in the country – your call for keeping quiet on the forgiveness issue if that is your situation, is without any real world basis.

Whilst your ‘solution’ sounds logical – it assumes ‘fault’ lies completely on the side of the consumer given that they are the ones that will have to go through the bankruptcy procedure, in full public view, for a situation that is largely beyond their control. Does this seem right or fair? My view is definately not.

It strikes me as odd when we have reports suggesting the Regulator is now likely to question the fitness of the current CEO of BoI given his past association as head of commercial lending at BoI during the boomist of the boom period. We hear the NAMA tell of woe last night about c€40bn of potential debt write offs, a significant portion of which was made under the current CEOs direct approval.

It now seems we have to be ultra careful to preserve the banks capital because otherwise the €3bn the ESRI predicts that will be going back to the Govt from the excessive capital they will end up likely holding by 2014 may disappear. All of this seems very at odds with Enda Kennys comments this morning along the lines of ‘working with the people’. What cohort of people does he actually refer to?

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