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32 Responses to “Introductory remarks by Governor Patrick Honohan at the Central Bank Conference “How to Fix Distressed Property Markets”?”
The comments are quite vague, no? Especially given that the central bank has been reported over the last few days as ‘getting tough’ with the banks on not dealing with mortgage arrears quickly enough.
What Mr Honohan seems to say is that the banks should proceed more quickly to repossess btl properties but not to seek this route for owner occupiers except as a last resort. Is that not what banks are already doing? There didn’t seem to be all that much in the speech which differs from the current bank policy. In fact, he seems to endorse their current cautious approach when he states that the outcome of increasing repossessions is uncertain and could drive down property prices resulting in greater losses.
So what is it the central bank wants banks to do exactly that they aren’t doing already? It certainly isn’t clear from those comments.
A question of valuation
Thursday, January 24, 2013
A property has two prices, the price you can get for it, or the net present value of its future cash flows.
If a €5 note was auctioned on Grafton Street and an unwise person bid it up to €20, then a surveyor would value all €5 notes as €20 notes.
Likewise if an unwise person paid €2m for a house with a net present value of €0.5m then a surveyor would value all similar houses at €2m. Almost all of the Irish banks’ reckless lending was done using surveyors valuations. These valuations were as good as money. This is the valuation error that created the property bubble and bankrupted the country.
I understand many of the valuers have professional negligence insurance with Lloyds of London etc. Time to start suing?
What we need to do, is save the people from Good Families.
The sons and daughters of professionals, senior department officials, judges, and political dynasties. The younger couples who already have connections with the law libraries, partnerships, golf clubs, and socialite circles. These are the people who matter, and who will form the foundation of the next generation of talented, successful people who run this country.
We have to save these families, including their older generations who through no fault of their own, ran up huge debts guaranteeing their children’s homes and cars, and in speculating on the buy to let market themselves. The power and flexibility of the PIAs and DSAs allows us to do this on a selective basis, so that the monies allocated for debt relief can go to where they are needed most: To the finest families in Ireland.
Where the money cannot go, where it will be utterly wasted in vain, is on the masses of the Nouveau middle-classes. People perhaps only two or even one generations removed from an inner city tenement, or a farmhouse out the country. People with no political or social connections, and whose only source of wealth is their own labour, service, and skills.
These people gambled recklessly, taking out loans to buy houses above their station, practically forcing the banks to give them outrageous mortgages which they always knew would never be paid back. A few even entered the BTL market! To leave them in their homes would simply undermine the proper and deserving social order of Ireland. For humanitarian reasons, we can house them in vacated properties like Priory Hall, and mostly completed ghost estates in the Midlands, making use of our housing surplus.
We have to save the right people; the families and traditions which have provided leadership and direction to this country, and who will continue to do so. The limited funds available mean we can only afford to save the best of the younger generation from debt and emigration, and it’s clear where the best can be found. In Good Families, with Good Names, and a Good Record of Running Ireland.
Apologies for going off the original post but this ties in with my comment above. Yesterday Martin Wolf wrote a very interesting article which agrees with many of the things I’m saying.
”Some are sure that the troubled western economies suffer from a surfeit of money. Meanwhile, orthodox policy makers believe that the right way to revive economies is by forcing private spending back up. Almost everybody agrees that monetary financing of governments is lethal. These beliefs are all false.”
”Alternatives exist. As Lord Turner notes, a group of economists at the University of Chicago responded to the Depression by arguing for severing the link between the supply of credit to the private sector and creation of money. Henry Simons was the main proponent. But Irving Fisher of Yale University supported the idea, as did Friedman in ‘A Monetary and Fiscal Framework for Economic Stability’, published in 1948.”
”Why should state-created currency be predominantly employed to back the money created by banks as a byproduct of often irresponsible lending? ”
I’d hazard a guess that intergenerational equity in Ireland is one of the worst in the developed world. At the moment it’s national policy to screw the young, emigration valve, high unemployment, recruitment ban in the civil service, less wages for the few that do get recruited etc
Those in trades have got particularly hammered having been trained for an industry that can not longer support them. Those that are young, in trades (likely male) and bought in the commuter belt (negative equity) during the ‘boom’ got even more screwed.
Finally those in that category with a kid or more got the most screwing of all, as they’re son(s) or daughter(s) as well as helping them with their future pension problem, get to pay off the debts of Anglo/IN.
Basically those in the families you cite, a lot of whom were born in the 50s have not only shafted the immediate generation after them, they’ve managed to shaft the generation after them too.
That’s an impressive feat for a generation who managed to reap the rewards of the generations before them, eg high growth during the 90s, price increases and the Bertie bribes aka ‘benchmarking’.
Incidentally, at the expense of the young, those employed by the state (in that generation) have managed to secure the kind of pensions that will never be seen (or afforded) again, in addition to getting subsized health insurance.
I for one, though (or perhaps because ) I’m an engineer and not an economist by profession, agree with your thesis. Strip the power to create private money from the banks. I’m interested in knowing how you envisage the state/ECB handling the powers if they were entrusted to it? One can’t imagine they’d be worse with such power than the current private institutions, simply because it’d be difficult to be worse, but isn’t there room for them doing a poor job?
Also the current system has made a lot of institutions rich and so powerful, power I’m sure they’ll always exert to prevent any move toward the common good or more accurately away from lining their pockets. Isn’t that the biggest reason such common sense is so often ignored.. I.e it’s implementation is seen as unrealistic given the powers that would be exerted against it and political capital required to implement it.
@Carson great summary,watched him on ‘off the week’ i think,he appears reluctant to ‘tell/instruct’ state owned banks/other banks what to do,to avoid shifting the blame.
Result is a vacum,no decision is in effect a decision,there is a shocking lack of leadership and dereliction of duty by many people including the Minister,who after all represents the ‘owners’ of the banks,you guys.
Its the worst of all worlds young people are excluded from entering the market via a ‘repo’ or bargin…inventory is getting capital starved and run down and milked for cash flow.
Its not a ‘market’ problem its a ‘debt’ problem…still no sign of modern BK laws,why could the UK’s not simply be copied,all market participants work within them.
I would agree with you except I detect a distinct lack of respect for what heretofore were considered to be our betters.
As the IOUs’ come due and the Gov’t lays on the myriad charges necessary to meet the obligations entered into by the present and previous governments that is when the honeymoon ends. The net inflow of funds from the ECB/IMF that has allowed the gov’t to buy a temporary acquiescence is becoming a net outflow which will sow dissent.
Of course this is Ireland and anything is possible including a FF led coalition after the next election. It’s enough to get people fingering their Rosary Beads to ward off SF or worse.
@ JF: “I’m interested in knowing how you envisage the state/ECB handling the powers if they were entrusted to it? One can’t imagine they’d be worse with such power than the current private institutions, …”
Creation of credit (electronic money) is more God-like than God! No one who possesses this power will ever relinquish it - absent they are first exterminated. Or it is Constitutionally prohibited.
We are stuck with it unless our Supreme Court rules that you cannot claim private ownership over fiat money - on the basis that it had no element of a physical prior - hence it is itself, not an object with any physical reality. Mind you, “… and the word was made flesh.”, does seem somewhat similar!
If all economists had to ‘endure’ a prior basic training in either science or engineering, I fancy that they might be a tad more coy with their dopey models and their unfettered enthusiasm for failed social experiments.
On the subject of the thread: “How to Fix Distressed Property Markets”?”
“debtors should fulfil their obligations if at all possible, and freedom from legitimately incurred obligations is a privilege, potentially subject to abuse, that should therefore be a carefully guarded last resort”
How about: “… lenders should fulfill their fudiciary duties - without fear or favour, since originating a loan without due diligence is at best abusive, at worst fraud.”
” … the Personal Insolvency Arrangement (PIA) which could allow insolvent mortgage debtors to earn a “fresh start” through being subject to an onerous payment plan …”
“onerous?” How non-onerous were those loan originations?
The disease lies back at the loan originations, and it here that any remediation must commence. Each loan is forensically examined to see how it was originated. There are two sets of signatures on these loans. So who signed for the institutions? These individuals must be forced to explain the manner in which the loan was considered for approval. The institutions do hold the original paperwork? ‘Dodgy’ approvals will result in either the loan being declared void (fraud), or written down (abuse of process). If its the former, people go to jail! If its the latter the institution suffers the loss - not the taxpayer, irrespective of any guarantees or legislation which seeks to stick the taxpayer with the bill. None of this will occur.
“A long understood maxim in retail banking is that early engagement with distressed borrowers is a valuable tool for improving ultimate recoverability”
An even longer understood maxim is NOT originating imprudent loans in the first instance!
No research whatsoever is needed in order to determine the Performance Characteristics of a viable residential property market. Prof Honanhan should observe what many tutors have to tell their students - “READ THE F*****G MANUAL!” What’s so hard to understand here? A great deal it appears.
‘We continue to scrutinise and seek to learn from research analysis of Irish data, and from the research findings about the experiences of other countries. Drawing on what we have learnt, we will continue to make more precise our thinking about when debt modifications are needed and how best sustainable modifications should be designed. Having ensured that the banks are much better staffed and organised for dealing with arrears, we will be setting out our quantitative expectations for their effectiveness in achieving lasting solutions’
It’s not so much what we don’t know, it ’s what we know that can never ever be acknowleged. It might lessen public confidence in the PTB.
I’m not sure if your aware but when a bank processes a loan repayment the money no longer exists. However under the proposal no money would ever be ‘deleted’. The exact same, permanent money could recirculate and fund several projects. So the NCBs would only ‘top up’ the money supply to meet an expected increase in products and services. Hence it would not be critical that the NCBs or the ECB get their decisions right every time.
As well as this the banking system cannot behave prudently. Banks can only create the principal of each loan and yet they have to expect the prinicipal plus interest back. Even if banks lent only to those with the highest credit rating it’s still impossible for all bank loans to go according to plan. Hence the NCBs under the ECB could not do a worse job.
Our proposal is described in as much detail as you like I’m our document ‘Resolving the Eurozone Debt Crisis’. It’s 38 pages long but it’s well subcategorised. It can be read at;
I had read the ‘Chicago plan revisited’ a while back but you provide a good and obvious answer to a poorly thought out question i.e. If implemented the total power to do social damage is reduced considerably. Thanks for the link, the answer is contained in section 6.2 of the report you link to… Keep beating the drum, one can only dream of such a world, personally Id love to see a stake driven in to the heart of property market ponzi schemes world wide.
@PF: Thanks for update. I am away from desk until Sat. Will post a comment if this thread is still ‘live’. The arrogance of our financial Dear Leaders is truly breathtaking. This economic regression has exposed them for the ignorant experts they are.
Are any other papers available from this,,some reporting on other speakers in the IT ?
“Another speaker, economist Anthony Murphy of the Federal Reserve Bank of Dallas, said the lack of repossession of houses in Ireland by the banks was “crazy and really strange”. A former academic with UCD, Mr Murphy said that while the level of foreclosures in the US might be too high, the level in Ireland – zero – was too low.” http://www.irishtimes.com/newspaper/finance/2013/0214/1224330013027.html
Interest rates across the West are on the floor. That means deleveraging is going to take a long time and may involve large doses of deflation. Renault in Spain and France are offering workers a choice- take your job with.a pay cut or join the dole queue.
One of the ‘issues’ highlighted in the papers was the large amount i think about 60% based on total loan amount of loans in arrears that have tracker mortgages.
Adjusting the ‘rate’ is really not an option unlike in other places where re-financing to take advantage of lower rates has somewhat been successful.
The reason for the ‘qualification’ is that its still early days with some of the programmes.
The Dunne decision only pertains to certain vintage ‘paper’ and is no excuse for the lack of action from the various parties involved.
Interesting exchange yesterday regarding this situation and the govt.’s plan or lack there off….
“The Governor of the Central Bank spoke about the need to be more directive with the banks, notwithstanding the risks associated with that. The Keane report was published 18 months ago, but very little has happened since in the context of practical, innovative responses from the banks. Only 12 split mortgages have been effected since then and only one mortgage-to-rent arrangement. Therefore, the response to the Keane recommendations by the banks has been appalling. Given that the banks got €9 billion in the context of their recapitalisation to deal with mortgage modification and losses and were supposed to use that funding intelligently, what plans has the Government to direct the banks to engage once and for all with customers and to deal with this issue? As Fiona Muldoon, the deputy Governor of the Central Bank, has said, the banks have been in complete denial on this issue for far too long.”
While the academic papers are very informative and interesting,the fact that they are ‘yank’ will lead to some ignoring them-as the similarities are to be fair a bit faint.
This opinion piece by someone on the ‘front lines’ of the issue is excellent.
“Banks are only doing what banks are supposed to do when they seek the repayment of money. Now it’s up to government and our financial regulation regime to do their job to protect consumers and get this society past the awful misery of over-indebtedness which is poisoning our society.”
I find the Irish media somewhat lacking at times,so one the best RTE programmes is actually The Oireachtas Report,the exchange from above is at the start of the programme. http://www.rte.ie/player/us/show/10110195/
The infamous Dunne ruling…..which the current govt. and regulators are hiding behind the skirt tails off….
“Justice Dunne ruled that a lending institution cannot apply for an order for possession where a mortgage was created before1 December 2009but a demand for full payment was not made by the lender until after that date. Justice Dunne stated that the repeal of the old legislation had created a ‘lacuna’ (effectively a gap in legislation) and it was not for the court to supply that which was not in the 2009 Act.” http://www.anthonyjoyce.ie/landmark-legal-ruling-find-loophole-mortgage-halt-hundreds-repossessions/
The title to the conference was slightly tongue in cheek,as the main topic was forbearance measures and their effectiveness.
“The extremely low level of repossessions, even given the Dunne ruling, cannot
be efficient and must increase the incidence of strategic default (about 12% in
the U.S. according to Bradley et al. (2013))
– The new provisions in the Personal Insolvency Act (2012) may also increase
the incidence of strategic default”
Anthony Murphy-link above.
The issues/market is bifurcated with BTL and PPR-principal private residence.
its not in dispute by anyone that the legal loophole is getting closed so further discussion or in fact even bringing it up is flogging a dead horse or stating the bleeding obvious.
One area to look into after the loophole is changed is called “dual track”,Cali passed a law preventing a lender/loan servicer from doing this….
Exclude BTL from this and protect PPR below a threshold or ceiling.