How Large Are Strategic Arrears in the Irish Mortgage Market?

This post was written by Gregory Connor

Strategic arrears denotes the amount of funds voluntarily not paid on mortgages by homeowners and buy-to-let investors who have the ability to meet the payments but choose not to do so. The available funds are spent on current (non-necessity) consumption or redirected elsewhere, outside the control of the mortgage-holding bank.  Distressed arrears are the “can’t pay” component of mortgage arrears and strategic arrears are the “won’t pay” component.

Since 2009, Irish mortgage arrears have grown dramatically (see Central Bank of Ireland, Chart 1). As of third quarter 2012, the mortgages with 90 day + arrears on principal private residence totalled €16.8 billion. Mortgages in arrears accounted for 15.1% of outstanding mortgages (expressed as a proportion of mortgage value rather than mortgage numbers).  In the buy-to-let sector there are €7.9 billion of morgages in 90+ day arrears, and the mortgages in arrears accounted for 25.5% of outstanding mortgages (by value).

Not coincidentally, the dramatic growth in Irish mortgage arrears coincides with the Law and Conveyancing Reform Act of 2009, which made property repossession more difficult and time-consuming, and the subsequent Dunne Ruling, which resolved that the Act was flawed, and put a stop to virtually all new repossessions until such time as the Act was amended to remove the flaw in its construction. This legal flaw has not yet been removed, but the Troika has made it an explicit condition of its financial support program that the flaw is finally removed by March 2013.

Statistically measuring strategic arrears is difficult, but not impossible.  As Guiso, et al. state

“The main problem in studying strategic defaults is that this is de facto an unobservable event. While we do observe defaults, we cannot observe whether a default is strategic. Strategic defaulters have all the incentives to disguise themselves as people who cannot afford to pay and so they will be difficult to identify in the data.”

Strategic arrears are a major policy concern in the USA following its own mortgage crisis. Over the last few years there has been a flurry of US-based research to measure strategic arrears and to explain what policy choices tend to encourage or discourage them. Strategic arrears can be statistically measured either using large questionnaire samples (asking people about the strategic behaviour of themselves and/or acquaintances) or by forensic examination of panels of household income/budgets and mortgage payment choices. See Ghent and Kudlyak for a survey of the many US studies. There are some interesting recent findings from all this recent US-based research. Strategic arrears went up sharply as US property prices fell. They rose from 26% of total arrears in March 2009 to 35% of total arrears in September 2010 following the decline in US property prices (Guiso, et al.). The proportion of strategic arrears (relative to total arrears) is strongly dependent upon property prices, and in particular on contemporaneous loan-to-value ratios. The contemporaneous loan-to-value ratio is the current book value of the mortgage (that is, the original amount minus cumulative principal repayments) divided by the current market price of the house. Bhutto, et al. find that for the subset of households with a contemporaneous loan-to-value ratio above 162% the proportion of strategic arrears reaches 50%.

The contemporaneous loan-to-value ratio depends upon the original and current price of the property, the original loan-to-value ratio, the age of the mortgage, and the principal repayment schedule. Consider an Irish mortgage taken out in the 2005-2007 period with an original loan-to-value ratio of 85% and no principal repayment so far (or a higher original loan to value ratio adjusted downward to 85% to account for cumulative principal repayments). If the value of the property has fallen by 48% or more, then such a mortgage has a contemporaneous loan-to-value ratio of 162% or higher, since .85/(1 - .48) = 1.62. This class of mortgages encompasses a nonnegligible proportion of Irish mortgages-in-arrears and among these, according to US-based research, 50% of arrears are strategic.

The US research is not definitive when applied to the different circumstances of Ireland. Social and psychological influences play a big role in strategic arrears decisions. Most people consider strategic non-payment of mortgage debt ethically wrong, but express moral relativity. If home equity losses are sufficiently big, the majority will engage in it. It could be that these ethical/social/psychological influences differ between Ireland and the USA since they are culture-dependent. There is another extremely important difference between the US and Irish environment. In the USA, strategic arrears are inevitably followed by property repossession within a one to three year period, with the specific time length depending upon the State jurisdiction and particular circumstances. In Ireland, repossessions have been effectively blocked since 2009, and the new Personal Insolvency Act continues to block them in most but not all circumstances for principal private residences. US repossession laws differ substantially across US states. Gent and Kudlyak find that cross-state differences have an influence on state-by-state proportions of strategic arrears. Given Ireland’s extremely restrictive regime regarding repossession, this predicts a relatively higher proportion of strategic arrears in Ireland.

Now it comes time to tentatively answer the question in the title. It seems likely that the proportion of strategic arrears in Ireland is greater than 35%, which was the measured proportion in the USA in 2010. Ireland has experienced a greater cumulative property price fall than the USA, and its repossession laws are much stricter, which strongly influences upward the proportion of strategic arrears. Among the buy-to-let subset, the proportion of strategic arrears in Ireland is likely higher than 35%, and may be greater than 50%, reflecting the particular features of this sub-market (wealthier households, a larger proportion purchased near the height of the boom). Cultural and psychological influences could go either way in a US vs. Ireland comparison so I am using conservative guesses, taking into account the influence of very strict Irish repossession laws.

Using the 35% figure, the new personal insolvency regime begins its life with an overhang .35 times (16.8 + 7.9) = €8.645 billion of mortgages with strategic arrears, along with €16.055 billion of mortgages with distressed arrears. Much of the distressed arrears will be lost (as they should be) and much of the strategic arrears will also be lost (as they should not be). The funds will be subtracted from the proceeds on the government-owned commercial banks when they are eventually sold into private ownership.

90 Responses to “How Large Are Strategic Arrears in the Irish Mortgage Market?”

  1. OMF Says:

    Distressed arrears are the “can’t pay” component of mortgage arrears and strategic arrears are the “won’t pay” component.

    Strategic arrears? Is this what we’re calling the “Won’t Pays” now? Is this redefinition the signal that a new policy is being implemented? Is this how we are going to sell a bailout for the Buy-to-letters, or is this actually part of a plan for real debt forgiveness for the ordinary mortgage owners who genuinely can’t pay?

    Among the buy-to-let subset, the proportion of strategic arrears in Ireland is likely higher than 35%, and may be greater than 50%, reflecting the particular features of this sub-market (wealthier households, a larger proportion purchased near the height of the boom).

    A lot of these people are in decision making positions in the government and the courts. The dynamic in play here is that of a bankrupt ascendancy, starving the rest of the population long before it pays for itself.

    We are not talking about mere “strategic defaulters”. We are talking about a class of organised criminals, stationary bandits, who have been running Ireland for their own benefit since at least the foundation of the state. One way or the other, they will be looking to load their losses onto the rest of us.

    So, I choose not to call them strategic defaulters. These are and always have been, the “Won’t Pays”. The Departments’ officials, the county councillors and politicians, the retired Gardai, the Barrisiters, Judges, professionals, gombeen’s great and small who have spent their lives cheating their way to the top in rotten Ireland. They are a cancer on the body politic, deserving no pity, and would should be removed fro public life by way of en-masse bankruptcy. It will be a healthy purge for Ireland, and won’t cost one red cent.

  2. Garo Says:

    Any study of strategic arrears would be incomplete without an examination of recourse vs. non-recourse. It stands to reason that recourse mortgages would suffer lower levels of strategic arrears. Doesn’t this counter te stricter repossession laws?

  3. John Gallaher Says:

    @Gregory terrific post,prime time this evening is running something on this..with some “experts ” should be worth a watch.

  4. Ernie Ball Says:

    OMF: “The Departments’ officials, the county councillors and politicians, the retired Gardai, the Barrisiters, Judges, professionals, gombeen’s great and small who have spent their lives cheating their way to the top in rotten Ireland.”

    Yes, that’s right: this is a scam (like all scams in Ireland) perpetrated almost entirely by the public sector. Indeed, the public sector are nothing but parasites feeding off of the rest of society.

    Seriously, do you ever read what you write?

  5. seafoid Says:

    Surely unemployment rates are pertinent- 14.5% irl vs 8% US. And date of purchase. Presumably the post 06 cohort of buyers esp in the sticks and with construction jobs and high ltv ratios are more likely to be in difficulty. The assertion that btl are wealthier needs some backup. A lot of regular people got into the game late.

  6. John Corcoran Says:

    This is merely a question of valuation?
    http://www.irishexaminer.com/opinion/letters/a-question-of-valuation-220487.html

    The Bank of Ireland have successfully sued their valuers in the UK. Perhaps these distinguished Irish valuers might be worth suing. Many have professional negligence insurance with Warren Buffett etc.

  7. John Corcoran Says:

    Perhaps the Irish Times property editor or property journalists,might like to comment. They were a great source of wisdom and restraint during the bubble years. Their chairman David Went’s old company Irish Life was sold off to the Canadian monolith today. Perhaps David might like to comment?.

    Fintan O’Toole might write an enlightened esoteric opinion piece on his paper’s property pornography and MyHome.ie. A sad lot.

  8. Bond. Eoin Bond... Says:

    @ OMF

    For a rare occasion I’m more than just a little bit inclined to agree with Ernie Ball. We have 149k BTL mortgages, 36k of which are in arrears. Just how many TDs, retired garda, judges, barristers etc are there out there involved in this? A few hundred percent of them? Any reference supporting this or are you just spouting the usual nonsense?

  9. Gregory Connor Says:

    @seafoid — yes but the unemployment rate effect is more muted than this comparison might indicate. Among mortgage-holding households the unemployment rate in Ireland is only 7% (Irish Central Bank Macro-Financial Report Q2 2012) and among households with serious mortgage arrears, 68% do not have an unemployed household member responsible for the mortgage. So unemployment is a big causal effect, but not the whole story.

  10. skeptic01 Says:

    It’s hard to buy these numbers, based as they are solely on extrapolation from US estimates taking into account some local differences (stricter repossesion) and ignoring others (full recourse loans, higher unemployment).

    Neverhteless this is an important subject. The Irish economy is over-indebted and mortgage debt is a large component of this. Unlike other components (public debt, promissory notes etc), resolution of mortgage related over-indebtedness is a matter almost entirely under our own control. Indeed thr Irish state has put 9Bn euro into the banks to cover mortgage losses. So how well have we done?

    I’d give us a big fat zero to be frank. It is quite incredible than more than 5 years into the bursting of this bubble we are only now getting around to dealing with flaws in repossion and bankruptcy law. And the policy of letting the banks work through this on a case-by-case basis is still being pursued, despite abysmal results.

    McKinley reported last year that the only economy that has made progress in deleveraging so far is the US (in terms of reducing total debt to GDP), and that mortgage write-offs are the largest single contributing factor. Ireland by contrast had made no progress at that time. If the banks are not going to deploy the 9Bn that we put in, can we have our money back please?

  11. Paul Ferguson Says:

    I surprised that there is so much analysis of the mortgage arrears problems and there’s so little acceptance that it’s impossible for all mortgages to be repaid.

    Are people aware that banks create the money they lend, through mortgages or otherwise? Are people aware that banks ‘delete’ all but the interest they receive when processing a loan repayments?

    Hence what’s in circulation is the negligible amount of cash plus the principal, or partial principal, of every recent loan. What’s owed back is the principal plus compound interest. Can we acknowledge that it’s impossible for all loans to be repaid under this system?

    Would it not be sensible to gradually move towards a system whereby banks lend existing money only which doesn’t get destroyed through loan repayments?

  12. John Gallaher Says:

    Does anyone know if the rental income has at least been “lock boxed”…in that notices sent to tenants to pay rent directly to lender,
    It’s a standard form in mortgages over here,SNDA.

  13. Ahura Mazda Says:

    It’s still unknown how banks will operate under the code. There is a real risk that performing borrowers currently struggling will opt for lower repayments. And borrowers’ definition of “struggling” will widen.

    The arrears rates for btls are very high given vacancy rates are lowish. Personally I think there’s something funny going on with some of these loan categorisations (eg inns).

    Ignoring social concerns, it’s troubling that Irish banks don’t seem to have foreclosed on loans with positive equity. Ie Irish banks aren’t behaving like banks.

    This may sound a little German central bankish, but you need to be careful about any measures that lower the cost of a loan. Harsh as it seems, for a credit system to function the creditor is required.

  14. Robert Browne Says:

    @ Paul Ferguson I saw some interviews with Professor Steve Keen a while back where he talkws about debt Jubilees and by implication why Professor Hohohan should not have got the banks to sit down and work out the value or their dodgy loans books so that they could be “recapitalised” free gratis by the Irish tax payer, a taxpayer who strangely enough, is the person on the hook for their own negative equity loans. Keen’s argument was, that the government instead of handing the cheques to the banks should have handed it instead to the debtors who then would have given it to the banks thereby recapitalising them while at the same time removing the lever and need for ministerial “hope” that the banks will be nice to the people, will not give them the run around and will not use their veto. It is like removing a muzzle from a Pit Bull terrier putting him into the middle of a dog fighting ring and hoping he does not bite anyone. Daft and a complete cop out.

    As the banks are still hopelessly insolvent and we are about to make the same mistake again, a sort of deja vu can you perhaps comment on Keane’s argument. We most certainly would not be watching our TV’s screens with David Hall telling Alan Shatter, “minister you had one glorious chance to do something historic and you blew it!”. I agree with him. The insolvency legislation is a crock, that will only make money for the PIP’s and of course there will be tens of thousands of people put out of their homes or reduced to indentured slavery. Meanwhile, the clever clogs including an ex FG minister went across the border to avail of a real insolvency procedure not a pretend one. I don’t blame him.

  15. OMF Says:

    @Ernie Ball

    Yes, that’s right: this is a scam (like all scams in Ireland) perpetrated almost entirely by the public sector. Indeed, the public sector are nothing but parasites feeding off of the rest of society.

    Barristers, professionals, and gombeens count as being in the public sector now? Well, of course they are _really_, but not actually officially of course, but I don’t think that’s the point you were trying to argue I was making.

    For a rare occasion I’m more than just a little bit inclined to agree with Ernie Ball. We have 149k BTL mortgages, 36k of which are in arrears. Just how many TDs, retired garda, judges, barristers etc are there out there involved in this? A few hundred percent of them? Any reference supporting this or are you just spouting the usual nonsense?

    Since you’re probably not as familiar with the mortgage market as the bond one, simply consider the following; most of the top people took out more than one mortgage.

    Take the top 5000 professionals, civil servants, etc, with an average of 3 houses each, and there’s 15k of your BTL mortgages in arrears, almost half of the current total. I’d give a higher estimate, but of course that would be a matter of dispute.

    There are what, 10,000 or so members of the law society? In and around the same number of Gardai. Not sure about the numbers for Doctors, teachers, rural and urban “gombeen” businessmen, senior civil servants, bankers, etc, or the retirees from these groups. But I can assure you of this: Whatever the numbers, the “Won’t Pays” in these populations will consist almost exclusively of their most senior members.

    And I think the senior “Won’t Pays” are in fact basically the only “Won’t Pays”. No-one else would have the clout or the neck to pull off giving the two fingers to the banks over a BTL mortgage, and no other group could ever have been treated so leniently.

    But yeah, of course the BTL arrears could all just be unemployed flower stand salesmen as well. That might stand to reason.

  16. Ernie Ball Says:

    You know full well that the main targets of your insane ire were the public sector. “Professionals” was clearly an afterthought.

  17. John Gallaher Says:

    @Ernie clicked on your nom de guerre as they say on here hat tip or +1,the writing is exceptional.
    Very little attention is/has been paid to the tenants in this BTL fiasco.
    The Dunne ruling is dunne and dusted,legislation imminent.Now where are the tenants deposits,are the banks going to be liable for these too?
    Will existing tenancies be protected,specifically after foreclosure ?
    What’s to stop current BTL landlords aware of the billet heading their way entering into say long term below market leases,for a few bob cash upfront?
    But most importantly the blood supply to these deadbeat landlords has to be cut off,the banks/institutions simply must grab the cash/rent and honor/enter into market leases with existing tenants before its too late…..
    Unless of course the plan is to sell them as is and leave the tenants at the mercy of “new” owners….that’s gonna work out really well…,

  18. Michael Hennigan - Finfacts Says:

    Bank of Ireland has said that 75% of its buy-to-let financing was via 10 year interest only mortgages. So it will be until 2017 when some of these deals will require capital repayments. AIB was more prudent.

    Given that 3-month Euribor is at 0.221% and with a margin of say 2%, with inevitable negative equity, the rational thing to do is to string the process out while collecting rental income.

    Conall Mac Coille and colleagues at Davy last August estimated BTL mortgage arrears to peak at 38%, comprising around 40,000 loans.

    http://www.davy.ie/content/email/mortgage20120817.pdf

    @ Paul Ferguson

    It is not necessary in Switzerland to pay back the borrowed capital, even after a long period. Banks generally only require that a third of the debt be paid off within 20 years or when retirement age is reached.

    Mortgage rates have not been as low ass now there, since 1850.

  19. David O'Donnell Says:

    @OMF

    Why was the bankruptcy limit set at €3 million? ……

    … rather than half a million?

    Even an adult with 2 or 3 BTLs could figure it out or even design it!

  20. David O'Donnell Says:

    @Gregory Connor

    ‘Strategic’ is one of the most abused terms in academia …. your usage here is plausible …. but ‘latently strategic’ is probably more appropriate.

  21. What Goes Up... Says:

    Only in Ireland could the banking industry’s incompetence and new-found state bailout dependency culture be transmogrified into a concern for strategic default by the borrower!

    Look at the “180 day+” default rate:
    http://www.japlandic.com/2012/12/continuing-to-take-off-like-rocket.html

    It should be like a wave - first manifesting itself in the “<90 day” range, then in the next quarter rolling on into the “90-180 day” range and in the following quarter breaking in the “180 day+” range.

    Instead, the Irish banks, in their incompetence, have tried to mask the rotten state of their books by doing restructuring on bad loans until even they no longer see the point of continuing to throw good money after bad after “180 days+”.

    They also have perfected their state bailout dependency culture and know full well that letting the problem grow to large enough proportions means it becomes a political problem, not a banking one.

    If they were left to live and die by their actions, then they would have had to manage their mortgage book properly - but thanks to Comical Leni and Biffo The Clowen, and now Comical Mickey and Enda The Good European, deciding that these zombies were systemic… the banks simply continued where they left off in September 2008 and ran the rest of the industry into the ground.

    Cheapest. Bailout. Ever.

  22. Bond. Eoin Bond Says:

    @ John G

    re rent being “lockboxed” - think thats been a major problem in a lot of cases (ie was not going to servicing account automatically), but banks trying to close it off and have most of it covered now.

  23. Kevin Lyda Says:

    I bought a property in 2005 - initially to live in but the intent was to let it in the future (which I have done for the past 3 years).

    The property is worth approximately 1/3 of what I paid for it. Obviously until I sell it, I haven’t lost money but it does seem like an uphill climb.

    Meanwhile my bank (which was bailed out by tax payers in it’s own country) does only one thing with the interest rate - raise it. It is now at 5.15% while the ECB rate is at 0.75%. This raise of 0.25% occurred after the ECB rate had dropped 0.25%. It appears that each time the ECB lowers their rate, my mortgage rate goes up.

    So why are people doing strategic defaults? Well, it’s one thing to absorb a loss in your own bad investments, but it appears that as long as I pay my mortgage I have to pay increasingly for the losses of banks as well. I’m not likely to join the ranks of the strategic defaulters, but I’m getting progressively more annoyed that I’m locked into an agreement with an industry that seems to suck in money like a financial black hole.

  24. seafóid Says:

    @ Gregory Connor

    Is there any data on salary cuts and mortgage arrears ? I presume you could add those to the 7% you mentioned who are unemployed.

    Has anyone done any mapping of the arrears problem?

    http://www.irishtimes.com/newspaper/weekend/2013/0105/1224328446985.html

    “Nowhere is the decline in affluence more striking than in the outer stretches of the capital’s commuter belt. Parts of Cos Louth, Longford, Offaly, Kildare and Roscommon have experienced a dramatic reversal of fortunes.
    “People living in the commuter belt are very much the squeezed middle,” says Corcoran. “These are the people who were getting on the ladder, moving out to a nice, bigger, more affordable house. But they were hit hardest. They may have jobs in construction, the bank or elsewhere. Their kids are growing up now and life is becoming even more expensive.”

  25. Gregory Connor Says:

    @Seafoid - as part of the Financial Measures Program of 2011 the Irish Central Bank compiled a large detailed database on households in arrears and described their statistical characteristics including regional statistics in a series of papers and presentations. They are on the Irish Central Bank website you have to use the search engine on the website and look up mortgage conference.

  26. JFH Says:

    When you read that “As of third quarter 2012, the total 90 day + arrears on principal private residence totalled €16.8 billion.”

    Does this mean that €16.8 billion is the actual arrears i.e. unpaid amount OR

    Does it mean that Mortgages totalling €16.8 billion are in arrears of which maybe only €1.5 billion is the unpaid amount?

  27. Paul Ferguson Says:

    @ Robert Browne,

    I saw Steve Keens’s analysis but I had some issues with it because he didn’t distinguish between central-bank-reserve-money and bank-account-money. We have a publication, ‘How Money is Created and Destroyed’ which explains how the three types of money; cash, reserves and demand-deposits are created, transferred in various ways and then destroyed so if you’re not familiar with how the euro zone system works you can read it at:

    http://sensiblemoney.ie/data/documents/How-Money-Is-Created-And-Destroyed.pdf

    It’s 20 pages long so if you want a quick answer I’ve summarised my thoughts on Steve Keen below:

    Reserve-money is held electronically at the central bank and it’s the type of money that banks use to settle payments between each other but it’s not in general circulation. Banks are allowed to create bank-account-money for customers to a multiple of the balance in their reserve account. Under the bank bailout, money was transferred from the exchequer’s account (which is at the central bank) to the banks’ reserve accounts; the idea being that the banks are well capitalised again and hence in a good position to create more bank-account-money for the economy. While this argument has merit banks cannot create bank-account-money if no-one is willing or able to get a bank loan. As well as this, banks create more debt in the economy than they do money through each loan and so even if this tactic did encourage the creation of more bank-account-money it can only make the debt crisis worse over time.

    Steve Keen’s argument that the bailout should have gone to the debtors might seem like a good thing initially too. Money would be transferred from the exchequer’s account to the debtor’s account at which point it would be bank-account-money. However banks ‘delete’ the money they receive through loan repayments. This isn’t thought in economics so it’s possible that Keen doesn’t understand this. Hence this money could not be used to recapitalise the banks since it won’t exist after the repayment is processed. There would be less debt in the economy but also less money and it’s still the case that whatever bank-account-money which remains in the economy has a corresponding debt.

    Ultimately for there to be new money in the economy someone has to take on a corresponding debt to the banks. If we reduce our debts to banks the money no longer exists. Resolving the debt crisis under this system is quite the conundrum.

    Of course there’s no reason why bank loans should be the only significant source of money in the economy and we could start discussing alternatives.

    @ Michael Hennigan

    I didn’t realise that. I wonder how that works? It’s effective interest only mortgages? Does that not mean that the principal of each loan going back several hundred years still exists somewhere in the Swiss economy, as effectively debt-free money?

  28. seafóid Says:

    @ Paul Ferguson

    Swiss mortgage practice seems to be a function of the price of Swiss apartments.

    http://www.homegate.ch/kaufen/wohnung/bezirk-stadtgenf/trefferliste?mn=ctn_ge&ao=&am=&an=&a=default&tab=list&incsubs=default&l=default&fromItem=ctn_ge&be=&cid=5466483&tid=1

    1 million CHF is the starting price in many areas.
    Most punters have no hope of paying off such a sum over 25 years.

    Banks accept pension assets for deposits.

  29. Paul W Says:

    @ Kevin Lyda
    Anyone on a variable rate mortgage is clearly subsidising those on trackers…that’s why you report your interest rate rise despite the ECB rate (tracker) going down.

    Doesn’t make sense for a tracker mortgagee to strategically default. The legal right to the tracker can be lost if there is default…Why would anyone easily /voluntarily go there? (although there always willbe a small group of gougers on the periphery).

    I saw somewhere that 60% of mortgages are trackers….I would therefore say in general that the “problem” is concentrated in the other 40% (variable rate mortgages), many of which were BTL mortgages. Of those, I cannot imagine ahuge number of strategic defaulters….but I can envisage plenty of bankrupt landlords who cannot service their mortgages.

  30. Bond. Eoin Bond Says:

    @ Paul W

    agree to an extent on the trackers, but a lot of the trackers are also “peak vintage”, given that the product itself is newer, so they are probably/averagly worse in terms of neg equity and LTV, and that therefore creates the question - am i willing to try and keep a really low rate if the negaive equity is very large and long term in nature. In fact, given that the rate itself should not be a problem for tracker mortgages, any arrears in this segment should be of a more strategic nature than say for SVR’s where a 4-5% rate is clearly a problem for even some of those trying to service it.

  31. Bond. Eoin Bond Says:

    @ JHF

    the 16.823bn is the nominal loans in arrears. Actual arrears (ie interest due) = 1.555bn

  32. OMF Says:

    @Ernie Ball

    You know full well that the main targets of your insane ire were the public sector. “Professionals” was clearly an afterthought.

    No actually. My main complaint is directed at the legal profession, speaking of which…

    @David O Donnell

    Why was the bankruptcy limit set at €3 million? ……

    In fact, the original recommendation from the Department of Justice was that the PIA limit be set at €10 million. Not that that’s relevant now; DSA’s are essentially PIAs for unsecured debt, and have no upward limit whatsoever.

    @Kevin Lyda

    I’m not likely to join the ranks of the strategic defaulters, but I’m getting progressively more annoyed that I’m locked into an agreement with an industry that seems to suck in money like a financial black hole.

    He’s a hypothetical(?) question: If you were to find out that the top, say, 2000 BTL mortgage holders had had their debt effectively forgiven by a forced sale of their houses followed by a “bankruptcy lite” Debt Settlement Arrangement in which they kept their homes, cars, and children’s college funds, how annoyed would you become then? Annoyed enough to employ strategies yourself?

  33. Paul Ferguson Says:

    @ Seafoid/Michael Hennigan,

    I’m still confused by Swiss mortgages.

    When an Irish bank processes a loan they credit their ‘Depositor’s’ account and debit their ‘Debtors’ account by the principal of the loan, thus the M1 money supply increases by the principal of the loan, P.

    For simplicity let’s imagine the borrower repays the principal plus interest, I, in one go.

    The bank debits their ‘Depositor’s’ account by P + I, credits their ‘Debtor’s’ account by P and credits ‘Shareholder’s Equity’ by I, the result being that the M1 money supply reduces by P.

    How does a Swiss bank process a mortgage and repayment?

    No doubt they credit ‘Depositor’s’ by P and debit ‘Debtors’ by P.

    It sounds like you repay an interest only loan in Switzerland in which case each month they debit ‘Depositors’ by I and credit ‘Shareholder’s Equity’ by I.

    Am I correct in saying that after you’ve repaid 1/3 of P, they credit ‘Debtors’ by P? What’s the corresponding debit entry? If it isn’t to ‘Depositors’ then the M1 money supply won’t reduce by P.

    Any ideas?

  34. JFH Says:

    Bond. Eoin Bond Says:
    February 20th, 2013 at 1:07 pm

    @ JHF

    the 16.823bn is the nominal loans in arrears. Actual arrears (ie interest due) = 1.555bn
    ***********************

    Thanks for that. I think the authorities are not yet revealing the whole facts. The banks should be revaluing their security at current market prices. This would then tip off the prudent bankers to make the appropriate provision for losses.

    Anybody that retained a smidgeon of what they learned in banking, accounting and economic studies would have realised that a worrying balloon was being created at the turn of the millennium. The mortgage craziness should have been checked then. But, I am afraid that the establishment’s understanding of money and debt was zero!

    When the dust hit the fan, macro economic or business acumen was again ignored. What should have happened was that our jumbo mortgage holders should have been the first to be rescued. See here for details plus subsequent posts for explanation. http://www.politics.ie/forum/economy/130355-we-so-blind-we-cannot-see-6.html#post2703995

  35. seafóid Says:

    Thanks, Gregory

    http://www.centralbank.ie/stability/Documents/Mortgage%20Conference/Session%203/Paper%201/Presentation.pdf

    slide 7 has the regional distribution

    Outer commuter counties badly hit

  36. zhou_enlai Says:

    @Garo
    +1
    There is bound to be way more strategic default where loans are non-recourse. One cannot extrapolate US figures to Ireland without clearly accounting for that major difference.

    @Gregory Connor
    “Not coincidentally, the dramatic growth in Irish mortgage arrears coincides with the Law and Conveyancing Reform Act of 2009, which made property repossession more difficult and time-consuming, and the subsequent Dunne Ruling, which resolved that the Act was flawed, and put a stop to virtually all new repossessions until such time as the Act was amended to remove the flaw in its construction. ”

    I also just discovered your prior comment:
    http://www.irisheconomy.ie/index.php/2013/01/30/irish-mortgage-arrears-an-economic-mystery/#comment-379580

    “@ Zhou En Lai and others — an update on the coverage of the Dunne Ruling. At the (excellent) Irish Central Bank conference on property markets yesterday (13 February) I spoke to two senior Irish banking sector insiders. They both claimed that the effective coverage of the Dunne ruling is close to 100%. It effectively prevents all foreclosures other than for properties which were given “final warning” letters prior to 2010. This is only based on my discussions in casual conversation but given the absence of solid data it is all I have to go on.”

    My understanding is that the Dunne Judgment only affects Land Registry title (approx 60% of houses). I have heard no suggestions to the contrary.

    The assertions of the “two senior Irish banking sector insiders” that the Dunne Decision affect close to 100% of mortgages strikes me as bogus and I suggest that you should not accept same. I suggest that you contact an academic colleague who specialises in property law to clarify this point.

    In the meantime, I would quote you Justice Hogan from his judgment of 31 January 2013 in the case of Irish Life and Permanent Plc -v- Duff & Duff:

    “All of this means that even in the case of unregistered land, the homeowner cannot be required to give up possession save by court order. But unlike the position with regard to registered land (which was governed by statute), in the case of unregistered land the courts have always assumed a jurisdiction to grant possession and, in fairness, mortgagees have always (or, at least, almost always) submitted to the necessity for court adjudication and an actual order before taking possession ever before the enactment of s. 97(1) of the 2009 Act.

    All of this is to say that the court retains a jurisdiction to determine whether to make an order for possession in the case of unregistered land and this general jurisdiction to grant possession is not affected by the operation of the 2009 Act in the same manner as has occurred in the case of registered land. “

  37. seafóid Says:

    Blackrock ran the PCAR macro assumptions that killed ILPM back in 2011. This from a presentation given to analysts at the time , no longer online

    ..”BlackRock (who) re-ran the base and stress scenarios based on their internal models and they produced an outcome in the stress case which was €2.5 bn – or almost €1 billion worse.

    That appears to have reflected a number of very conservative assumptions namely;

    • That the number of new defaults in Ireland would double from our current
    expected levels
    • That there would be a significantly higher number of repossessions and higher losses on repossession based on their model.
    • And that no allowance should be made for the current forbearance structure which is currently in place in Ireland.”

    I wonder if there will be a big ramp up on
    repos this year. The IMF is also looking for some action

  38. Mickey Hickey Says:

    A few posts ago I wrote that social supports in the bad old days were provided by charities like Saint Vincent de Paul. Today I read that demand for SVDP services which had been increasing at a few per cent per year are up 40% in Kerry this year. This means that people are now being forced off the previously reliable government supplied social supports onto the last resort charities.

    Mortgage defaults are also likely to rise as well as outbreaks of social unrest. Hunger is a powerful motivator.

  39. OMF Says:

    Mortgage defaults are also likely to rise as well as outbreaks of social unrest. Hunger is a powerful motivator.

    The last time this country was hit by mass hunger and evictions, 1/8th of the population died, 1/8th emigrated, most of the rest kept their mouths shut for a generation, and the bankrupted Ascendancy of the time received a handsome bailout from the government.

    Civic society in Ireland is still dysfunctional. You cannot assume that it will operate in the same manner as most modern countries.

  40. Gregory Connor Says:

    @Zhou En Lai — yes I have heard conflicting views on how complete a blockage is created by the Dunne ruling. And you are correct I do not know the legal ins-and-outs and banking industry sources are likely to give their own perspective.

    @JFH - your question was answered by others - but of course for deep arrears there are serious questions about repayment of the subsequent amounts so the total value outstanding is relevant not just overdue payments — with repossession some of the total outstanding loan value would be covered by sale of the secured property.

  41. John Gallaher Says:

    If BTL landlords are not current on their own obligations,say security, technology,heat and quiet enjoyment and debt service,begs the question why the tenant should bother paying.
    With this level of non payment for this amount of time inevitable that the collateral/stock is getting impacted.

  42. Tullmcadoo Says:

    JG,
    If a tenant did that in Dublin he would be out the door quick smart. If you have a BTL from a UK bank you would be insane to be currant as you will probably get a deal.
    If you are with an Irish bank, you can afford to sit back and wait until they figure out you exist. Anecdotally rents are picking up in urban areas and rent receivers are coming. Judging by the hint of panic down the golf club or in the RDS, I forecast a near term peak in BTL arrears.

  43. Joseph Ryan Says:

    I think that this is a very useful post, in that it attempts to put a figure on ’strategic’ default particularly in the BTL sector. I doubt that there are many ’strategic’ defaulters in the OO sector.

    Whatever the reasons for strategic default in the BTL sector, the fact is that the banks are being forced to dump assets at firesale prices and restrict lending to make up the shortfall in interest or capital payments on these BTL.

    As to the reasons for ’strategic’ default in the BTL sector, there may be many, but it is clear that the continuation of an income benefit, in cash or in kind, to the landlord must be the lead reason.
    The other reason is the avoidance of the crystallation of loss because of fear that the subsequent residual debt will then be squeezed out of the individual, who in all probability will be in no position to pay it. The PIA bill may lessen the fears on that part of the defaulting landlord.

    The root cause of most of the problems in the BTL sector and some in the OO sector is the threat to the ‘family home’ or the roof over family’s head.
    My view is that if no such threat such existed, being negated by a mandatory system of owner to rent being introduced after a period of about two years in arrears, then the bank guilt factor in tackling BTL default could be assuaged. So too would the landlord’s fear factor (I never though I would see the day) of losing their own home and make them more realistic in coming forward to settle.

    But lets also be clear, there are a stack of well off landlords, sitting on property with some equity, but choosing to squirrel away the rent as a hedge against the dreaded day, but also hoping that their investment property will recover in value! Those squirrels will have a lot of nuts stored before their investment recovers.
    But they may have dissipated any other assets in the meantime, as is being contested in many high profile cases every week.

    We should also be clear however that no major economic benefit is likely even from a very successful tackling of the BTL default issue. Lets remember that the banks already got oodles of cash from the government, but they sat on it, they paid their bondholders, they stuffed their pension funds etc etc. But they gave very little out in loans. Is that what will happen to any funds retrieved from BTL landlords?

    @David O’Donnell.
    “Why was the bankruptcy limit set at €3 million? ……

    … rather than half a million?”

    My understanding, subject to correction, is that the 3million limit applies to secured debt only. There is no limit on the unsecured debt ceiling in applying for a DSA (Debt settlement arrangement). Now lets guess who the people might be that were able to get unsecured debt well in excess of 3 million or 10 million or 20 million and get leglislation written for them so that they could apply for a DSA, and therefore not go into bankruptcy, with all its consequences.

  44. John Gallaher Says:

    @Tull no idea what “rental” support schemes exist over there,but it would not surprise me if such rental income was getting diverted .
    It’s closing time for these BTL delinquent miscreants,c’mon now ladies and gentlemen…

  45. Mickey Hickey Says:

    @John Corcoran

    I have had difficulty understanding your rental problem.

    What I am accustomed to is a flat monthly space rental with or without cost of living increases. This covers operating costs lighting, heating, cooling, security services, cleaning outside the rented space. On top of that there is a percentage of the take which is highly variable but around 6% in common garden locations. The latter makes up most of the landlords income and goes up and down with the economy.

    There is some balance in that arrangement. One of the strangest retail/distributor arrangements I have seen concerned dairy products in a managed dairy supply (managed at farmer level) situation. As volume increased the retailer paid more per unit to the dairy. Since the retailer was a leading operation it was in the dairy’s interest to keep price up for the other retailers so as to drive business to te volume retailer.

    I assume you were locked into fixed monthly payments not related to volume of sales.

  46. David O'Donnell Says:

    @Joseph Ryan

    Hmmmm

  47. Fungus the photo Says:

    In 1982, the Revenue had a problem. J Livingstone and T Tuite had found that half of the Gardai in Dublin had failed to declare rental income.

    The lack of an Anti-Corruption force is telling.

  48. John Corcoran Says:

    @Mickey Hickey
    The eurozone is a group of seventeen countries with a combined
    population of three hundred and thirty million citizens. All member
    countries have the same currency,the same central bank,the same
    interest rates and the same commercial property lease law except one,—Ireland.
    Ireland has very different commercial property lease law to all other eurozone
    countries. The three components of all countries commercial lease law
    is the length of the lease,the rent determination process and lease exit
    strategies/break clauses. In all other eurozone countries lease lengths
    are short,say three to ten years,with break clauses and rents are
    indexed annually to changes in the consumer price index. In Ireland
    lease lengths are long,say twenty five years,with no break clauses and
    rents are reviewed every five years using the ratchet upward-only rent
    review process. This review process used the highest rent as evidence
    against all tenants and was open to malpractice and corruption.

    Irish commercial lease law was a twin headed monster which incentivised
    the over-renting of tenants and more damaging,it was the rocket fuel
    for the commercial property valuation model which created the monster
    commercial property bubble. When this bubble burst it destroyed the
    entire Irish banking sector. Reckless Irish banks lent tens of billions
    against these ruinous leases,not against the properties. If Ireland
    had had regular eurozone commercial lease law it would have been almost
    impossible to have had a commercial property bubble.

    The only reason Ireland had these feudal leases was,because the state signed them for the politicians major donors/bagmen

  49. Kevin Lyda Says:

    @Paul W: “Anyone on a variable rate mortgage is clearly subsidising those on trackers…that’s why you report your interest rate rise despite the ECB rate (tracker) going down.”

    I’m not really into fighting among people who are essentially in my position, but getting slightly less screwed. I don’t blame people on trackers - it took two parties to agree to each tracker. The individual borrowing money and the bank. An individual borrower has at most a handful of tracker mortgages. Banks have thousands. Tens of thousands. If they couldn’t afford to offer them, why did they offer them? One assumes the banks were professionals in the field of finance, yes?

    And yet the way you phrase the question I should blame the individuals with the lesser experience.

    That seems silly.

    @OMF:

    @Kevin Lyda
    > He’s a hypothetical(?) question: If you were to find out that the top, say, 2000 BTL mortgage holders had had their debt effectively forgiven by a forced sale of their houses followed by a “bankruptcy lite” Debt Settlement Arrangement in which they kept their homes, cars, and children’s college funds, how annoyed would you become then? Annoyed enough to employ strategies yourself?

    I wouldn’t be at all annoyed. Good. Less money going to banks, more money being spent in the economy. The same reason I think it’s great people have tracker mortgages - they at least have a few extra bob to spend on things other than banks.

    We have a number of problems in this country. One is unemployment - we are wasting one thousand years of labour every day. That’s essentially one US Interstate Highway System worth of work every week.

    That seems like a problem.

    The other problem is that people who do have jobs are spending huge amounts of money servicing loans. How many of them have everything they need to start a business but can’t because they can’t afford the financial risk? How many businesses close because potential customers have no money left over after paying for their debts - for assets worth a percentage of that debt.

    Here’s the deal: people who borrowed money took a risk. The risk didn’t pan out and there’s a good chance they’re going to take a loss. But what always seems to be forgotten here is that banks *also* took a risk. But rather than take a loss, they are actually getting their losses backfilled by the taxpayer.

    That makes no sense. The financial experts made mistakes and they get bailed out. The financial amateurs made mistakes and they must pay for their mistake in full.

    Eventually people are going to realise that and they’re going to come up with a solution. I would prefer a thoughtful, positive solution, but I worry that the eventual solution will be found in a heat of anger and just create more problems.

  50. Kevin Lyda Says:

    Oops - large error in my math there. That’s a US Interstate Highway system every 4 years.

  51. zhou_enlai Says:

    @Gregory Connor

    Some critical comments in the abstract to Ghent and Kudlyak’s paper which specifically addresses the question of recourse -v- non-recourse.

    http://rfs.oxfordjournals.org/content/24/9/3139.short
    “We quantify the effect of recourse on default and find that recourse affects default by lowering the borrower’s sensitivity to negative equity. At the mean value of the default option for defaulted loans, borrowers are 30% more likely to default in non-recourse states. Furthermore, for homes appraised at $500,000 to $750,000, borrowers are twice as likely to default in non-recourse states. We also find that defaults are more likely to occur through a lender-friendly procedure, such as a deed in lieu, in states that allow deficiency judgments. We find no evidence that mortgage interest rates are lower in recourse states.”

    All mortgages in Ireland are recourse.
    Many bubble loans in Ireland fell in the region of $500K to $750K (€380K to €570K).

    Did you factor this into your extrpolation to Ireland? It is hard to tell without access to the source papers.

    Apart from that, it is possible that the culture/acceptability of strategic default amongst recourse loans in the US is likely to be higher than in Ireland due to more generous insolvency regimes, and
    b. behaviour contagion from states with non-recourse loans.

  52. zhou_enlai Says:

    this formatting stuff has me bewildered

  53. Gregory Connor Says:

    Zhou enlai — Good formatting — I have no idea how to do that and will not attempt it.

    Yes I did not try to compensate for recourse versus nonrecourse differences in default laws across US states but have read that paper and mention it briefly. Note that this difference does incidentally show tangentially the influence of strategic factors since there is no difference by definition in tendency toward distressed arrears across the two systems. So the bigger the difference, the more one must lean to strategic default as a relatively large proportion. I only gave a general caveat about this type of US versus Ireland difference, and the offered a conjecture for Ireland based on my reading of the US evidence. I stand by my own conjecture of 35% for Ireland, admitting that it is difficult to give a step-by-step numerical derivation of that number and their are lots of potential sources of noise. There is a lot of ambiguity. Perhaps my noisy forecast is too high or perhaps it is too low.

  54. Yields or Bust Says:

    @Kevin Lyda

    Wow - it seems we’ve unearthed a very rare beast, someone who actually gets the real issue here with regards to the actual problem overshadowing this debate - thank you Kevin.

    Your comment..

    “..Here’s the deal: people who borrowed money took a risk. The risk didn’t pan out and there’s a good chance they’re going to take a loss. But what always seems to be forgotten here is that banks *also* took a risk. But rather than take a loss, they are actually getting their losses backfilled by the taxpayer.

    That makes no sense. The financial experts made mistakes and they get bailed out. The financial amateurs made mistakes and they must pay for their mistake in full.

    Eventually people are going to realise that and they’re going to come up with a solution. I would prefer a thoughtful, positive solution, but I worry that the eventual solution will be found in a heat of anger and just create more problems..”

    ..hits the nail on the head and yet the economist namely GOC who put up the original post convienently forgets this time and time again. Banks are not entitled to 100% of their cash back.

    The assumption here is that the banks are fully entitled to 100% of their cash back. This is nonsense. When the entire banking industry in the country (including the branches of the international banks were they considered as stand alone operations) goes bust effectively within a 6 month period something has gone badly wrong. Yet that annoying fact is not even considered in much of the dicsussion that has gone on before this post.

    Why we have so many people crying about banks not get their cash back is nothing to do with with the economics of their dire lending decisions its due to the ownership problem with Govt now wanting to get the best return on its equally dire decisions to firstly Guarantee the banks liabilities and then to take ownership of them on their recap. Two wrongs don’t make it right to believe the banks are entitled to 100% of their cash back. They are not - bad lending decisions deserve to have consequences, yet GOC and other believe otherwise. I can’t see how market economists can buy this claptrap.

    This is simple suff, from about 2002 until about now (excluding Dublin by about mid 2015 on my estimate) property in Ireland was (is) mispriced. Another annoying fact. But its is a fact nontheless. Property is priced (not valued) but priced based on the availability of credit - nothing at all to do with consumers interactions or stuff like a property is only worth what someone is willing to pay for it etc etc. Bladder.

    Banks price property based on someones ability to repay a loan. The underlying value is rarely considered especially for housing/apartments. You see original price does not equal value. (The term LTV is in fact misleading, its actaully LTP) Banks still don’t get this and I know from very recent experiences that not a lot has changed in this regards over the past 10 years.

    The ONLY way to get to bottom of this problem is, as you correctly note, to find a solution. I have suggested a solution years ago which to my mind is as yet not yet equalled in terms of simplicity, fairness and market stability and that involves finding a model that works in terms of properly valuing properties effected and comparing the model valuation with the lending against it as it should have been based on original LTPs comparing todays mortgage with the model valuation and writing off the difference - regardless of the fact that the mortgage is being repaid or not.

    This pricing and mortgage adjustment would, overnight, right size mortgages, correctly value property and allow banks at that stage to reposses houses (were the restructured loan not being repaid) with loans attached now net of write downs happy in the knowledge that any future sale would be completed at a price in line with the long run value, which means for once and hopefully for all time we move away pricing property in a recourse lending world off the individual borrowers idosyncracies and back to the underlying asset value namely the house/apt in question.

  55. Gregory Connor Says:

    Financial experts do not own the Irish banks — they are owned by the Irish taxpayer. So any punishment fees/borrower compensation given by Irish banks comes from current and future taxpayers not financial experts, at least until they are sold into private ownership (admittedly not the case of Bank of Ireland which has been released from most government ownership it is now 15%). But even in that case any large claims will be backed by Irish taxpayer funds unless we expect the Euro core to pick up the tab.

  56. grumpy Says:

    Gregory

    “unless we expect the Euro core to pick up the tab”

    http://www.bloomberg.com/news/2013-02-21/irish-will-be-looked-after-as-bank-refund-chased-noonan-says.html

    “Noonan is seeking as much as 30 billion euros ($39.6 billion) from Europe’s new rescue funds as a refund for the money it spent on the recapitalizing its surviving banks. German Chancellor Angela Merkel and French President Francois Hollande called Ireland a special case.

    That phrase is “shorthand,” Noonan said in an interview with Francine Lacqua and Guy Johnson on Bloomberg Television in London today. The message is “we realized that there was a very heavy imposition put on you, so you’ll be looked after.”

  57. David O'Donnell Says:

    Picture of the day

    Picture This: Despair in Damascus

    http://www.spiegel.de/international/a-884861.html

  58. grumpy Says:

    http://www.nytimes.com/2013/02/17/business/dont-blink-or-youll-miss-another-bank-bailout.html?_r=2&amp;

    Wouldn’t happen in the periphery…

  59. John Gallaher Says:

    New numbers out in US.

    “Seriously delinquent U.S. mortgages fell to the lowest level since 2008 as employment improved and recovering housing demand enabled struggling borrowers to sell without losing money.
    Home loans that were 90 days or more behind or in the foreclosure process fell to 6.78 percent of mortgages in the third quarter from 7.03 percent in the previous three months, the Mortgage Bankers Association said in a report today. The rate was 7.73 percent a year earlier.”

    http://mobile.bloomberg.com/news/2013-02-21/serious-u-s-mortgage-delinquencies-fall-to-four-year-low.html

  60. Kevin Lyda Says:

    @John Gallaher: And now the US is about to impose European-style austerity. Watch the housing market collapse again.

  61. john gallaher Says:

    @Kevin,interesting times over here,Im off the grid this week but assume its that dastardly ’sequester’….it may halt the recovery not sure it will tilt it back into a ‘collapse’ again.
    The ‘recovery’ in NY in housing has been very muted,significant layoffs in financial services.But with this on the horizon the jobs may start returning….

    “Now the European Commission says it is time to ensure that “financial institutions make a fair and substantial contribution to covering the costs of the crisis.” A secondary benefit is said to be “creating appropriate disincentives for transactions that do not enhance the efficiency of financial markets, thereby complementing regulatory measures to avoid future crises.”

    http://www.nytimes.com/2013/02/22/business/a-tax-that-could-change-the-trading-game.html?pagewanted=all

  62. Yields or Bust Says:

    @GOC

    That’s precisely my point. Your argument is not an economic one its a political one. What your essentially saying is that its unfair that other taxpayers are having to cover the costs of debt write offs for potentially undeserving mortgage debtors in covered banks. Buts that not the issue - everyone can see that there is an unfairness in some people gaming the system - but your not asking the correct question. That question is - is the bank entiled to look for 100% cash back in the first instance - your belief is obviously yes - I say no (as do many others).

    Until you can satisfy yourself that the original lending decision was done in compliance with the well worn core consumer protection principles then your barking up the wrong tree from the get go. I’ve indicated to you here before that the first principle of the consumer code as outlined by the Central Bank to which financial institutions are required as a minumum to adhere by is to ensure that the ‘integrity of the market is maintained in their dealings with their customers..”. With 290k vacant properties per the last census littered across rural Ireland (c60k of which are deemed as ‘holiday homes’) only the blind or stupid would suggest that banks cared one jot about the integrity of the market with such a disaster left in their wake. Adherence to the general principles as required by the CBI Regulations simply didn’t happen. With that monumental screw up in my opinion banks forfeit the right to automatically look for 100% of their cash back. Its basic common sense and basic economics.

    I know you’re neither blind or stupid so please desist from suggesting that consumers are entitled to repay 100% the cash they borrowed because the credit agreement says so. Thats a child like stance to adopt.

    The credit agreement between borrower and bank no doubt didn’t indicate that the lending bank should go out of its way to finance deal after deal when the long run metrics made zero sense yet they did so by the billions,guaranteeing that their own security was at best compromised (which we all know it was - all the banks are bust, the capital markets have answered this for us) and ensuring the property market remains in intensive care for a generation. Please tell me that at the very least these facts have been at least considered in your thoughts becuase drawing conclusions from the US et al without at least considering the fact that the entire industry here went bust is rather ostrich like and pointless.

  63. john gallaher Says:

    One very complex and murky area is going to be the tax treatment of debt write off’s/forgiveness further complicated by reliefs or inducements such as Section 23.
    NOT an expert by any means on Irish tax-in the US taxation of debt relief is also in flux.

    “In normal years, the IRS would tax any reduction in mortgage principal as ordinary income at the homeowner’s marginal tax bracket. But under the Mortgage Forgiveness Debt Relief Act of 2007, enacted shortly before the financial crisis would erupt as a way to stem what was then a rising tide of foreclosures, the IRS allows this reduction to be tax-free.”
    http://www.cbsnews.com/8301-505145_162-57566301/avoid-paying-taxes-on-forgiven-mortgage-debt/

    Will foreclosed BTL landlords get tax bills-for the ‘debt forgiveness’ or any shortfalls-can interest relief and section 23 reliefs be clawed bak in event of foreclosure ?

  64. Yields or Bust Says:

    @John Gallagher

    Don’t know about the BTL sector but in the case of the OO could the stick be for those that avail of such a relief (if available) lose the tax exemption on any future sale of the family home?

    Just a thought.

  65. john gallaher Says:

    @Yields or Bust over here a ‘foreclosure’ is an event just like a sale,not sure if any data available but would be interesting what % of he BTL market was juiced by tax incentives, not sure if the ten year ‘hold’ is compromised by a foreclosure,resulting in tax reliefs claimed getting clawed back.
    Getting a little sidetracked but the Bacon report on Hotel’s, indicated massieve distortions in that market due to tax breaks.
    Some have taken the view that the softly softly approach to that sector is protecting the great and the good, from averse tax implications,in other words revisit after the ten years have expired.

    Pg 38 onwards.
    ‘However, the requirements to avail of allowances contain a provision that allowances that have been claimed already for any hotel that does not remain open for seven years can be clawed back by the Revenue.”
    http://www.ihf.ie/documents/HotelStudyFinalReport101109.pdf

  66. Yields or Bust Says:

    @John Gallagher

    Same issue I believe will arise - the pot is empty. The State can claim back tax breaks until the cows come home but there’s no cash to fund any such liabilities and not many lenders lining up to fund a loan for such a purpose. Its an industry thats beyond broke for many players.

  67. john gallaher Says:

    @Yields or Bust,the ‘one’ most people are watching is The Ritz,the tax breaks were so large EU approval had to be sought !
    NWL has been following this situation,a certain national broadcaster and personality availed of these tax breaks,Pat Kenny.
    One wonders what the ‘line’ taken on this will be by the national broadcaster..perhaps a bit more disclosure before Pat starts holding hands,getting teary eyed and campaigning for no clawback of tax breaks !

  68. Gregory Connor Says:

    @John Gallagher — that seems a bit unfair to the guy IMHO and a bit ad hominem. I don’t like it as a style of comment but will let it sit. I have a delete button at the bottom of each comment but I only delete things when they are completely beyond the pale. Try not to mention individual names in that type of context please if it can be avoided in the argument.

  69. John Gallaher Says:

    @Gregory is hardly a “secret” widely reported assumed was common knowledge.
    “Pat is unlikely to be affected by the appointment yesterday of an interim examiner at the Treasury Holdings company Carrylane Limited, this despite the report in the Sunday Times in June 2012 that Pat had bought a suite at the Ritz Carlton hotel in Wicklow worth “up to €2m”
    http://namawinelake.wordpress.com/2012/11/20/pat-kennys-property-dealings/
    “For those suite owners – included it is understood and reported in the Sunday Times, radio and TV presenter Pat Kenny – who refuse the offer, they face repudiation of their leases under Irish examinership rules which may lead to clawbacks of tax concessions as well as an uncertain future income.”
    http://namawinelake.wordpress.com/2012/11/20/nama-to-benefit-from-appointment-of-examiner-to-treasurys-ritz-carlton-hotel/

  70. Gregory Connor Says:

    You are probably right I might have over-reacted.

  71. John Gallaher Says:

    @Gregory apologies will allude to individuals going forward,on a more serious note anyone know the tax implications from foreclosure,assume if it occurs during the term prescribed to “hold” in order avail of said breaks then they can be clawed back.
    Which may be acting as a further incentive to the current govt.’s foot dragging and inertia….

  72. John Gallaher Says:

    Stress tests pushed back and…lots on above topic.I disagree with the case by case approach,in my opinion it’s flawed.

    “In addition, even without these factors, new international standards under Basel 3 will require additional capital over time for the Irish banks. These various factors will require close and detailed examination in a new stress test, where we will again be taking an independent view of projected loan losses in reaching our conclusions.”

    http://www.centralbank.ie/press-area/speeches/Documents/130222%20Address%20by%20Deputy%20Governor%20Matthew%20Elderfield%20to%20Institute%20of%20Directors%20Spring%20Lunch.pdf

  73. eternaloptimist Says:

    As someone with more that 10 rentals I am curious about the idea of ’strategic default’. I’m not struggling as all my loans are trackers and half are interest only for the full term and I bought near city centre. I might be struggling in a few years time depending on interest rates. I have done my best to deal with pay cuts in my day job and tax increases. My wife has gone back to work on minimum wage at the age of 50. But here is the moral hazard bit. I feel I’ve been screwed over the past few years and if there is debt forgiveness going why is it that only the careless/irresponsible/unlucky should get it. Why shouldn’t I get some as well ??

  74. John Corcoran Says:

    @JG

    John–I note Gayle Killalea,Simon,yourself and other developers blogging on the Namawinelake site. Who owns the site–is it owned by the developers who played a very significent role in destroying the Irish economy. It always appears very one sided and very biased against Nama and Irish commercial tenants. It reads like George Orwell’s 1984 Newspeak–War Is Peace, Tenants Are Bad,Ignorance is Strength, Nama is Bad,Developers are Good, Freedom is Slavery, Four leg landlords good Two leg tenants bad. Who finances it.

  75. John Gallaher Says:

    @JC some commentators are critical that it carried way too much “Pierce Doherty”,forgetting that until recently he was effectively opposition spokesman for finance.Also,one only TD’s asking intelligent questions,FF in a bit of an awkward spot questioning NAMA.
    John I genuinely don’t know,when I have sent in stuff it’s to the contact “jag” available to all,he/she comments on here.
    Can’t speak for Simon or Gayle,their are one two other “old hands” from the property game on it too.
    The “line” on abolishing UORR was overall positive…robust arguments but good natured debate in general.Sorry,you were let down by the current govt. I have always found UORR abhorant and counter to an efficient market.
    John truly no specific insight,I’m miles away never did business in Ireland or with any Irish banks/institutions etc.Originally,I thought it was someone writing a book…hoping get a mention :)

  76. John Corcoran Says:

    @JG

    Who is Jag? Is he still running it? He does not blog on Irish Economy anymore. Who finances it?. I always assumed you were a major developer/a member of the famous FF Gallagher family. To me they were poisonous against anybody who didn’t support developers/builders/property speculators.
    Prpaganda and spin–some unfortunate commentators believe it.

  77. John Gallaher Says:

    @JC. some court cases sat,Anglo V FirTree the Irish traditional media is woeful.
    I forwarded a few court docs that are freely available over here,”Jag” responds.
    That the extent of my “involvement” but why not take the discussion over there,right to reply and all like that.
    Major developer ….by New York standards….ya gotta be kidding me!
    Distressed debt/real estate earned my first few bob buying off the REO.No family ties to the “Gallagher” banking/development family.Some people thought that NAMA had the capacity to be Ireland’s first truly great “sovereign fund” and go buy the arse out of the Euro RE market.In fact some people even presented this idea…..

  78. John Corcoran Says:

    @JG

    They block tenants comments but are very happy to facilitate any developer/builder or property speculator. Very biased and I believe it’s total propaganda.Hence developers are on it everyday all day.

  79. John Gallaher Says:

    @JC I’m just off a rec eye from Denver,kids break last week.Take it up over there,this is someone else,well written post.
    It’s a moderated blog,do you think NWL had the time or interest in moderating comments,go start your own blog.

  80. grumpy Says:

    @John Corcoran

    “They block tenants comments but are very happy to facilitate any developer/builder or property speculator. Very biased and I believe it’s total propaganda.Hence developers are on it everyday all day.”

    John, are you talking about ‘tenants’ in general, or the JC posts, a fairly large percentage of which on here have tended to be a tad spammy-selling-of-anti-UORR-legislation-or-DMcW-fan-club. You can imagine a mod losing patience and zapping on sight, no?

  81. John Gallaher Says:

    @JC,in this area David Hall is worth following on twitter,is there any Irish retailers association ?
    Would appear at first blush,the constitutional rights of property owners can be usurped…hope for abolition of UORR ?

  82. John Corcoran Says:

    @Grumpy/JG

    I and all others I know assume you and the rest of your crew on Namawinelake are developers mouthpieces.

  83. grumpy Says:

    @John C

    That is one of the most bizarre pieces of deduction I’ve come across of late.

  84. What Goes Up... Says:

    @grumpy

    Infamy! Infamy! They’ve all got it in for me!

    http://www.youtube.com/watch?v=h6BJJe9JV_A

  85. Karl Deeter Says:

    Fair play to you Gregory for covering such a sensitive topic, it’s a mixture of kryptonite/dynamite/flame for the most part. And is part of a national conversation we have not be able to debate rationally as of yet.

    To have a functional market we need all facets of it given some level of understanding and the absence of recourse on such large swathes of the market can only be a bad thing. Last year there was much discontent over a 10-25% figure I put on this issue using collector sampling calls.

    In this instance I hope I was right and you are wrong, if it’s as high as you estimate we have a big problem, but it could also result in a lot more ’self cure’ than we might think could happen!

  86. Gregory Connor Says:

    @Karl Deeter — the dynamic pattern of mortgage arrears when the new system is fully up and running will be very interesting.

  87. Noonan disputes claims about level of strategic mortgage defaulters | NAMA Wine Lake Says:

    [...] month ago, Professor Connor produced a blogpost for irisheconomy.ie in which he suggested that at least 35% of Irish mortgage arrears were driven by “strategic [...]

  88. Anthony Layng Says:

    The article misses the three major legal differences between the US and Ireland in relation to mortgage arrears, fails to identify how each of the three legal differences makes strategic default disadvantageous in Ireland compared to the USA and fails to address that Ireland has not yet introduced mortgage debt attenuation measures comparable to those in operation is the USA.

    I prefer an evidence based approach to major problems. Extrapolating from a non comparable environment may be of interest to academics but a more rigorous approach is needed to address real problems in the real world.

    The article does not contribute to the analysis of the mortgage debt crisis in Ireland or how the crisis might be mitigated in severity.

  89. Strategic Ideology – Preparing the ground for Repossessions? | critical media review Says:

    [...] to pay. McCarthy is citing a blog post by Gregory Connor of the National University of Maynooth on The Irish Economy.  There are however some serious issues with this blog post which becomes evident even after a [...]

  90. Strategic Defaults in Irish Mortgages – What do and dont we know? | Brian M. Lucey Says:

    [...] its 1/3 of arrears in default are “Strategic” , Wont Pay defaulters. This arises from a post by Professor Gregory Connor where he took US studies and tried to map the findings to Ireland. This [...]

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