Mortgage Principal Relief: Possible Lessons from the US

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On the Private Debt Relief thread, commenters Brog and John Gallagher (same person?) usefully draw our attention to the debate on participation of the GSEs (Fannie Mae and Freddie Mac) in the HAMP-PRA programme (Home Affordable Modification Program – Principal Reduction Assistance).   

The federally sponsored GSEs hold a substantial fraction of US mortgages, and so their position is somewhat analogous to Ireland’s state-owned banks.   The GSEs are administered by the independent Federal Housing Finance Agency (FHFA).    John draws our attention to correspondence from the US Treasury to the agency, urging its participation in the HAMP-PRA programme.    (See here; speech by head of FHFA at the Brookings Institution here.) This program, one of a number in operation to improve the functioning of the US housing market, provides subsidies to mortgage holders for principal reductions.   The gist of the correspondence is that such reductions could, depending on the case, have a positive net present value for the owner of the mortgage.   Indeed, it is argued that the gains in NPV would more than cover the cost of the subsidy, resulting in a net gain to taxpayers.   The correspondence also discusses strategic default concerns. 

Of course, given the differences in the housing markets – e.g. the relative importance of non-recourse loans in the US – the estimations are at best suggestive for the Irish case.   But the broad approach to thinking about the issue is useful.  

One issue that is not explicitly taken into account is the possible macroeconomic benefit of facilitating household balance sheet repair.   Here again the Irish situation is different given the state creditworthiness challenge and the importance of avoiding further losses at the banks.   A programme that ends up with a net cost to the state (from combination of any subsidy and the need to inject further capital into the banks) would further erode the financial position and creditworthiness of the state.   To the extent that weaker creditworthiness (and the associated “fear of default”) feeds back to higher interest rates and lower growth this would be a macroeconomic cost.   Nevertheless, it is worth looking at how these issues are being addressed elsewhere. 

43 Responses to “Mortgage Principal Relief: Possible Lessons from the US”

  1. john gallaher Says:

    Not the same @borg linked a statement to FHFA,Ed Demarco has been called the most hated person in DC or a dead man walking.With Krugman,hysterically screaming for him to get whacked.The paper @Borg linked is by the top ranked analyst in the MBS space,Laurie Goodman.The re-default rate among modified mtg.’s has improved recently but had been abysmal.

    “Neil Barofsky in his book Baiout, that Treasury was indifferent to how homeowners fared under HAMP, and merely saw this as a vehicle for “foaming the runway,” meaning spreading out the number of foreclosures over time, rather than saving borrowers, led to irresponsible actions (like ordering servicers to sign up people for trial mods initially without even qualifying them)….

    http://www.nakedcapitalism.com/2012/07/why-firing-ed-demarco-is-no-solution-to-fhfa-refusal-to-engage-in-principal-modifications.html

    http://krugman.blogs.nytimes.com/2012/07/31/fire-ed-demarco/

  2. OMF Says:

    Of course, given the differences in the housing markets – e.g. the relative importance of non-recourse loans in the US – the estimations are at best suggestive for the Irish case. But the broad approach to thinking about the issue is useful.

    I’m not sure that the situations can be so easily compared in the absence of non-recourse loans “jingle mail” in this country. The empowerment of indebted homeowners to simply choose to give up their homes in exchange for a second chance at life constitutes a fundamental difference between the US and Ireland, and probably makes us incomparable.

    I think considering retroactive non-recourse mortgages is in fact the way forward for this country. The only person who knows whether they can afford or indeed still want to live in their home is the homeowner. The banks have proven themselves incapable of deciding, the government won’t decide, and the “free market” via the professionals are the people who decided to create this problem in the first place.

    We should make all residential mortgages issued in this country non-recourse. All of them; no exception. Allow the owner-occupier themselves to make the decision about how much they are willing to pay to keep their home, and allow them to re-enter normal society if they choose to finally give it up.

    I believe that both “evictions” and “debt-forgiveness” will only be tolerated in this country if they come together, at once, and only if they finally put this issue to bed once and for all.

  3. john gallaher Says:

    Non-Recouse mtg.’s apply to the commercial space,pretty much all principal private residential mtg.’s in the US are fully recourse.One of the catalysts for this debate is the actions of private resi. debt pool buyers.After buying pools at significant discounts they often rewrite the mtg. downwards or encourage the borrower to seek a refi above their basis but below the face value-principal debt forgiveness.

    The noblesse oblige in Ireland are enjoying principal debt forgiveness..
    IRBC forgave 100 mio on the extremely controversial siteserv sale.
    NAMA has sold 1.9 billion of loans making a 90 mio profit on their below par basis,new owners under no obligation to pursue outstanding amount in full.
    Debt forgiveness the Irish way!

  4. Paul Ferguson Says:

    One consequence of the current monetary system is the inevitability of loan defaults.

    This is because the money supply is created in parallel with an even higher debt since interest is charged on Euro the banks create. Apart from the moral questions this system raises, it’s worth questioning the economic soundness of running the economy this way.

    Would it not be better to have a system whereby it would mathematically possible for all loans to go according to plan? If banks could only lend existing money we could never get to the stage whereby it’s impossible for all loans to be repaid.

    Having said that if we are going to continue to ignore the fundamentals of money creation in line with debt then I agree that ‘the broad approach to thinking about the issue is useful’.

  5. Michael Hennigan - Finfacts Says:

    In the US, banks sell on their mortgages to the federal guarantors.

    So the State would have to guarantee Irish non-recourse mortgages or how much would it cost on a typical mortgage?

    Parents provided deposits for many properties (Ireland has one of the highest levels of owner-occupied houses without mortgages in Western Europe – - they were in a position to).

    In an unfair society, debt forgiveness could be another means for those on the inside track to take advantage.

    I support sorting out the mess for people in need.

  6. Occam Says:

    For another (american) view on how to skin this cat check out ;
    http://www.hussmanfunds.com/wmc/wmc090223.htm and
    http://www.hussmanfunds.com/wmc/wmc110606.htm

  7. Bond. Eoin Bond Says:

    @ John Gallagher

    “pretty much all principal private residential mtg.’s in the US are fully recourse”

    I thought it was more like a 50/50 split tbh, and was basically a state-by-state issue (legal in some, illegal in others). Either way, non-recourse is very much over estimated in the US.

  8. john gallaher Says:

    @Michael Henningan,they only recently became ‘guaranteed’ it was implicit or assumed in past.
    Some banks are balance sheet lenders, Hudson Savings extremely active in high end NY resi. and Hampton’s retains all the loans they originate,as the majority don’t qualify.Linked the current ‘conventional’ loan limits to qualify.
    “Maximum conforming loan limits in 2012 will generally remain at 2011 levels ($417,000 for a one-unit property in the continental U.S.), as announced by the Federal Housing Finance Agency (FHFA). Loan limits are set annually by FHFA and apply to conventional loans that Fannie Mae may acquire. ”

    https://www.efanniemae.com/sf/refmaterials/loanlimits/

    decent summary on how it “works”!

    “The secondary market channels funds to borrowers by facilitating the resale of mortgages and mortgage-backed securities (MBSs). In that market, lenders such as banks, thrifts, and mortgage companies obtain funding for the loans they originate by selling the loans to purchasers such as Fannie Mae, Freddie Mac, and other financial institutions (including banks and insurance companies).”
    http://www.cbo.gov/publication/21992

  9. john gallaher Says:

    @Bond.Eoin Bond you really have two markets-conventional or conforming,all fully recourse.
    Jumbo or Non-Conforming mtg.’s negotiable on recourse,but generally fully recourse,perhaps via a private bank and with say 50% down pmt. may get non recourse, extremely unusual on principal private residence.
    The interest rate deduction here is capped at around 55,000 p.a so some buyers will utilize a ‘small’ LTV mtg. to avail of that tax relief.But a lot of NY buyers use their line or cash to buy.
    Majority if not all income producing investment RE lending/borrowing is non recourse-mtg.’s are then fed into the CMBS machine.

  10. brog Says:

    As a reminder Blackrock presented a paper on this issue at the Central Bank Mortgage conference last October “Borrower Behaviour in Distressed Mortgage Markets: Comparative Studies from the US, UK and ROI Focus on the Efficacy of Loan Modifications”

    http://www.centralbank.ie/stability/Documents/Mortgage%20Conference/Session%203/paper%202/Presentation.pdf

  11. David O'Donnell Says:

    from Yields or Bust

    http://www.irisheconomy.ie/index.php/2012/10/27/private-debt-relief/#comment-345608

  12. Fiatluxjnr Says:

    Off topic but nonetheless relevant…
    The game may be up in Greece . It looks as if the coalition is be falling apart with leaders of coalition abstaining in crucial vote.

    http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_31/10/2012_468067

    Could have a major impact on us?

  13. veronica Says:

    As a very ordinary citizen this issue worries me – I have a gut feeling that the policies of our own government in this area may be leading us down the wrong path and that some fresh thinking should be brought to bear on what sort of schemes would be most appropriate for the Irish market, or what ideas might usefully be borrowed from other markets and modified to meet our needs.

    I have a great deal of sympathy for the anxiety and misery in which many people have found themselves because they bought multiple properties during the bubble period, thinking such investments would be ‘as safe as houses’ and that property assets would serve as a viable alternative to a conventional pension arrangements. But I also have a concern that, in the anticipation that some of them have that the government is about to bail them out to the tune of 3m euro of their crippling debt, there is also a belief that this is all a good thing and something they’re entitled to. That’s where the niggling doubt comes in as it seems to me that the rest of the community who either had no interest in speculative property buying or, as young people didn’t have the wherewithal to indulge in it anyway, will be asked to pick up the tab in higher taxes for the rest of their days.

    Even though it’s a bit late for it, the more options that are put on hte table to resolve mortgage indebtedness the better. A variety of schemes talored to the requirements of different kinds of debtors would surely be much better for the economy ( and the community) than a one size fits all formula?

  14. zhou_enlai Says:

    “One issue that is not explicitly taken into account is the possible macroeconomic benefit of facilitating household balance sheet repair. Here again the Irish situation is different given the state creditworthiness challenge and the importance of avoiding further losses at the banks. A programme that ends up with a net cost to the state (from combination of any subsidy and the need to inject further capital into the banks) would further erode the financial position and creditworthiness of the state.”

    I think that statement needs to be tested. A net cost to the state in terms of injections into banks might be more than covered by the net gain in tax revenue as a result of household balance sheet repair. It is not clear that Ireland is really so different in this regard. In any event, has the absence of any proper insolvency regime for the first 4/5 years of the crisis not skewed things in favour of the banks sufficiently?

  15. seafóid Says:

    Instead of ending AIB ads with “AIB is regulated by the financial regulator”, wouldn’t it be more honest to say

    “House prices may fall as well as plummet and, remember customers ,
    “AIB is not capitalised to solve borrowers’ negative equity”

    http://www.irishtimes.com/newspaper/breaking/2012/1031/breaking23.html

  16. grumpy Says:

    @veronica

    “I have a great deal of sympathy for the anxiety and misery in which many people have found themselves because they bought multiple properties during the bubble period, thinking such investments would be ‘as safe as houses’ and that property assets would serve as a viable alternative to a conventional pension arrangements.”

    I think this idea that borrowing over 3 mill to play a big swinging dick property “investor” can be regarded as in some way equivalent to prudent people contributing, over decades out of savings from earned income, to a pension scheme, is ridiculous spinning.

  17. David O'Donnell Says:

    off thread:

    10/31/2012
    Jobless in the Crisis
    Euro-Zone Unemployment Higher than Ever Before

    The European debt crisis and related austerity measures continue to drive up unemployment across the euro zone. In September, according to statistics released on Wednesday, fully 18.5 million people were without work in the common currency area, more than ever before.

    http://www.spiegel.de/international/business/euro-zone-unemployment-rises-in-september-to-highest-level-ever-a-864541.html

  18. Fiatluxjnr Says:

    @Zhou
    “In any event, has the absence of any proper insolvency regime for the first 4/5 years of the crisis not skewed things in favour of the banks sufficiently?”

    +1

  19. grumpy Says:

    @veronica

    Actually I know of people who made large leveraged investments in (mainly) equity markets around 2007. These are broadly equivalent to those borrowers who thought it would pay off to buy several properties.

    They are nothing like pension savings.

    Those people were investors in certain hedge funds. The funds I am referring to got stopped out at the bottom of the market and the “investors” are unlikely to get bailed out.

  20. Fiatluxjnr Says:

    http://www.spiegel.de/international/europe/german-finance-minister-says-worst-is-yet-to-come-in-euro-crisis-a-862994.html

    As far as I know Wolfie hasn’t changed his mind.

  21. Brian Says:

    Cui bono is the answer to why 3 million is proposed Private Debt Relief maximum figure. Could some government ministers benefit, along with some senior public servants and a lot of their fellow travellers? It just the sort of sums these guys could borrow. Your average Paddy did not borrow 3 million or anywhere near it. Enda should check with his imaginary friend.

  22. john gallaher Says:

    @Veronica not really my cup of tea but linked a scorecard on the various US attempts,sad reflection on the current government, more a OCC type myself.
    its quite simple don’t lend poor or inept people money,they have unfortunately a tendency to not pay it back and trap themselves in poverty.

    http://money.cnn.com/2012/09/14/real_estate/obama-housing-market/index.html

  23. Garo Says:

    @John Gallagher: You are flat wrong about most mortgages in the US being fully recourse. A simple google search will show you that a lot of states have either anti-deficiency or one action laws that effectively mean that mortgages on residences are non-recourse. Helocs are generally recourse whereas refis are a grey area.

  24. john gallaher Says:

    @Garco great I’m looking to refi or cash out non recourse
    You got a number !
    Who you recommend currently active in mkt?

  25. john gallaher Says:

    I will be nice :)
    A helioc is a home equity line of credit or a equity release,a second !
    Refi ?
    Don’t waste my time or at least provide a link

  26. seafoid Says:

    @zhou
    It looks like the usual irish situation . A crisis, totally inadequate victorian era law, citizens in trouble, catch 22s all around, vested interests getting their interests attended to, the sense the real losers will be shafted, an absence of evidence based or data based policy, a big dose of spin, time wasting.

  27. Mickey Hickey Says:

    The key was the overvaluation of the collateral. Everyone knows that in a boom that went on from 1999 or so and looked solidly entrenched by 2006 that delusional reasoning kicks in amongst the public at large. Very few countries are immune to this trend. In Ireland I was told many times when I said to people that the outcome will be disastrous that I was a begrudger. Only one of my close relatives acted on my advice by selling 90% of his holdings in 2007, the rest held on like grim death secure in the knowledge that property values have never decreased in Ireland.

    The banks and other financial institutions in Ireland as well as the ICB and DoF did not lack professional know how with their phalanxes of Accountants, Lawyers, Commerce graduates and last and most importantly Economists. A number of Indices were off the chart with alarm bells ringing loudly. Were they all delusional, “things are different this time”, aren’t we the best educated”, “cleverest”, “hardest working” “highest paid” people in the EU. We earned and we deserve our prosperity at last after 85 years of hard slog.

    I would not blame the borrowers they are not paid to know and cannot be expected to know what the banks and gov’t should know.

    The 3 million ceiling is evidence of the incredible stupidity and venality that passes for government in Ireland and the tolerance that the Irish voters have for that kind of irrational behaviour.

  28. David O'Donnell Says:

    @Chris Christie

    Well played!

    @Mickey Hickey

    ‘… tolerance that the Irish voters have for that kind of irrational behaviour.

    If only we could figure that one out? On Governance:

    Governance precrash = Governance postcrash

    statsig*****************************************************

    Such stroking insider upper_echelon resilience & and looking like a total waste of a beautiful financial system generated crisis & the plebs, spalpiins and serfs are roightly screw€d once again in arithmetic progression since cattle replaced grain and irish labour in the early 1800s.

    ‘Spose a decent revolution is out of the question! Blind Biddy has been ready for one now for five years ….

  29. John Gallaher Says:

    Mr. Hollister: Just how obscene an amount of cash are we talking about here? Profane or really offensive?
    Edward Lewis: Really offensive.
    Mr. Hollister: I like him so much.

    Trick r treat I dressed as “pretty woman” I’m special !

  30. David O'Donnell Says:

    off thread: budget

    It’s time we had a budget that promoted the interests of working people. UNITE outlines a few simple proposals:

    1.Start an investment drive with €1 billion in 2013 (in addition to reversing the planned cuts of €550 million in the capital budget), to be sourced from Government’s cash and asset reserves of €29 billion.
    2.All fiscal adjustments in the budget to come via taxation on higher income groups. There should be no cuts in overall current expenditure.
    3.Introduce a Wealth Tax – this would raise between €400 and €500 million per annum according to the Minister for Finance.
    4.A Job Guarantee for all young people in danger of falling into long-term unemployment – to be provided through public agencies and non-profit civil society groups.
    5.Raise the low-income floor through increases in working-age social protection payments (including Family Income Supplement), introduction of refundable tax credits and a Government declaration that it will seek an increase in the national minimum wage.
    6.Establish a Strategic Investment Bank, as promised in the Programme for Government, to extend credit to business and long-term infrastructural projects.
    7.A Government declaration that it will suspend Anglo-Irish promissory notes and, pending a satisfactory negotiated outcome with the Irish Central Bank and the ECB, will not be making further payments.

    Jimmy Kelly is the Regional Secretary of UNITE the Union

    Read the full budget submission here.

    http://www.irishleftreview.org/2012/10/30/submissions-mobilise/

  31. Garo Says:

    @John gallaher

    You said: pretty much all principal private residential mtg.’s in the US are fully recourse.

    I said that is flat out wrong and stated that helocs and refis were exceptions. You clearly have no idea what you are talking about. Have you ever taken out a mortgage in the US? I helped a friend do so, so speak with some experience. You cite the naked capitalism blog. Try posting there the same statement I quote above. You will be laughed out of there in no time.

  32. FiatluxjnrFinancial Says:

    Lies, damned lies and
    statistic ……
    “The bank said just €600 million of lending to SMEs this year of its €3.5 billion target for the year was new money; the remainder was the restructuring of existing debt.”
    Isn’t it time we woke up to the s**t that the bankers are feeding us.
    As for the cost of funds argument, either they are incompetent or they are feeding us loads of bulls**t.
    Quote above from the IT on Oireachtas hearings.
    They argued earlier that they were the meeting the targets…now we are a little more enlightened.

  33. Fiatluxjnr Says:

    And in the real world…
    “A study by Britain’s National Institute Economic Review said the eurozone’s austerity strategy is “fundamentally flawed” and has become self-defeating. “Even on its own terms, it is making matters worse.”
    The institute said synchronized fiscal tightening by a group of countries in the middle of a slump does deep damage to the productive economy and may actually worsen the debt ratio, pushing some countries into a “death spiral”.
    It said the “fiscal multiplier” rises sharply when interest rates are already near zero and monetary policy cannot easily offset the budget squeeze. “We do not appear to be in normal times but in a prolonged period of depression, which we define as when output is depressed below its previous peak. The impact of fiscal tightening during a depression may be very different,” said the paper by Dawn Holland and Jonathan Portes.
    While debt may fall, it cannot keep pace with falling output, as has occurred in Greece. “Our simulations suggest that coordinated fiscal consolidation has not only had substantially larger negative impacts on growth than expected, but has actually had the effect of raising rather than lowering debt-GDP ratios. Not only would growth have been higher if such policies had not been pursued, but debt-GDP ratios would have been lower.”
    “The direct implication is that the policies pursued by EU countries over the recent past have had perverse and damaging effects.”

  34. Gregory Connor Says:

    International comparisons are a very good idea for Ireland in rethinking its mortgage system. However the US provides an extremely poor role model in this case. Although the US has among the best-performing national economies along many dimensions, its mortgage system risk architecture was scandalously bad before the 2007-2008 crisis and still needs fundamental changes. Also, the US system is confusing due to the big influence of varying state laws across the 50 states.

  35. Michael Hennigan - Finfacts Says:

    When I was in West Cork last month, I heard that a former developer back from bankruptcy exile was spotted by an unpaid ‘subbie’ filling up his car at a petrol station and got a puck in the face for his trouble.

    It’s tough on a small operator who may not only be out-of-pocket for materials but has no access to PRSI or redundancy.

    The Indo has a story on AIB pensions, with as much as €500k annually being paid from the bank bailout to a former CEO.

    It’s of course another case of let he who has not sinned, cast the first stone.

    Force majeure or ‘inability to pay’ could have been invoked by the Government on much like this but that would have been a bridge too far for many others at the trough.

  36. John Corcoran Says:

    This horror story was caused by an elementary valuation error by valuers/surveyors. Bank of Ireland are suing UK valuers for overvaluing residential property in the UK. Perhaps Irish people in negative equity can do the same–many of these valuers have negligence insurance. Below is the article in the current edition of Property Week UK;

    Bank of Ireland chases UK Valuers for £11.7 million;

    Bank of Ireland is pursuing six-figure settlements from three further surveying firms as it seeks to recoup losses accrued from unpaid property loans.

    The bank is claiming a total of £11.7m from Cluttons, DTZ and Bond Davidson for alleged breaches of contract relating to their valuations
    of residential properties.

    Since the downturn, the bank has distinguished itself as a lender that has frequently turned to litigation to recover losses in valuation disputes against some of the UK’s best-known property firms. The new cases are among at least five that are being defended at the High Court in London.

    DTZ and Bond Davidson face claims of £4.1m and £6.6m respectively after the bank agreed to loan a special-purpose vehicle connected to Penpol Developments £9.3m in 2008 to develop 16 flats and two houses in Newquay.

    Following a dispute between the owners of Penpol, the vehicle that owned the project was placed into receivership and sold for £1.4m. The bank claims DTZ and Bond Davidson overvalued the site and the gross development value. Both companies are defending the claims.

    Cluttons is facing a similar claim brought by the bank for more than £1m over its valuation of a flat in Belgravia.

    Aside from the claims that emerged this week, the bank pursued: Lambert Smith Hampton in August after suffering a loss of £4.5m on a Leeds residential scheme; Edward Symmons in February to recoup £4.9m in losses on a business park in Cheshire; and DTZ in February to recover £2m it lost lending against a plot of development land in Swindon.

    Bank of Ireland, which suffered a 26% increase in its underlying first-half loss in 2012, declined to comment.

  37. Occam Says:

    The priority is to keep people in their family homes. It is also preferable that btls continue to be managed rather than sold off. The key is to restructure mortgages by changing the payment stream in a way that doesnt dramatically reduce its present value any further and give something away for nothing.
    If the principal is reduced with no other recourse for lenders you undermine the basic principles of contract law which underpin our economy. If you provide government funds to reduce the mortgage principal of some homeowners with nothing for those who have played by the rules you create huge inequities and incentives for good owners to go delinquent – our old friend, the moral hazard.
    The creation and coordination of a scheme of restructuring involving property appreciation rights (along the lines suggested by Hussman qouted above) is at least one solution that should be considered for Ireland. Some ingenuity is required.

  38. David O'Donnell Says:

    @Fiatluxjnr

    May we have a link/reference to the Holland/Portes paper please.

    Anything which aids our understanding of flawed EZ policy is helpful ….

    …. An Taoiseach might even slip the abstract into his billet doux for The Chancellor this afternoon in Berlin ….

  39. brog Says:

    Some further colour on the US market from John Campbell of Harvard.

    http://www.economics.illinois.edu/seminars/dkl/pastlectures/documents/MortgageMarketDesign013112.pdf

    He notes that “most European countries have recourse mortgages, as do most US states with some important exceptions including California”

    Article points to research from Massachusetts of an average forced sale discount of 27% (difference between the prices of houses sold by mortgage lenders after foreclosure with the prices of comparable properties sold by owner occupants). The volume of repossessions in Ireland is low but is there any research as what an equivalent forced sale discount would be?

  40. John Gallaher Says:

    Different states have specific BK provisions,but its “personal” or fully recourse at origination.
    Your credit gets thrashed in Bk but you walk away from the debt-non recourse!

  41. Yields or Bust Says:

    @Veronica

    I agree the €3m figure is completely nuts when even in the height of the madness the average house in Dublin was selling for €450k – despite being completely daft €450k is a long way off €3m so I suspect what’s at play here is that the policticos and I’d suspect virtually all the Judges in the country are up to their necks in property debt and need an out clause to supposedly ‘aid’ the suffering coping classes but the €3m figure suggests all is not right with the PIB and as indicated here and elswhere (despite some notable exceptions) its the wrong way to tackle what is in effect a very basic mis pricing error.

    Despite some of John Corcorans annoying posts to this site his basic argument is 100% on the money. – and for those of you who read but don’t really want to understand then wake up. Property valauation and the loans attaching to it is a legalised scam. When a scam is legitimised by banking and contract law it soon becomes a legal reality but at its heart its still a scam.

    There is no serious analysis of the size of the error or as Pat Kenny likes to refer to it as the ‘reckless element’ in the average mortgage loan in residential transactions from about 2001 to about 2010. There is no serious analysis of what could actually be referred to as a fair valuation and a corresponding fair mortgage versus the part over and above this which was effectively an expected super profit element for the lending banks. The analysis is absent because ownership concerns has taken over the debate i.e. the new owners being the Govt are in exactly the same position that the banks were in before the guarantee was issued i.e. in denial.

    This mortgage disaster will not be solved by employment and an economic upturns because both are highly dependant on ongoing competitiveness gains -code for reducing labour costs at every conceivable juncture – meaning bubble wages simply won’t return and as a result bubble mortgages will never be repaid in the normal manner. Hence the CPA stalemate.

    Govt needs to wise up and face reality – mortgage write offs are necessary for longer term economic recovery, it does not require a bankrupty bonanza for the lawyers, it requires a template/model to calculate what the overvaluation element was in residential houses sold in the period from 2001 to c2010 and the corresponding reckless element was in the correspnding mortgages and it requires the Govt to be brave and instruct the banks to write it off otherwise F*?k off and appoint someone to do it.

    Those who benefit lose the right of tax free gains in any PPR subsequent sale and sizes to be limited to average house prices at the peak. With regards to those non covered banks who are in a similar situation Govt instructs that full implementation of the scheme must be adhered to otherwise banking licences to be withdrawn – this is an economic emergency. Simples.

  42. John Corcoran Says:

    @YoB

    The Irish Times – Wednesday, July 1, 2009
    Ban on upwards-only reviews leaves industry at a crossroads

    What started as an almost irrelevant dispute between a trader and a landlord on Grafton Street looks like ending in a crucial turning point for the industry, writes JACK FAGAN .

    WHEN BUSINESSMAN John Corcoran became a little irritated two months ago over Canada Life’s refusal to reduce the rent of his small Grafton Street shoe shop he launched a campaign to end the principle of upwards-only rent reviews on commercial leases.

    Surprisingly, the Minister for Justice Dermot Ahern immediately responded with the announcement that he would introduce legislation to end the practice before the Dáil breaks for the summer recess.

    The intervention came within days of the Labour party putting down a private members bill and was in keeping with the Government’s policy of encouraging everybody to take a cut in income in the present economic crisis.

    So, what started as an almost irrelevant dispute in a commercial property industry more concerned about plummeting capital values, widespread defaulting by tenants and an ever worsening banking crisis, looks like ending in a crucial turning point for the industry.

    The knock-on effect, according to some property experts, may well result in fewer developers, investors and pension funds pumping money into retail, office or industrial property in Ireland because they can no longer be assured of guaranteed returns.

    Similarly, the experts argue that banks will inevitably impose more stringent terms when funding new developments once the long-term rental structure is no longer in place.

    The Government’s stricture on rent reviews will only affect new leases but the case is also being made for the landlords that, once the new guidelines come into effect, older leases tied to the upwards-only clauses will be in less demand and will inevitably have a lower value.

    Much of the attention over the rent review procedures has centred on Dublin’s Grafton Street where there is a range of shops over-rented and no longer capable of giving traders a worthwhile return.

    It is generally acknowledged that a great many rent reviews over the past five years have pushed rents above a viable level. A new and more realistic headline rent for the street is awaited but will not emerge until a brand new lease is signed, possibly this autumn.

    From then on the expectation is that Grafton Street will have a two tier rental system – one level of rents for the large, prestigious stores and another one for the small outlets. The street’s rent profile will never be the same again.

    John Corcoran, who led the campaign for the reform of the rental system, illustrated quite forcefully what has gone wrong on Grafton Street. He originally leased number 47 – it has a trading area of 84sq m (900sq ft) and three floors of storage – 14 years ago for £95,000 (around €120,000) for his Korky’s shoe store. Five years later Canada Life raised the rent to €217,000 and it now stands at €445,000.

    Rather than continue to sustain annual losses of €200,000, he put his lease on the market and, despite offering a reverse premium of at least €300,000 to any trader prepared to take over the shop, there were no takers. Canada Life refused to budge and, as they say, the rest is history.

    The reality on the ground is that most landlords are now settling for reduced rent levels in the present difficult economic climate. An ever increasing number of tenants in shopping centres are in serious arrears.

    A survey of members conducted by the Society of Chartered Surveyors confirmed this position last Friday but, by then, it was too late.

    The Government had already signalled its plans to introduce new legislation. Once again the property industry had lost out because it had no leadership.

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  43. RebelEconomist Says:

    If they have not already heard it, readers of this blog may well be interested in yesterday’s Business Daily programme on BBC World Service: http://www.bbc.co.uk/programmes/p0104lvw

    To summarise, the programme discusses the Irish property bust, in particular including an interview with an amoral British lawyer who is facilitating bankruptcy tourism from Ireland to Britain.

    Perhaps the twelve year restriction on bankrupts in Ireland is more harsh than the year in Britain, but compared with the penalty that might be imposed for, say, embezzling a comparably large sum, it seems lenient to me. It’s a long way from the Marshalsea Prison!

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