Comments at Central Bank Mortgage Conference

For those of you who missed the excellent Central Bank mortgage conference a couple of weeks ago, the presentations are available here. I’ve also written up my own comments from the day and posted them here.

34 thoughts on “Comments at Central Bank Mortgage Conference”

  1. Your comments are very clear Prof. Whelan, and ring particularly true with re: to bankruptcy law

    but my question to you:

    Why is the idea of repossessions so bad? You claim it is undesirable to flood the market with houses, but undesirable for whom? Certainly not for would-be buyers who are currently waiting in the wings.

    The quicker we establish a real floor to house prices, the better.

    In the mean time, every fall in rents and prices makes wage deflation more palatable and helps Irish competitiveness.

    You point out that banks are paralysed by the uncertainty. But this uncertainty, is it not likely to be – first and foremost – a result of the fact that they cannot price the underlying physical asset?

    My solution: Break the dams of the River Isen, wash the filth of Saruman away….

  2. @LHE,
    Your point is logical, but if implemented it would discredit the number that forms the main foundation of Irish Government policy – the projection of debt peaking at 118% of GDP. Your proposal is, accordingly, very unlikely to be implemented.

  3. @ Ludwig Heinrich Edler

    The problem for would be buyers waiting in the wings is not the availability of cheap houses to buy, its their inability to get financing from the banks to buy them. The criteria banks have these days for getting a mortgage are quite severe. For instance the applicant must have the ability to levitate, should be able to solve a rubix cube in under a minute and the house they wish to purchase must be situated on or near a gold mine. Obviously the bank would get the gold mine.

  4. @Jarlath
    Have a cash only market for these consumer durables and you do not need financing.
    10,000 for the average house sounds about right to me – then people can be free to move whereever their job takes them without dealing with odious landlords and even more lowly banker golums..
    Financing is only needed to build capital – the capital if you want to call these consumer durables capital is already built and in dramatic surplus – why do you need financing in such a market ?

  5. In my view repossesions are good…as we need to wean the (inexperienced) residential punters from their property investing foibles.

    Something akin to co-operatives, with better tenancy rights would be the answer. Also the co-ops could trade unitized shares in a secondary market which would provide an additional public good: a liquid, efficient, transparent property market.

    The ISE should be gagging for said business, and with Govt banks+Nama holding all the cards, public policy of generational importance could readily be implemented.

  6. @Dork
    It a little drastic but i would advocate implementing the Kelly report as a means to keeping house prices honest.
    The level of “wealth” caught up and therefore being distroyed in property in this country is shocking.

    Anyone doubting the long term damage to society overpriced housing causes should look at this.
    http://www.youtube.com/watch?v=akVL7QY0S8A#t=4m49s.

    Obviously we are seeing a massive correction at the moment but implementing Kelly would help stave off our unhealthy love affair with property. Introducing non recourse loans to Irish legistlation would also help but no one is advocating it.

    Consumer Association of Ireland??? 🙂

  7. @Eamonn
    You just divorce the money supply from dead assets – problem solved and thats it really , we did not reduce the money supply in the 20th century to save horse drawn carriages did we ?
    Economic madness squared.
    Mortgages are useless when every horse I mean House is built.
    Just give ALL mortgage holders the deeds and then and only then increase the money supply & taxes.

  8. @ Dork

    I’m a bit wary of engaging with you because i rarely understand anything you say…but here goes….

    you need financing because nobody will accept 10k for a house

  9. @Karl Whelan

    I thought your comments were excellent: thoughtful and balanced.

    I guess the big question for me is: “how do we stop this problem from getting worse?” Prevention being better than cure and all that – but I can’t see anything other than that figure of 7 percent (as of June) of Irish mortgages being in arrears doing anything but climbing. Perhaps preventing lenders from gouging their variable rate customers with further interest rate rises (irrespective of ECB rate changes) might be one small step.

    @Dork of Cork

    At the rate prices are still falling, you may get your wish for the €10k house soon enough! Or maybe we should just stop having an Irish lotto and get Nama to sell €3 tickets for several lucky punters to win a house each week instead (to first time buyers and those in mortgage arrears only of course). Make everyone in the country a homeowner and clear the outstanding stock of empty houses – then the market will really find its floor. Then use the proceeds of the lottery income to pay down everyone else’s mortgage. Yippee. Imagine a country full of homeowners with no mortgage. That would put some consumer spending back into the real economy!

  10. @ All

    LHE has put his finger on the problem. In no other country in Europe is there such an unwillingness to put into the public domain the real market value of houses. This is now comprehenisvely available to the government since a rate of stamp duty has been introduced for the sale of ALL houses. As another blogger has demonstrated on many occasions, the real actual value can also be readily worked out from rental levels information in respect of which is widely available. This is the prospect too dreadful to contemplate for the vested interests involved.

    The market will not clear and buyers will not risk their money until this prospect is confronted. The fact that when a partial clear picture is established – as the recent distressed auctions have demonstrated – the buyers will emerge, many with hard cash.

    The rest of the debate is just a waste of time.

  11. @Jarlath
    Give it time , give it time.
    When I want to hold cash or bonds I want it to be backed up by the productive capacities of a state not a criminal credit conspiracy backing false asset values that distort dramatically the remaining bits of the real economy.
    The fact that people are ignorent of the real price of houses in Ireland is at the moment of no personel consequence to me.
    If the banks who control this state continue with this policey I prefer to hold private money thank you very much.
    InFact the only real reason I hold money in the post office is because I think there is a slight possibility of reversing this pro private money economic policey.
    PS refer to Karls Icelandic presentation (housing completions per 1000 people graph) – house construction in Ireland Vs the US.

    Post 1990 we started to pull away from America – after 1994-5 we went into a orbit ,after 2001 we were go for translunar injection…………Hueston we have a problem…………………..

  12. @DOCM

    re LHE has put his finger on the problem.

    He may have put his finger on it but ..well lets not go there.

    LHE wants a floor on houses prices and the sooner the better. I agree with that part.

    But repossesions are not necessary to achieve such an aim and in fact would be highly undesirable, extremely dangerous and would fail in a catastrophic way for everybody.
    By repossession I mean evictions. I do not mean shared ownership or indeed full public ownership while the house remains as tenant.

    Of course neither government or banks wants a floor on prices below what it curently is. Such a result would ‘require’ further capitalization of banks. And I think the entire country has already crossed the bank capitalization pain threshold.
    There is no chance (I hope) of any further public money going into banks in this country.

  13. @ Dork

    Ok i’m convinced, you’ve won me over. I’ll give you 10k for your house so, the 2 of us can get the ball rolling.

  14. @Jarlath
    I don’t own a house – never have , I live is a hobbit hole.
    Houses are consumption sinks – its better to keep it simple.

  15. @Karl Whelan
    From your notes

    . And with so many mortgages being held by banks whose private owners have provided risk capital to absorb losses, there should be no question of the Irish government providing handouts to these banks to subsidise mortgages losses.

    Amen to that

    With over half of the mortgage arrears in Irish residential mortgages accounted for by banks outside state ownership, it is clear that the question of how to deal with mortgage arrears goes well beyond a policy of how to write down distressed mortgages in Irish-government-controlled banks.

    This was a comment that was given a lot of prominence in the Keane report. Firstly is it really valid.
    Secondly even if valid it is likely to change substantially. The reason being that while the sub-prime lenders and more aggressive foreign owned banks may have a disproportionate amount of the early arrears mortgagees, as the arrears problem progresses their portion of the arrears cases will fall as the mortgagees from the main banks start getting into arrears.

    I think it was a disingenuous statistic used in the Keane report to deflect attention away from the main banks and to try to put distance between the government and its responsibility for dealing with the issue by inferring that the government did not have control over 50% of the problem.
    But the government, even through the main banks, does ‘control’ far far more that 50% of the overall mortgage debt problem.

  16. @ Joseph Ryan

    I was referring in particular to this comment by LHE.

    “You point out that banks are paralysed by the uncertainty. But this uncertainty, is it not likely to be – first and foremost – a result of the fact that they cannot price the underlying physical asset?”

    That’s about it!

    I have every sympathy with those at risk of losing their homes but that is an issue of social solidarity not the realistic pricing of assets.

    Every country has its blind spots and this is the Irish one. The river Shannon should, in my view, be renamed the Nile.

  17. @ Jarlath
    The 2 of us don’t control the monetory system – even if we both wanted to change the world – we could not.
    Our transaction would be overpowered by credit – its best to sit back and watch this slow motion implosion at a distance as the credit living dead destroy all remaining productive capacity.
    PS before Hobbits got all fancy in the Lord of the Rings thingy they really did live in simple holes in the ground – much less hassle although slightly damp I am afraid.

  18. Did anyone at the conference raise the idea of EU ‘set aside’ payments – to protect (non-farmer) property owners, the banks that lent to them and the states that might be ‘required’ to recapitalise the banks – from having the value of their real estate fall as a result of a drop in demand for either purchase or rent?

    This is what farmers are entitled to, why not everybody else?

  19. @Dork
    “I don’t own a house – never have , I live is a hobbit hole.
    Houses are consumption sinks – its better to keep it simple.”

    At least you are good for a laugh 🙂

  20. Hi all,

    it seems to me there is a slight mixing of policy goals going on here.

    On the one hand, we have people not paying their debts and unwilling to move out of the asset on which that debt is secured. That is one issue, the one I am dealing with.

    On the other hand, we have the issue of people – some of whom may be in the above category, others not – not being able to afford a home for themselves or their families. that is a separate – though equally important – policy issue.

    But these are entirely separate policy problems and should be treated as such.

    I imagine there are decent people in Ireland who never got mortgages in their lives and are currently having a hard time finding decent accommodation for their families. There are no more, or less, entitled to some form of socialised housing than the reckless lenders who can currently not service their debs.

    So by all means, let’s have a debate on how much social housing we should provide and for whom.

    But in the meanwhile, my point is folks should pay their debts or else pack their bags and give some paying customer the chance to occupy that premium housing unit at a price (s)he can afford.

  21. @ Grumpy

    “Did anyone at the conference raise the idea of EU ’set aside’ payments – to protect (non-farmer) property owners”

    So the EU pays me not to grow crops in my sitting room. i like it. sign me up.

  22. @Ludwig
    The problem with the morality argument of the “good people” paying their private debts and the not so good people not paying their private debts is that ALL their private dealings through the banks has screwed up the National money supply.
    There is no real reason for the level of inactivity in this economy other then the entering of unsustainable private credit contracts.
    I am not a priest – I do not want to make judgements on who the good people are and who are the bad people.
    I just want to inhabit a moderately functioning society at least & see people engage in sustainable commercial activities.

    This can be acheived tomorrow if they wish – but they don’t so we are in this pickle.

  23. @Jarlath

    Not really. It pays you to not release the property on to the market for rent. It is a way of pretending surplus capacity isn’t, by taking it out of the market.

    You will notice farm land isn’t cheap.

  24. @grumpy

    ‘You will notice farm land isn’t cheap.

    No market. We had this on the blog a few centuries ago. The Physiocrats reign supreme … modest land tax anyone? Thought so …

    @The Dork

    C’mon – you live in a montenotte goldmine – suss up!

  25. LHE
    Irish culture will not accept evictions en masse. End of. Decry it if you wish but thats the culture we have. And culture is notorious impervious to change

  26. @David
    It could be Blarney street boy (although the part of Blarney street adjacent to Montenotte is known by the locals as Blarney Roood).

    To be honest a part of me always wanted one of those big Houses by the river – but I resisted the temptation , I guess all Hobbits have a ancient affinity for rivers.
    http://www.geograph.ie/photo/1248076

    But alas I have become corrupted by the precious.

  27. @Eamon Moran

    Many thanks for the link to Elizabeth Warrens lecture – I’ve read some of her stuff before and to me she speaks in an even more sensible fashion than she writes – I’d suggest to most bloggers here to have the patience and set aside the hour or so and listen carefully to what she says. In fact I’d go as far as suggesting the Govt should be made sit down and watch it next week as opposed to appearing in the Dail on their extra sitting days and spouting the usual old bladder and bluff.

    The debt issue has occupied this site in one form or another quite literally from its inception. The housing issue is now full square in vision and despite what others above have suggested the simple solution of bankrupting those who can no longer afford the four walls around them is quite simply
    missing the point. Being.

    Banks price property not consumers.

    Until the legions calling for bankruptcy light solutions for this mortgage mess get their simple heads around the above fact they’ll quickly realise the sheer stupidity of such calls when in the vast majority of cases the consumer had absolutely no say in the price he/she paid for these housing ‘assets’.

    In the vast majority of cases consumers buy a place to live in, to repay and importantly avoid becoming another Social Welfare burden when they retire with their property paid for.

    The stigma attached to bankruptcy on the part of a consumer is completely unwarranted particularly when the mis pricing error was that of the banks. Can we please take on board that this is not a solution to this problem. The solution is very simple – it lies in the very basic rules of capitalism – those you financed the banks take the losses first. It quite literally is that simple.

    Bring the ECB bofins over again again and again until we are sick and tired in telling them that basic story – the losses for this problem will be borne by those who got the prices wrong and that’s the banks and their financiers. Please no more debates.

  28. @Eamon Moran

    Many thanks for the link to Elizabeth Warrens lecture – I’ve read some of her stuff before and to me she speaks in an even more sensible fashion than she writes – I’d suggest to most bloggers here to have the patience and set aside the hour or so and listen carefully to what she says. In fact I’d go as far as suggesting the Govt should be made sit down and watch it next week as opposed to appearing in the Dail on their extra sitting days and spouting the usual old bladder and bluff.

    The debt issue has occupied this site in one form or another quite literally from its inception. The housing issue is now full square in vision and despite what others above have suggested the simple solution of bankrupting those who can no longer afford the four walls around them is quite simply
    missing the point. Being.

    Banks price property not consumers.

    Until the legions calling for bankruptcy light solutions for this mortgage mess get their simple heads around the above fact they’ll quickly realise the sheer stupidity of such calls when in the vast majority of cases the consumer had absolutely no say in the price he/she paid for these housing ‘assets’.

    In the vast majority of cases consumers buy a place to live in, to repay and importantly avoid becoming another Social Welfare burden when they retire with their property paid for.

    The stigma attached to bankruptcy on the part of a consumer is completely unwarranted particularly when the mis pricing error was that of the banks. Can we please take on board that this is not a solution to this problem. The solution is very simple – it lies in the very basic rules of capitalism – those you financed the banks take the losses first. It quite literally is that simple.

    Bring the ECB bofins over again again and again until we are sick and tired in telling them that basic story – the losses for this problem will be borne by those who got the prices wrong and that’s the banks and their financiers. Please no more debates.

  29. @Yields
    Look the bank bond holders are obviously very powerful people who can threaten governments as they seem to have the money power – it follows that they run this shop.
    As long as our goverment accept that private holders of capital have a money power we have no goverment – its as simple as that really.
    Watching the VB show tonight made it very clear to even the most simple minded of Dorks.
    Personally I think the whole post empire republic thingy was just a useful device to keep the redneck proles busy with a alternative harmless reality of sorts while the real business of extracting interest income from human & resourse capital was carried out.
    The one good thing about this time is that the stress in the underlining physical economic reality is highlighting to anybody with eyes that see whats going on behind the curtain – before this time period things were more nuanced but I believe we had essentially the same power structure.

    At least we Know there is a higher power then FF or FG – its just easier to see now that only circuses and not bread is available.
    So we have a sort of fake or at most a light weight republic that never really existed in the first place.
    Heres Karl Denninger take on what a real republic is

    “Restore the Rule of Law. We’re a Constitutional Republic, not a Democracy. In a Democracy the 51% enslaves everyone else. Are you black, hispanic, or some other minority? In a democracy you’re a slave. Recognize this or make a huge mistake supporting any such move. A Constitutional Republic is governed by the Rule of Law, which says that nobody gets to infringe your fundamental liberty interests, no matter who they are: Rich, poor, white, black or Martian. Everyone who breaks the law is punished and for like crime one gets a like sentence. If I rob you of $50,000 whether I do it with a gun or briefcase is immaterial. Whether I take it one penny at a time or all at once is immaterial too. In each case I must go to prison for doing it and what I stole must be returned to the maximum extent possible.”

  30. What about asking to pay interests on only the current value of the house? We would still have to pay off the negative equity, but not an interest on it!
    Note, that, mathematically, paying an interest on a negative equity should mean getting money from the bank !
    I moved to Ireland in 2006, bought a house in September 2007 (my luck), and, being a University Professor, I am a public servant whose monthly paycheck has been effectively reduced by 33%. – Tough.

  31. @ Karl Whelan,

    You make good points analyzing the current situation. But I don’t agree with your solutions. As soon as you start parking portions of loans in arrears, you may as well throw it open to everyone. What would this cost?

    “In the current circumstance, there may also a case for extending the “split mortgage” scheme to some who are in mortgage arrears but are in positive equity.”

    Ye wha?

    “Given the current dysfunctional state of the Irish mortgage market, there is a question as to whether a split mortgage scheme may also work better for these borrowers and their banks.”

    In conjunction with your first quote, I guess you’re saying that although a bank can recover 100% of such a mortgage, in the context of their loan book it might be better to rig the market.

    “(For what it’s worth, I don’t expect to see house prices stabilise until 2013 at the earliest.)”
    In the context of anticipated falls, the ‘pretend and extend’ for positive equity mortgages mightn’t be too clever for banks.

    I think any solution should to factor in future mortgage lending. If you create an environment that won’t allow lenders enforce mortgage contracts, it’s hard to see credit being made available for new mortgages.

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