Karl Deeter on Mortgage Relief

Karl Deeter of Irish Mortgage Brokers has written a paper on mortgage relief Designing a Debt Relief programme with minimal moral hazard to address the Irish household debt overhang. You can access the paper here.

34 thoughts on “Karl Deeter on Mortgage Relief”

  1. What would be refreshing for once is if participants in the thread, or indeed authors, stated their liabilities with respect to mortgages, much like any business article requires authors to state any conflicts of interest. Personally I think bankruptcy reform will go a long way to addressing the issue. I do not have any mortgage liabilities.

  2. I am going to have to set time aside another day to read Mr Deeters paper.

    However the title looks promising as it does not include the word “forgiveness”.

    IMHO it would be political lunacy to even contemplate the notion that Irish people (including distressed mortgage holders with their “backs to the wall”) would even consider seeking “forgiveness” from bankers and financiers.

    Possibly the word “forgiveness” was “lost in translation” by the various continental experts drafted in to help us deal with this crisis and who speak English as an additional language. 🙂

  3. Only time to skim, but a vast improvement on the woolly debt forgiveness carpet bombing of the media over the last few weeks.

  4. This seems biased in favor of the creditors, with the intent of extracting as much as possible from the debtor. The example given gives the bank a lower limit of $253k (net present value) with the possibility of increasing this if over the next 25 years the status of the debtor improves.

    In bankruptcy, (under the Law Reform Commission’s suggestions) the bank would get repossession, $174k + 3 years of 1,267 a month, or $45k. for a total of $219k, and possible upside for the next 3 years, if the debtors income increased.

    The debtor would be foolish to choose to remain in negative equity (for possibly the next 10 years), when they could escape debt free in 3 years in bankruptcy.

    Any ‘forgiveness’ proposal should be more lenient than bankruptcy, not harsher.

    (I have a large non-Irish mortgage, but only for tax reasons).

  5. Further to quick skim:

    “The issue is therefore not about whether debt forgiveness of itself is wrong or right, it is about
    creation of a fair process that will in certain outcome warrant such a solution as being timely,
    efficient, workable and fair.”

    Any scheme would have to be fair also to those who did not over-stretch and would like to buy that big house now they should be able to afford it, or people renting that would like to buy now. You would have to exclude debt write-offs the possibility of write-offs that allow continued occupation of properties above some sort of minimum comparative value. It would be ironic if newly cash strapped barristers got their mortgages written down and stayed in the trophy house.

    “Any plan should involve finding a level of net disposable income available and applying it to the
    existing loans on a rational basis, this requires the same brand of underwriting that banks use in
    order to forward a loan.”

    Uh-oh! the brand of underwriting used in advancing loans has been shown to be vuklnerable to “manipulation”. Combined with the suggested timetable, this looks less than watertight – irrespective of fraud warnings.

  6. Interesting about mortgage write-downs, bankruptcy shortening etc in the context of what the state “can afford”.

    Just been drawn to my attention that The Sunday Times reported that the Health Minister is shocked, yes Shocked!, to learn that Irish hospital consultants are entitled to a whole year’s holiday with full pay before they retire.

    Maybe they should just give them a couple of repossessed houses instead of the year’s pay so the state doesn’t have to borrow the funds from the official funders to pay for it.

  7. In normal countries, particularly during downturns it is common for banks to renegotiate the terms of a mortgage where the mortgage holder is unable to pay the full monthly amount. Due diligence applies, the mortgage holder is suitably squeezed but banks are not half as stupid as most people think. The bank estimates the present value of the house, the cost of foreclosure, repairs, sprucing up for sale, brokerage fees and usually settles for a reasonable lower principal amount, interest rate, longer term or a combination of all three.
    There is nothing that should preclude the application of common sense.

  8. After a quick look it seems that the paper proposes that banks be required to either restructure loans or accept a baseline of repossession and no further recovery (i.e. turn loans into non-recourse). A week ago at the Oireachtas Committee hearings Patrick Honohan all but ruled out any mandatory measures for banks, and while he is obviously not the ‘decider’ I think it unlikely given his stated position. I would also be surprised if the baseline is not “repossession and take your chances with other unsecured creditors for the shortfall”, assuming a consumer bankruptcy law based on the Law Reform Commission proposals is introduced. Beyond this baseline then if banks figure they can get a better outcome by restructuring then they would be free to do so. However just declaring that loans are effectively non-recourse should a borrower enter a personal insolvency regime, is something that I doubt would fly, but you never know.

    About 25-30% I think of residential mortgages are held by non-domestic banks (and maybe more due to asset sales and deleveraging by AIB etc.) so that any mandatory write-down scheme could lead to additional taxpayer costs refunding the banks/institutions owning these loans.

    I would agree that all the deferred interest schemes (which typically end up with the borrower ending up even more in debt) or shared equity (where a bank might get part ownership in an illiquid asset that may not be sold for 40 years or more) are not good solutions.

  9. Delighted to see the response thus far, fair criticism so far!

    I’ll give a quick response to a few posts:

    @P Frank Holden: I don’t see how that would make the analysis right or wrong, it may prove a bias but I’d rather see that bias established than have an automatic need for lots of personal disclosure in advance. For what it is worth I do have a mortgages that are fully serviced and I’m not in negative equity, but I don’t know if that makes the conclusions I draw correct or otherwise.

    @What Goes Up: There is probably a case for that, but I think it is outside of the area of addressing distressed households. As to where that blame lies I think page 21 footnote 27 of the Nyberg report is a fair place to start.

    @Livonian I take ‘forgiveness’ as being unable to pursue a debt beyond a certain point, for instance, in the scheme outlined if the bank decide to repossess rather than work with the borrower then they forgo the right to a deficiency judgement if the property is sold for less than the mortgage owed.This may skew incentives where people do have equity in their home and can’t pay but that is why there are other balancing effects in the proposed solution.

    @Tom Costello I am in favour of honouring contracts to the extent that it is possible, I think that is a good thing. Bankruptcy brings with it many other negative factors about general ownership of property etc. that make paying as much as is reasonable a viable alternative, with this approach you don’t end up as a bankrupt – that our bankruptcy is harsh is proven by the numbers (c. 30 for 2010 as I recall). I would disagree that the proposal is worse than bankruptcy.

    @Grumpy: I’m talking about current underwriting criteria which gives conservative discrimination against the borrower being turned on the bank, giving them their own criteria to contend with. In the case of a minimum comparative value, when you look at the ability to service the debt and in cases where the option to take the property back is better then the bank will probably do that but in doing so the inhabitant is set free. The one area where this might be abused is where people earn cash and can hide their actual income and orchestrate such an end to their advantage. This is where the criminal fraud disclosure in the process would kick in (if discovered), naturally there are people who will abuse this somehow and get away with it.

    @Mickey Hickey true, but your qualifier was ‘normal countries’!

    @Bryan G: the solutions for the bank are not mandatory, but the system is partially prescriptive. To operate on a ‘principles’ based system in a workout is too open to interpretation to be effective but full prescription is inhibitive towards alternative workouts. What this does do is align incentives to 1) try to find answers outside of this solution and 2) once you enter the process to give a fairly quick menu of choices available to the participants. This process only begins after frustration/failure of work out plans prior to it. Knowing this exists would also give an incentive to a more comprehensive answer in the zone that is before & outside mediation, ideally you want people to work things out without this process.

  10. @karl deeter

    “once you enter the process to give a fairly quick menu of choices available to the participants”

    But at this point the options seem to be
    – mandatory restructuring or
    – repossession without recovery of the shortfall (i.e. converts to non-recourse)

    Have I got that right?

  11. @KD: Have, literally, skimmed thru paper. Thoughtful. I have a few nits to pick, but these are trivial and are best set aside. Later, perhaps.

    I’ll just re-work Clarke, J:

    “”to enable in an appropriate case, a FAMILY, to continue in existence for the benefit of the economy as a whole and, of equal, or indeed greater, importance to enable as many as possible of the DEPENDENTS (whose wellbeing) may be at state in such enterprise to be maintained for the benefit of the community in which the relevant FAMILY is located. It is important both for the court and, indeed, for examiners, to keep in mind that such is the focus ….”

    This is the crux: its a deeply personal (human) issue, the future stability of our social (political and economic) structure. That structure has been undermined (in a vital part) by a combination of criminal fraud, managerial incompetence, gross regulatory failure and political cowardice on a heroic scale.

    Trainee medical practioners are ‘warned’ (in respect of diagnosing a patient’s ilness).

    “When you hear hoofbeats, think of horses, not zebras”.

    I think we may (at the present anyhow), have zebras on our plasma screens.

    Thanks KD for your paper.

    Brian Snr.

  12. @ karl deeter

    I think you’re being a bit Jesuitical with your Nyberg defence:

    While these
    changes impacted on the mortgage market, mortgage intermediaries had only a limited and indirect impact on the
    banking problems which are the subject of this Report
    because, in the final analysis, intermediaries did not make the
    lending decisions.

    This is merely stating, to use an apt analogy, that the drug dealer on the corner has no significant influence on the amount of drugs imported and supplied into a market.

    Unless you’re claiming mortgage brokers are merely innocent bystanders, simply facilitating the financial transaction between consenting adults? I have an apt analogy for that too.

    As I’ve expounded previously:
    http://www.irisheconomy.ie/index.php/2011/09/05/household-debt-restructuring-post-number-4012/#comment-166799

    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.

    Prosecute the fraud and the solution present itself.

    But in Nyberg’s world this is heresy. He allows the guilty to use the Dermot Aherne “No one is responsible… it just happened” defence.

    The problem was the bubble.

    This is just the fallout.

    The financial industry somehow imagining it has a say on what the best solution is for the victims of it’s fraud is just bizarre.

  13. @WhatGoesUp far from allowing the financial industry to call the shots this idea takes a lot of the power out of their hands (because at the moment it is unbalanced).

    Even if you are correct and could prove that all mortgage creators (brokers or otherwise) were cunningly tricking people into taking on massive debts, the weight of evidence and process for fraud and ensuing ‘justice’ would take many years to sort out.

    This programme addresses the immediate problem and can be done in 6 weeks. From an operational and pragmatic perspective it would therefore be far more successful than your call for ‘justice’ against ‘fraud’ which hasn’t taken a central theme in the national debate (in terms of regular residential mortgages), primarily because nobody thinks that is the cause of the problem; we obviously have different views on this point.

  14. @Brian Woods Snr. y’know I was trying to draw the comparison but substituting the words in the piece actually do it far better! thanks for taking the time to read the paper and contribute to the debate

  15. @karl deeter

    I would agree we have different views.

    If you think this is about a national debate, then shooting for the short-term, populist “solution” is always a winner.

    If you think this is about allowing people to see that the devil has played this tune over and over again – then it’s about educating people to allow them to learn from the past and arm themselves for the future.

    I’ll ignore your strawman, thanks very much.

  16. @what goes up: Reform of our debt laws is not a ‘short term populist solution’, it is actually a long term and long overdue requirement that took the influence of the IMF to bring forward.

    What devils tune are you referring to?

  17. @bryanG effectively that is the situation that exists anyway, but it has no legislative backing. The choice will always be ‘take what is on the table or take the property’, I tried to create a model that would put some formality on it (likely made lots of errors too!).

  18. The whole issue of Debt forgiveness has become rather emotive esp the from the “Forgiveness Brigade” and the cost is increasing daily.
    Morgan K mentioned a fig of €5-6 bn a few weeks ago. There was a Niamh Byrne on the radio this morning on Newstalk ( I don’t know her qualifications, it wasn’t mentioned) and she breezily suggested the amount required to “solve this problem is €10 bn”. What will it be next week or next month? Brendan Burgess mentioned a fig of €30 bn plus.

    Where she got this figure from I don’t know. FF and Marc McSharry in particular talk about entitlement to “The Family Home”. The bould Marc is an estate agent who dosen’t see the irony on an estate agent looking for debt forgiveness (which will be carried by the tax payer) for a problem that he helped caused. Someone should ask Marc about the site he has for sale on daft (300k for .11 acres works out at around €2.7m per acre!!). When you check the mortgage calculator the payback period is 35 years and this guy is Michael Martin’s Czar on debt forgiveness. This site is in North Sligo not Manhattan.

    I wonder would the author of this report (Mr Deeter) like that the State would force the same forbearance (that the banks have to apply to those in mortgage arrears) on him towards this tenants i.e. pay as much as they want to (even if this is nil) while they spent the rent money that he should be receiving in the pubs on holiday etc. No legal action can be taken for 12 months etc.

    Because that’s the option that private renters should be allowed to avail of to allow them have parity of esteem, with mortgage holders to give them their proper term instead of the favoured term of the deluded – “homeowner”. But then if you’re of a certain class in this country renters are in the main Untermenschen and not like “Us”.

    Everyone should have shelter and “A family home” but they shouldn’t decide that they should be maintained by the taxpayer in a style that they have become accustomed to or because everything didn’t turn out rosy in the garden ala the likes of Ms Hunt who “writes” in the Sindo or a certain Mr Yates that literally bet everything on black and still thinks he’s a businessman.

  19. Folk are easily distracted – nay bored, by being forced to face the unpalatable facts of the predicament we are in.

    Serious, radical and profoundly unpopular (to the vested interest corner) structural (political, financial and economic) changes, HAVE to be made. There is no escape. We are in a bad situation due to bad people doing mad, bad and dangerous things. This bad behaviour WILL (actually is) continue unless and until our legislators have the courage and conviction to stop it.

    There are some key remedies (both temp and permanent) that the Dáil has the power, and jurisdiction, to enact. So, why not? This is one of the key questions that needs to be hammered relentlessy. All else is a distraction.

    Bombard our legislators with whatever missile you consider appropriate. Pummel them! “Why, have ye ‘funked out’ on your moral and legal duty to your fellow citizens?”.

    What sort of permanent remedies could be enacted? – at no cost (other that pre-paid Dáil time, ink and paper):

    1. Full, unfettered FoI (no exceptions whatsoever).

    2. Unconditional Constitutional protection for Ombudsman – answerable only to the Oireachtas, and completely immune from Supreme Court challenge.

    3. Ministers must publish (or have available for inspection) ALL correspondence to and from their office – except the Ombudsman decides otherwise.

    This would enable individual citizens to ‘see’ exactly what is being done in their name. The sky would not fall in. More sunshine, less overcast.

    “So why not?”.

    I’ll leave the temp financial and economic remedies for some other time. The above three are critical, and we should not let up until they are in place.

    Brian Snr.

    @KD: Thanks.

  20. @karl deeter

    effectively that is the situation that exists anyway, but it has no legislative backing. The choice will always be ‘take what is on the table or take the property’, I tried to create a model that would put some formality on it (likely made lots of errors too!).

    But what exists today are recourse loans. If loans are not paid, then the bank can repossess and pursue a judgement for the shortfall. I don’t believe a model that just turns existing recourse loans into non-recourse loans if someone declares bankruptcy is going to be introduced. Instead the amount of the shortfall judgement will vary, depending on ability to pay. If someone has very little income, then in practice very little of the shortfall will be recovered. However if someone was very highly leveraged and had a large property they could still have significant income, just not enough to cover the loans. In this case the shortfall recovery could be significant. So just turning recourse into non-recourse would be of most benefit to those with large properties and the most leverage.

    Also what happens if someone remains in the property and then defaults again after the restructuring? Is the process entered a second time?

  21. @karl deeter

    I’m confused. Can you square this circle for me?

    On the one hand you say:

    This programme addresses the immediate problem and can be done in 6 weeks.

    But when challenged about spouting simplistic, populist nonsense you say:

    Reform of our debt laws is not a ’short term populist solution

    Are you saying you can see this (or any Irish) government implementing bankruptcy legislation in 6 weeks (or even 6 months)?

    If so, I got a bridge I think you might be interested in!

    As for the devilish recurring tunes, you may not be aware – but housing bubbles are a feature of poorly regulated banking systems. The past decade will become infamous for the destruction wrought by this financial malfeasance:
    http://en.wikipedia.org/wiki/Real_estate_bubble

    As of 2007, real estate bubbles had existed in the recent past or were widely believed to still exist in many parts of the world,[4] especially in the United States, Argentina,[5] Britain, Netherlands, Italy, Australia, New Zealand, Ireland, Spain, Lebanon, France, Poland,[6] South Africa, Israel, Greece, Bulgaria, Croatia,[7] Norway, Singapore, South Korea, Sweden, Baltic states, India, Romania, Russia, Ukraine and China.

  22. @Karl
    Did you co-write this Karl – or is this the “Royal we” you refer to:

    “It is our contention that these tenets do not hold when considered under analysis, and in this paper present an operational solution that can be backed by legislation due to be drafted by the Department of Justice in the coming months. We also hold that losses to the banks can be reduced”

    I must admit I am not 100% clear why there is suddenly a number of people arguing for some form of debt forgiveness for people who – lets be honest – made foolish decisions and over borrowed. If some of them were tricked into this by fraudulent practices then as WhatGoes Up points out that is soluble by recourse to the courts.

    I can’t help having a lingering suspicion that many of those ( I will not include you good self here) arguing debt forgiveness, have some vested interest.

    I was against socialisiing the losses banks who borrowed (and lent) foolishly and for similar reasons (and yes that does include “moral hazard”) I am equally against socialising the losses of individuals. Two wrongs don’t make a right.

  23. @AMcG: “I was against socialisiing the losses banks … … and for similar reasons … … I am equally against socialising the losses of individuals. Two wrongs don’t make a right.”

    Its not right v wrong, A. Its whether the social fabric of our society will be able to sustain ‘saving’ the banks v ‘unsaving’ the citizens. There is insufficient current income available to do either and current incomes are being ‘austeritized’, hence future incomes will be even lower.

    This is the predicament. Less future income – and its being guaranteed. So, our politicians have to devise some scam to pretend, and the banks some scam to continue lying, about their respective situations and unworkable ‘solutions’.

    Get onto your local Dáil members and ask them, “What are you NOT going to do about the private residential mortgage problems?”. They will readily answer this, but will obfuscate and blather if you asked them what they WILL do.

    Brian Snr.

  24. @ Karl: some observations

    Interesting paper which loses its punch as it looks to work through detail.

    Overview opinion: the totality of unaffordable debt needs to be factored in utility/revenue/other along with bank debt secured/unsecured. Your version of the holistic mortgage resolution/other debt solution approach proposed looks to cram down, up front unsecured debt but not mortgage debt- why not cram down mortgage debt and link it to a floor % of OMV below which the house is given over/sold off? I sense you are working in a blind spot and leaning too far towards secured creditors and away from insolvent debtors. The starting point has to be debtors are insolvent and cannot repay their debts. You proposal deals with those who can afford to earn debt forgiveness over time without having to resort to outright bankruptcy. Owner occupied mortgage debt is one debt requiring separate treatment to other debts. Perverse incentives/moral hazard can be controlled for but should not be a guiding principle. The LRC blueprint deals with unsecured debt and that debt not secured by the value of possessed/sold off mortgaged assets. How to value the unsecured element of mortgaged debt without possessing, jingle mail or or selling off? Non owner occupied property is sold with residual becoming unsecured. Owner occupied where impaired and income insufficient is crammed down ie the secured element is linked to OMV and unsecured element forming part of the unsecured pool. NDI is then used to in the first instance to fund secured OO debt along the lines proposed in your paper – could include for interest only to allow for pay-down on unsecured debts. In five years the debtor is free from residual unsecured debt and left with a mortgage that equates to the value of the home – may even have some equity in it or it may be in negative equity.

    Your NDI living allowance appears to be the social welfare bread & water level which is far too low to provide a decent standard of living- other approaches exist that factor in real costs and allow for differing levels ie where a child has a long term illness, where NDI is dependent on both working full-time – what about child care costs- there are many other examples of where NDI available for repayments will vary. In this sense your examples are far too general.

    Hope these are of use

  25. @Jimmy the Fish:

    The state does force forbearance on landlords, ask anybody who ever had a tenant who went into examinership about their experience. In many cases where a person has a significant revision to income leases do get renegotiated mid term, I can attest to that on a personal basis and assume I am not alone in that respect.

    @BryanG: this isn’t a method for turning recourse into non-recourse, it may end that way in some cases and therefore you can argue that it is the only outcome, I don’t agree. What I would say is the bank need to forensically assess the case, negotiate on the basis of what can be paid and adjust the loan so that whatever that figure is becomes a performing loan figure – drop the interest rate or the loan amount. If not and they’d rather repossess then they don’t get he shortfall. they would only opt to repo/sell where this is in their favour anyway so why force the shortfall when the bank are the one looking to liquidate? My attempt was to create balanced incentives.

    @WhatGoesUp housing bubbles existed before the modern banking system, and indeed before any non-merchant banking system, the research of Fred Harrison in the UK is a worthy start to following that up if you are interested.

    Regarding the contradiction, I don’t follow: addressing problem < 6 weeks (in the debt programme if enacted, not the introduction of the legislation) is/isn’t populist? I don’t get your point, please rephrase it.

    @A McGrath: I don’t have a particular vested interest because it won’t change my bottom line if people go into personal examinership. On the case of fraud, the FSO is there for that and it isn’t the central problem according to them or anybody other than WGU. As regards socializing the losses: I totally agree, big mistake, I did think that an AMC would be a good idea (it is one of the prescribed solutions) but the way we did it was wrong, a central point is that the losses will occur with or without opinion consensus or legislation, so the question is who foots the cost? The banking system or those outside of the banking system? This plan would embed them in the banking system, who may well pass it on but at least it is not an implicit transfer.

    @Bill: all I can say is a big ‘thank you’ for taking the time to read the full paper and critique it. Excellent points which I cannot respond to entirely. On the secured debt: the recourse element is the reason for the preferred treatment, it is also a common aspect debt plans in other jurisdictions that unsecured get a far worse deal.

    On the allowances, they are arbitrary and I cannot argue either for or against as they could be set at any level that is both feasible and politically/commercially acceptable.

    On mortgages: it would only be for OO, investment loans etc. can work in the normal way with solvency problems as they do already. Interest only isn’t working for many borrowers because the CB figures would otherwise show a decreasing level of arrears rather than increasing, loans on interest only would ‘cure’ (and in some cases do) but often don’t thus there needs to be a further form of resolution – or repossess.

  26. @karl here are some suggested design principles:

    1 entire debt process
    2 Robust assessment of NDI
    3 Robust assessment of asset values including liquidation
    4 OO debt waterfall/cascade model – escalating interventions
    5 OO solution prioritised
    6 Other debts pro rata to net available NDI after (5)

    Decision tree will drive out range of OO solutions

    Process is handled by end to end by one independent debt settlement agent – which is possible without creating a monolithic monster. Operating costs are paid for by creditors (models exist for this).

  27. @karl

    I view the “repossess with no shortfall recovery” option as a baseline option in that it is an outcome that either party (borrower or lender) can in practice obtain, by ‘doing nothing’. A bank can ‘do nothing’ by not modifying a loan, and a borrower can ‘do nothing’ by not making loan payments.

    For simplicity let’s divide all borrowers into Group A, whose incomes have fallen off a cliff and cannot sustain any reasonable level of payments, and Group B borrowers who still have a decent income but cannot meet the full loan servicing obligations of their current loan.

    Now for Group A borrowers, banks will generally choose the baseline option (repossession) since the banks should be able to recover more that way that they could by offering a new loan to someone with a low or very low income stream.

    However Group B borrowers can also obtain the baseline option simply by not servicing the loan (even after loan modification). That’s why I previously asked what would happen in this situation. The only remedy available to a bank facing a borrower that fails to service a loan is the baseline option, so that by stopping, or making sporadic payments, a borrower can eventually trigger this outcome. Almost by definition, Group B borrowers will have enough income to easily rent a property, so that when the original property is repossessed they will simply rent another one. So in practice a Group B borrower can turn the loan into a non-recourse loan (or close to it) by behaving in a certain way.

    Group B borrowers now have an incentive and a path to enter the scheme in order to walk-away from a property in negative equity. Instead of taxpayer money being used to prop up Group B borrowers, I would rather see it allocated to Group A borrowers, through increased job training initiatives and other schemes to help prevent long-term unemployment.

    If banks have a remedy whereby a deficiency judgement can be obtained for any shortfall, then the incentive for Group B borrowers to behave in this way is reduced. Perhaps this remedy could kick in after one failed loan modification but then it all starts to become very complicated, and the more complicated a scheme is the greater chance of unintended side effects.

  28. Karl Deeter wrote
    “The state does force forbearance on landlords, ask anybody who ever had a tenant who went into examinership about their experience. In many cases where a person has a significant revision to income leases do get renegotiated mid term, I can attest to that on a personal basis and assume I am not alone in that respect.”

    I’m not talking about a “tenant who went into examinership”. Am I right in presuming that you are referring to commercial tenants (in business) rather than a single mother or a family who are renting and who suffer a job loss (which I am referring to)? This kind of person that I speak of would in their new financial situation qualify for rent allowance.

    I hear from dispatches that you don’t exactly like those kind of people (who might qualify for RA). Of course, they are unter…. compared to the likes of your friend Ms Hunt who probably borrowed a half a million to buy a house in Dublin and thinks that she should get a big slop of her mortgage wrote off, just because she’s 260k in negative equity.

    The Irish mindset about property needs to change. The Irish attitude is that renting is bad buying an expensive over priced house good. No mention of the waste of resources and the number of cartels (including mortgage brokers) who are robbing us and who in the boom invented the 25, 35, 40 year mortgage to try perpetuate this situation.

    I think the percentage of the Swiss who “own” their house is c. 30%, while it’s over 90% in Bangladesh. We all know which is the best place to live.

    Before any consideration of debt “forgiveness” takes place the whole renting system needs to be fixed. One part of this would be to abolish all tax incentives for individuals (including mortgage interest relief)and allow the setting up of REITs (which would be properly regulated). Then and only then can we try and shake off this stupid luddite attraction with property and hopefully remove the possibility of the catastrophe that has hit the country, from happening again.

    Why should an owner occupier (which is a misnomer if ever there was one) be treated differently to a tenant? This discriminates proportionally in favour of “ability to borrow” and favours the well off. Surely, a limit should be placed on the monetary value that should be non-recourse that applies nationally to prevent a bubble developing in Dublin and richer areas of the country and on the floor area so those who want to build McMansions down the sticks (to prevent the allocation of scarce resources to build these Mc Mansions).

    PS A lot of families can’t extend their mortgages now because of the fact that they were facilitated in getting 30,40 year mortgages by the same people who caused the problem and who are certain that they have all the answers. A bit like a drunk driver who after crashing a car après ten pints (and killing their passengers) insists on telling the attending medics how to do their job and then insists on driving the ambulance to the hospital.

    What goes up wrote
    “A mortgage broker who fails to mention legal restitution for mis-selling.”
    Colour me surprised
    +1,000,000

    Details of all mortgages who qualify for Mortgage Supplement should be collected as a condition of the scheme including details of brokers (if involved). This should be tabulated and published so that we know that it’s not only the banks that are the bold boys. How about any mortgages issued in the future have a certain amount which can be recovered from the brokers if mis-selling took place? After all big drug dealers can’t operate without street dealers.

    Bryan G wrote

    “So just turning recourse into non-recourse would be of most benefit to those with large properties and the most leverage.”

    You have identified what all the scweaming is all about. I remember a while back the guy from “New Beginnings” on the radio use the example of a couple (one a lecturer and the other a teacher) who had a €400K mortgage. I worked out in my head that one income would be 100K and the other say 50K joint 150K. After tax income would at worst be around €100K and this guy wanted help for them!!!!

    Of course, the big thing for the legal profession (a certain amount who are up the creek in relation to property) is that the Law Society’s fund is basically gone and our “un”learned friends would love the State to bail them out (as if NAMA, Tribunals, the joke that is the Free Legal Aid scheme and the conveyancing cartel aren’t enough).

    Sorry for being so long winded, just one more thing we need a database containing details of ALL property transactions (house sales) and certain leases (over say 5 years or over 100k a year) before the end of the year. It also goes without saying that no unlimited liability company should be allowed to have anything to do with property as it hampers transparency and allows the like of Anglo Irish to develop.

  29. @Jtf

    All well said but a small problem – mortgage brokers may have helped screen the potential clients but the cheque was written by the banks. The banks hold the keys to the property market and despite the obvious exagerated income levels submitted to the banks its the banks who always had the opportunity to say NO – before the cheque was written.

    It’s the banks who have the skills to determine if the smell test regarding any application stands up. These are bank lending errors regardless of what information third parties submitted to the lending departments.

    Despite what you may believe the real issue here is that in a normal market (which is where net rental yields are c 7% over a 10 year period) those left with mortgages they can no longer service would ordinarily have the ‘out’ in selling their property. As you know this normal out is not available today – in some cases at any price.

    The question for me which nobody seemingly wants to ask including you and KD is why is this so. We know the answer is that with a significant oversupply sitting dormant on the market, the normal workings and integrity of same have been compromised . Who is to blame for this turn of events? The 150k earning couple above? The buyer who bought modestly but has lost his/her job? We both know the answer to the question is the banks who financed these crazy idle developments and in so doing have ensured all current market participants are losers.

    Does this seem fair or equitable that the lending party i.e. the banks can have it both ways. They screw the market up and close the normal relief valve for stressed mortgage holders and yet continually press for their side of the mortgage contract be enforced. Logic will tell anyone that this is simply a daft legal position and yet commentators such as yourself fail completely to appreciate this rather large elephant in the room and seek to vent your anger towards those who had little or nothing to do with such a turn of events.

    Sadly life is not as black and white as you present it above and the real sinners here from start to finish are the lenders. In leverage driven markets those in control of the leverage control the prices. The heart of the issue here is in mispricing the asset class and not affordability as KD believes.

    I hold the view that in time it will be seen that a fairer method in dealing with this issue will actually be a blanket write off across the board. The scenarios as KD presents are income/affordability driven models and will forever end up stuck in debate after debate and argument after argument as income levels change, which undoubtedly they will. Much better, and fairer to concentrate on the pricing error at the origination date, because in current property markets banks price property not consumers, despite what you may believe. Until the pricing error is fixed aross the board no formula – no matter how well intentioned such as KDs will work. They tried this in Iceland two years ago and realised it doesn’t work, what’s so unique in RoI to make us believe a model such as KDs will work here. Think again.

  30. @karl deeter

    Not quite sure why you’re conflating the financial engineering and the regulatory capture of the last 20 years, resulting in the disaster of the shadow banking system and it’s corruption of the commercial and residential real estate market, with fractional reserve banking and financial exuberance – do you think “these things just happened”?

    Should we just sit back and accept things the way they are? For we have always been at war with Eastasia?

  31. @What Goes up: We should stay at war and we can both get jobs in the ministry of peace. What lead us here is a different issue than how to deal with a debt overhang

    @BryanG the ‘group B’ would not be able to engineer their non-recourse loan because during the establishment of disposable income there would be a repayment calculated, if they don’t meet that then they waiver the protection/non-recourse aspect.

    @Jimmy Fish: I don’t have an issue with people renting, indeed I think it is very important both as a former renter and a person who lets property. That anybody was ‘robbed’ is a general outrage that doesn’t advance the debate.

    I’d be interested to hear how REITS might fix anything? On the other hand, land equity partnerships may well have a place in the future of creating a housing option that isn’t two tiered.

    @Yield or Bust: Do you think a blanket write off would normalize the market?

  32. @KD

    Supply Demand: Depends on your definition of normal – my definition is where demand and expected housing supply based on realistic house/family formations are in equilibrium. I appreciate that this is as close to a nirvana state the housing market will ever likely get to. It seems to be the case that planners, developers and lenders now have (or at least they ought to have) a better appreciation of the importance of overall market supply, rather than just the local market influences.

    Price: Using a top down analysis based on risk adjusted returns studies for risky asset classes in the RoI over the past c100 years, as conducted recently by Credit Suisse, would suggest nominal equity type returns using a premium over ‘risk free assets’ (a dangerous phrase in todays climate) indicates average returns of 6%.

    We know however that the illiquidty of property type assets carry with them an additional risk element over the more liquid equity type assets which gives one a return requirement in excess of 6%.

    The long run average net yields for RoI residential housing since records began in the early 1970s suggests nominal net rental yields of 6.98% ~ 7%. This is from Govts own numbers using a one month rent market average deduction from Gross to Net yields.

    So it seems to me that both the evidence on the ground and the evidence from the wider asset returns witnessed over the longer term clearly suggest the 7% number is well grounded and sensible over the longer term.

    The question you pose is whether a blanket write off will bring the market to exhibit an average yield of 7% over time i.e. normalised returns then I can only answer that it ought to, providing the supply demand dynamic normalises as well, which it is, albeit very slowly due to the ongoing employment problems and scarcity of leverage.

    The question of course with any market is timing, and quite obviously I don’t know the answer to that because, as I have repeated ad nauseam here and elswhere, todays property markets is a leverage driven one – in its normal state leverage is available, at a price, but still available. I’m not sure the leverage/credit availability will come back to the property market in the ‘normal’ sense for some considerable time given that the recent mis (over) allocation scars to the sector are still very raw in the minds of the lenders.

    Please note this property lending strike should not be the case if the assets are fairly priced, as I expect they should be if the above happens. Rather I expect lenders to be very fearful of reallocating scarce capital where they were very badly burned before, despite the fact that it now exhibts much safer return prospects than it did at any time from about 2003 to 2007.

    Such is the odd psychology inherent in asset allocation decision making.

    I respect the work you do in the area despite the very obvious compromsed position you find yourself given your position. That said, I think your attempt at a model is hugely welcome but as I indicated above I think it flawed because its not tackling the actual problem and that’s the enormous pricing error landed upon property consumers.

    How this error was allowed to go unnoticed for so long using very basic rental yield calculations compared to long run averages is still, and will remain, a mystery to me and why I suspect other posts above are correct in raising the fraud question.

    I recall a Davy report from March 2006 where a very basic exercise was conducted by the analyst along the lines of what I’m suggesting here on a net yield comparison versus risk free alternative – at that time net yields on some of the Dublin properties were below 1% !

    Anyone, and I mean anyone, who attended even the most basic of basic banking/property lending courses would have told you metrics such as this made no sense.

    You don’t go from market yields of 7% to 1% overnight – the pricing error took time to establish itself and more oddly in Irelands case with supply of new stock outstripping demand by a factor of 3 for years 04/05/06 prices continued to rise. Any student of markets will tell you that something else was at work driving this very very odd pricing dynamic.

    We now know the mis pricing was driven completely by daft allocation lending decisions by the banks. The banks, as you know, were financing the developers land purchase and working up using normal input unit costs to establish unit selling prices to generate a unit profit which meant minimum prices simply had to be known by the lenders before the digger even entered the field.

    In virtually all instances that I’ve investigated the rents being achieved in most proxy properties relative to new developments from about 2003 onwards made no sense.

    Banks were clearly seeing rents on house #1 at c€750 gross per month coming into accounts and yet for some reason were writing business to new buyers on mortgages of €1,500 per month with both parties in house #2 working full time to repay for house #2 on the same road i.e. exactly the same property type but one ‘valued at €117k on a long run yield of 7% but on 90% LTV on house #2 the ‘price’ was c333k based on a 25 year tracker at 3.75% – this is why in this instance the minimum PTT falls will be 65% – on the assumption of stable rents and likely to represent the minimum falls before the bottom is reached.

    The house pricing error is the driver of the mortgage mess not the income of the consumer. We need to fix the error.

    Buyers who approached banks, regardless of LTV metrics should have been quitely told to piss off in most instances from about 2000 onwards- as we know this didn’t happen.

    My basic point is that banks always have the opportunity to said no to ANY property deal. Stats suggest that 98% of deals simply would not happen unless the lenders allow it so. Given these basic facts about the market its the pricing error is where we need to focus. Until we go back to mortgage origination date and fix the error as in the example above we do not fix this problem. This I am absolutely sure of.

    The error was landed on all purchasers since c2000 – given that it was so widespread and the fact that all the banks are bust because of it tells you that it was a banking error. Why we feel the desire to foist that error on all consumers regardless of todays affordability makes no sense to me – its avoiding the real issue. To repeat the problem is not affordability is pricing. Fix the price and the affordability will take care of itself.

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