Central Bank Announces Pilot Scheme for Consumer Multi-Debt Restructuring

The new pilot scheme by the Irish Central Bank, specifying the claim priority of residential mortgage debt and unsecured consumer debt, is worth a brief mention here. It alters the features of Irish consumer debt contracts in terms of security and seniority. I have no legal training and I am unsure of my interpretation, so comments are welcome.

Two important categorizations of debt contracts are secured versus unsecured debt contracts and senior versus subordinated debt contracts. Security and seniority are entirely distinct contractual features.

Seniority is a contract feature which relates to the insolvency process. A more senior debt contract has first claim on the borrower’s assets if the borrower becomes insolvent. A subordinated debt contract has an enforceable claim only if the senior claim is fully repaid.

In a secured loan contract, the lender can take legal ownership of the asset if the borrower defaults on the loan payments. Taking possession of the secured asset does not require using the insolvency process. In most cases the lender additionally has recourse to the other assets of the borrower if the repossessed asset does not cover the outstanding claim. This “recourse” claim on other assets has no particular priority over any other debt claim.

The above is only a textbook description and the reality is more complicated, with lots of room from discretion and differences across jurisdictions.

The evolving legal environment for mortgage contracts in Ireland has effectively removed the principal private residence of the borrower as allowable security. This has created a conflict between mortgage lenders and other consumer lenders. If there is a nonnegligible probability of repossession, consumers are incentivized to favour mortgage loan repayments over other consumer debt repayments. If the repossession threat is negligible, consumers are inclined to favour consumer loan repayments over mortgage repayments, since they prefer to keep open the consumer lending facility. Mortgage lenders have noticed that consumers are no longer giving first priority to their mortgage payments, and have cried foul. This change in consumer behaviour alters the effective (not legal) “priority” that mortgage lenders had when mortgages were viewed by consumers as secured loans.

The Irish Central Bank has responded to this conflict between the two types of lenders by altering the claim priority of consumer loan contracts. This changes mortgages from secured debt into senior unsecured debt and other consumer loans from equal-priority unsecured loans to subordinated unsecured loans. This is an interesting policy move – it is an attempt at burden sharing between the two groups of consumer lenders in a difficult environment. It will be interesting to see how the new system evolves.

Comments

comments

84 thoughts on “Central Bank Announces Pilot Scheme for Consumer Multi-Debt Restructuring”

  1. So, can anyone now introduce an ad hoc well-intentioned scheme to help deal with the mortgage crisis? No legislation needed. Maybe the Irish Banking Federation can introduce a scheme. Or RTE. Maybe commenters on IE can propose an ad hoc scheme, it would probably be as good as the Central Bank’s waterfall!

  2. One of the more interesting angles to emerge from the crisis is the point at which the financial industry is no longer capable of solving its own mess and the problem or crisis concerned becomes political.

    “If there is a nonnegligible probability of repossession, consumers are incentivized to favour mortgage loan repayments over other consumer debt repayments. ”

    Aren’t most mortgage holders still incentivised to repay their mortgages ?

    “Mortgage lenders have noticed that consumers are no longer giving first priority to their mortgage payments, and have cried foul.”

    All consumers or certain consumers ?

    One of the problems with the threat of repo is that it only works when the numbers concerned are limited.

    It’s a bit like the old way of dealing with pregnancies outside of marriage. It worked when less than 5% of pregnancies were to unmarried women and there was a type of “repo” market in adoption but once the numbers got big it just collapsed.
    Many people still prefer to be married before having kids but the threat of ostracisation for those who aren’t has weakened enormously.

    The banks have problems with 15% or so of mortgages. The system doesn’t work in such circumstances. They can’t follow through with system logic without undermining the rest of their portfolios. There’s a hole in the bucket!

    I wouldn’t place all of the blame on cute mortgage holders either . The system the banks devised is broken.

    The banks are too. But we don’t have a recap strategy so the nonsense continues.

  3. @seafóid

    “The banks have problems with 15% or so of mortgages”

    Higher.

    The figures inside the banks look different to the figures seen outside the banks.

  4. As an exasperated CMcC might exclaim – “What the f**k!”

    So I am seated (comfortably of course) on the inclining deck of the foundering vessel as the water slowly laps closer to my feet. I promptly reverse my chair and face the opposite way. Mirable dictu! The waters no longer rise! Quite!

    Income insecure persons will prioritize the purchase of food and fuel. What’s so difficult to understand here?

  5. @BWS
    “Income insecure persons will prioritize the purchase of food and fuel. What’s so difficult to understand here?”

    Exactly. Although some of the pressure from the banks is because people are living off (buying food, fuel, clothes etc) their credit cards (or credit unions) and paying very lucrative interest on those cards, which in turn makes the banks really miffed. In effect people have moved their accounts from the secured lenders. But what else were they to do.
    I know several people in business that will not take cheques and not for tax evasion reasons. The reason is that if they lodge the cheque, the bank uses it to reduce their borrowings and they get no value whatever from the sale.

    PS The ‘difficult to understand’ part that you refer to is that the vast majority of policy makers, both in Ireland and elsewhere, have never been in such a situation. They are unable, and some unwilling, to empathise with the plight of people whose income is extremely low or intermittent or non existent. Many of the moralists are one step away from Marshalsea thinking.
    This is best understood in point 37 of the document
    “Borrowers must notify their lenders immediately should there be a material change in their financial circumstances so that those changed circumstances may be reassessed.”
    A difficult one for a ‘casual’ worker to respond to.

    One wonders who came up with the WATERFALL name. Sounds wonderful! The water may be icy though!

  6. This initiative should be strongly welcomed.

    The banks need to be made jump together and to share information as to how they effect debt restructuring. Borrowers should also be treated as equitably as possible in this national crisis.

    It is wholly undesirable that the insolveny regime should have to be used in the majority of cases. The fact of the existence of the insolvency scheme is what should inspire all parties to move forward by agreement in advance of any requirement for such a process.

    There is are no legal difficulties. Any contract can be varied by agreement between the parties. Creditors will be given a voluntary framework for co-operation.

    This is the first effort to devise an elegant solution to this problem. Well done to whomever kicked this off.

    The fact of the matter is that negative equity is always effectively unsecured because the underlying security is insufficient to redeem it. This should not be news to anybody.

    @Gregory Connor

    “The evolving legal environment for mortgage contracts in Ireland has effectively removed the principal private residence of the borrower as allowable security”

    That is incorrect in the main. The main driver of a lack of repossessions is the prevalence of negative equity combined with banks’ balance sheet weakness.

    I was recently told by an individual banker that generally they have no interest in repossessing houses as it is not in the bank’s interest. I told him that was no news to me.

  7. @Gregory Connor

    “The Irish Central Bank has responded to this conflict between the two types of lenders by altering the claim priority of consumer loan contracts. This changes mortgages from secured debt into senior unsecured debt and other consumer loans from equal-priority unsecured loans to subordinated unsecured loans. This is an interesting policy move..”

    The ICB seem to be proposing the equivalent of a ‘scheme of arrangement’, that is used in company law, outside the scope of receivership/liquidation. [In the case of receivership/liquidation, the specific laws governing those areas define the claim priorities.]

    I have little knowledge of law, but I would think that the claims in law of the respective lenders are not altered, they simply agree as a matter of expediency to compromise those claims.
    The CA 1963 (S 201, S202) are linked below.
    http://www.irishstatutebook.ie/1963/en/act/pub/0033/sec0201.html

    Schemes of arrangement are arrived at outside the scope of receivership/examinership. There is no legal protection for a company while the scheme is being arrived at, making it less useful than examinership where there is a 70 day, Chapter 11 type, protection period, that can be extended to 100 days.

    The pilot scheme of the ICB above lacks the ‘protective period’ (I think), that would be available under PIA and may be necessary to make it effective. Otherwise a dissenting creditor could try to get as much as they could in the meantime. eg repossess car, or whatever. Not that there will be much to get, which is the big incentive for all parties towards an agreement as one careers down the waterfall.

  8. The word mortgage is a French Law term meaning “death contract”, meaning that the pledge ends (dies) when either the obligation is fulfilled or the property is taken through foreclosure.

    Till death do us part.

  9. Below is the elementary property valuation error that bankrupted Ireland
    http://www.independent.ie/opinion/letters/bubble-values-3034584.html
    Professor Neil Crosby’s online response to this Irish Independent letter
    “Bubble values” 29th February 2012

    “The analysis may be simplistic but unfortunately it is not flawed.
    Banks ask valuers to tell them what the market value/exchange price is
    at a point in time and then lend vast amounts over time based on that
    simple number. The surveyor gives them that simple number and do not
    think it is their job to tell the banks that the question they have been
    asked is stupid on its own and what they should have asked for is the
    underlying value. It was obvious in 2005 and 2006 that prices in the
    property market were higher than could be sustained by any rational cash
    flow analysis. But in a culture that rewards individuals for short term
    performance rather than longer term perspective, it was in neither the
    bankers’ nor the valuers’ interests to stop it. I cannot see anything in
    what the UK regulatory authorities have proposed that makes me think
    they understand the role of property valuation in driving asset bubbles
    and will prevent it all happening again sometime in the 2020s.”

    Neil Crosby
    Professor of Real Estate and Planning
    University of Reading

    John Corcoran – Neil Crosby is quite right to point out the critical and corrupting role of valuers and banks in the property bubble. RICS and other property related professionals should hang their heads in shame for not raising the alarm bells and not challenging landowners, banks and homeowners about the outrageous rise in property valuations which had no relationship with reality or ‘underlying value’. Their role is similar to that of ratings agencies which were paid to sign off triple A ratings by their clients for junk.financial instruments most of which related to property assets..Sadly it does not require a university professor to point this out.

    Anyone with a modicum of experience in property and development knew we were headed for trouble and I am sure I was not the only person to flag it up. If these so called professionals had been held to account by their so called professional bodies ( as the General Medical Council regulates doctors) half of them would have been struck off. Their primary responsibilty should have been to the reputation of the valuation profession and not their commission. In many countries property is taxed and valuers are independent or are part of the state.

    Radical reform is required or we will surely revisit this crisis again in the near future.

  10. @ JR: Thanks for that. I’m laughing, but I should be cringing!

    @Zhou: ” Borrowers should also be treated as equitably as possible in this national crisis …”

    No. Absolutely not. The lenders MUST be forced (at the points of pitchforks if necessary!) to disgorge every piece of paperwork associated with any, and all distressed (or about to be distressed) private residential mortgages, that they issued from 1995 – until now. No ifs, buts nor exceptions. What exactly were they thinking? What exactly were they doing? Who was calling the shots? We really, really need to know this. In the interim this ‘initiate’ should be shredded.

    Some borrowers are much less equal than others. But we have no idea whom. We MUST have that info in the public domain. I know for certainty that some borrowers ‘lied’. They need to explain themselves also. If the lenders could not detect fraud in the applications, then why was this? If they could have, but didn’t, then why? If they could have, and did, but let it go! What’s that in law? Conspiracy to de-fraud? Now it’s not funny anymore.

    A rational risk model for private residential mortgage lending would have a 1% level of default – maximum! But its 15% AND RISING! That really is very unfunny.

    For what it is worth. Borrowers – especially distressed ones will act ‘rationally’ – just like our banksters did – and are doing! Me! Me! Me!.

  11. @Brian Woods

    As long as people stay stuck in the 1950s and opt to see debt as a morality play rather than a commerical, economic and social policy issue, this country will continue its regression towards 1950s standards of living.

    The suggestion that there should be full disclosure of private dealings so that people can conduct a morality trial rather than letting parties act commercially is so repulsive that I must allow that you are being ironic. Are you being ironic??

  12. noticed it excludes BtoL pg 4 (13).
    This may be a bit ‘yank’ for some,a bill was introduced overhere in 2009 know as the “cramdown bill” -linked something on it-defeated after bank lobbying.
    This proposal from the CB is welcome but a bit lite-they should look at some form of mandatory ‘mortgage cramdown’ otherwise its a waste of time.Have the banks rewrite the loans to market value for owner occupied.
    Regarding the above proposal,a bit confusing,do unsecured lenders not get rewarded by charging higher interest rates and accepting that risk-why alter the capital stack ?

    “The various bank proprietary loan modification programs and the government-sponsored loan modification programs are widely acknowledged to be failures for not helping enough homeowners and also for having high re-default rates. But one of the biggest unmitigated disasters about these programs is that homeowners who have succeeded in obtaining loan modifications actually have become mired in more debt. That is because instead of reducing homeowners overall debt, these loan modification programs have focused on lowering monthly payments on a homeowner’s primary mortgage by reducing interest rates and extending the term of the loan. In 2010, nearly 95 percent of active, permanent loan modifications resulted in homeowners’ actually owing more debt on their homes than before the modification according to a Congressional Oversight Panel report.”
    http://www.thenation.com/article/164096/why-mortgage-cramdown-bill-still-best-bet-save-economy#

  13. @john gallagher

    So what the evidence from the US is suggesting is that principal write down is in fact the only real tool that works?

    Well ain’t that a massive surprise !!

  14. @YOB….the only real solution is a recovery in the housing mkt. that lifts al boats,as that appears a bit far off,yep that dastardly moral hazard off debt forgiveness will have to be considered.Some have suggested what you know as a ‘split mtg.” to apease those that find any debt write off morally repugnant…convert the secured debts into a IO loan,behind the first-torch the unsecured.

    stateside one of your lenders was in favor of it-so should be a no brainer for the troika !
    “Consideration should also be given to allowing mortgages on principal residences to be modified in personal bankruptcy without secured creditors’ consent (cram-downs).”
    http://www.imf.org/external/np/ms/2012/070312.htm

    By enacting this type of legislation-it gives borrowers leverage as creditors/lenders know if they dont reach a compromise the mortgage will get a ‘”cram down”.
    An Irish variation of the above is already running into problems….as expected !
    http://www.rte.ie/blogs/business/2013/05/10/boucher-faces-showdown-with-central-bank/

  15. @omf

    The problem with that solution is that it presumes the banks are entitled to 100% of their cash back. They are not.

    The banks broke every code in the CBIs consumer lending code and there is zero justification is making somebody insolvent when the error rests almost entirely on the banks side. Please explain to me how this makes any sense? Its like you break the rule and I pay (not necessarily with cash but certainly with my dignity) and future credit standing left in the toilet.

    You see the prime issue here is that Govt and many commentators alike continually make the error in believing that just because something is signed off in a credit agreement then it simply has to be true and deserves full legal standing. Sadly, as Gregory Connor indicates above life is much more complicated.

    Just for starters the #1 code rule as set out by the CBI is to ensure that banks lending is done on the basis ‘that the integrity of the market is maintained..’.

    It would be a brave sole to argue that with c10 years supply of residential housing sitting idle (mostly outside Dublin) that the integrity of the market was maintained by the lending banks. The Lord himself would fail to make that case for the banks. Given this fact it always strikes me as odd, up until this scheme, as to why Govt et al are so adamant that the underlying credit agreements carry their full legal standing?

    The banking laws I presumed were written on the assumption that the folks charged with running banks were prudent and careful and agreements signed were done on the basis that banks would maintain that status pretty much for all time and especially over the term of the loan. This was an assumption too far as we now know to our cost. Banks were not prudent and were certainly not careful over the period under discussion and as a result whilst the credit agreements in most cases stand up legally the sad reality is that outside the borders of the paper on which the agreements were written banks ensured through their own actions that borrowers in many thousands of cases could never satisfy the conditions are repayments within the borders of those agreements.

    In simple terms in thousands of cases the credit agreements were dead on arrival and therefore trying to enforce, what on the face of it looks legally sound, was in reality crowded out by the banks own stupidity in the manner in which the banks believed they were maintaining the integrity of the market.

    In my view in light of what the property lending fraternity have done they have forfeited the right to enforce their charges under these mortgages and if this is start of recognising that process then I welcome it.

  16. @ Zhou: Its about the Rule of Law. OK! Moral behaviour is indeed a facet of obeying the law. At least I hope so.

    Lenders have a fiduciary duty both to themselves and to their borrowers. It is crystal clear that Irish financial institutions which lent into the residential property market from 1996 – 2008 (at least) failed miserably in their fiduciary duty – and they must be held to account for this. And this bad behaviour must be punished in some appropriate manner. There are two parties to each loan and there is sufficient anecdotal evidence that some borrowers also behaved badly. This must be discovered and dealt with.

    I fully empathize with your first para. The second is really not worth commenting upon. However, I would opine that our current mess in respect of private residential mortgages was initially a 100% private matter – which went very sour and the sh*t was then dumped into the lap of the state. That makes it a very public matter indeed! That’s my opinion – for good or ill, about it. We really need to discover why so many dud loans were originated. That’s my opinion. I have an opinion as to how we should exit the mess – buts that’s an opinion too!

    YoB (above) tells it as it was, and is.

  17. @Zhou En Lai — See page 8 (Modification H) in the document — that procedure is not consistent with the term “secured debt” as I understand that term.

  18. had a quick look at CB last 1/4 numbers……
    “The rate at which Irish households continued to deleverage increased during Q4 2012. Household debt5 declined by €2.9bn over the quarter, to stand at €173.9bn or €37,928 per capita (Chart 3.2). This represented a decline of 1.7 per cent, the largest reduction in household debt since Q2 2010. The decrease in household debt over the quarter was comprised of: net loan repayments (1.8bn), loan write-downs (€0.4bn), and reclassifications and exchange rate movements (€0.8bn).”
    http://www.centralbank.ie/polstats/stats/qfaccounts/Documents/2012q4_ie_qfaccounts.pdf
    only .4bn in debt write off,sure NAMA wrote off/took a hit off over .6bn on ONE transaction recently,Project Aspen.
    in reading the above,tks GOC,and the CB numbers are the poor indebted borrowers giving the banks the 2 fingers regarding their mtg’s and paying off other creditors.
    Will be interesting who gets selected for this pilot…people servicing/retiring debts other than their mtg-is the CB trying to redirect pmt.’s towards mtg.’s…difficult w/o a stick!

  19. Wanna bet this turns into an Irish waterfall!

    Do You Sail? – All debts cleared.

    Did You Play Rugby? – Do You Play Golf? – Do You Play Tennis? – Is A Family Member A Politician? – Is Someone You Know A Politician?- Is A Family Working In The Bank? – Is Someone You Know Working In The Bank?

    – If you have answered no to all of the above then you are a Prole – PAY YOUR DEBTS YOU BUM!

    http://www.japlandic.com/2013/05/an-irish-waterfall.html

  20. Ok – back to the house price question. Take a guy – Mr A.
    Mr A has a mortgage of 400k that has a monthly repayment of 2k and unsecured debt of 10k requiring a 0.8k monthly repayment over 15 months (whatever…)
    Now Mr A is only earning 3.2 k/month
    So it is said that he only has 2k to live on.
    So that means his 2.8k now gets reduced to 2k?
    And the mortgage repayments are reduced to 1.4k and the unsecured debt is reduced to 0.6k
    This means that the value of Mr K’s mortgage has now reduced to 285k(forgive any maths errors). So – if after the write-down somebody was willing to pay 350k for the property would Mr K be allowed to walk away from his mortgage scot free and still perhaps have money left over?
    Is this what would happen?

  21. @Yields or Bust

    The problem with that solution is that it presumes the banks are entitled to 100% of their cash back. They are not.

    I don’t understand what you mean here. I mean that the debtors, mortgage holders, shouyld be allowed to go bankrupt. The most important aspect of a bankruptcy In a bankruptcy, the creditors, banks, etc are hold to take a hike, and forced to take a loss.

    Lenders have a fiduciary duty both to themselves and to their borrowers. It is crystal clear that Irish financial institutions which lent into the residential property market from 1996 – 2008 (at least) failed miserably in their fiduciary duty – and they must be held to account for this. And this bad behaviour must be punished in some appropriate manner.

    The only way a lender (bank) can be punished, and done so in a way that sets an example, is for the institution to be wound up, employees all fired, pension funds wiped out, and all of _its_ creditors told to take a hike. No inquiry, no tribunal, no review, no relase of information or new regulation will ever serve this function. Yes these things are useful in _unerstanding_ what happenned, but they will not and cannot act as a punishment or disincentive to repeat such behaviour.

    Everyone on here is afraid of winding up the banks, as if this would bring in the apocalypse. To hell with your fears, and your pensions. Insolvent banks should be liquidated. The consequences of not doing so are the dysfunctional and dangerous world in which we are now living.

    It would be nice to see a few bankers hang as well, but I don’t care anymore. Just and end to this eternal farce is all I ask now.

  22. @ OMF and Yield or Bust — Keep in mind that in modern Ireland bankers = Irish taxpayers so any payments dished out in recompense from “bankers” to mistreated borrowers is actually from Irish taxpayers (not real-life “bankers”) to mistreated borrowers. That needs to be understood as part of your discussion about fair recompense.

    @What Goes Up — enjoyed the Irish Waterfall cartoon thanks for the pre-weekend humour.

    @Eureka — to really understand the evolving Irish insolvency process one needs a full Jesuit education; it is a bit complex for us (me) more humbly-educated types.

  23. @ zhou_enlai

    It is not a morality trial it is an immorality trial and I hope he is deadly serious and what’s more it is going to happen when a certain party get into power.

  24. @zhou

    “I was recently told by an individual banker that generally they have no interest in repossessing houses as it is not in the bank’s interest. I told him that was no news to me.”

    The only people who would not be on-side with this widely appreciated and widely cheered price support er, “conspiracy?” would presumably be those who don’t own any or much Irish real estate, but are potential buyers.

    Many of them are in Australia, Canada and the UK, which is handy for the incumbents (both property owners and bank staff).

  25. @ Grumpy
    You seem to think that it will keep property prices where they are.
    Any chance it might free people up to sell and move? And so open up the market a little?

  26. @ OFM: “The only way a lender (bank) can be punished, and done so in a way that sets an example, is for the institution to be wound up …”

    [The long para you quoted was actually mine – but no matter.] Revoke their existing banking license and only allow them trade as a bog-standard, pre 1970s style bank – for a very long time! Liquidation is also good, but our politicians have to have the testicles to repudiate the guarantee except for individual domestic depositors – the rest get Cyrpussed. Its official policy now!

    And liquidating all our domestic banks would be even better. Now we would get all that infrastructure, live accounts and low-level employees for free – and we create new, bog-standard banks – with fierce regulations to ensure they behave in future – you understand.

    Banks are society’s servants (or should be) not its master. You discipline an unruly canine by putting a choke-chain around its neck – and a few very hard chucks later – Eureka!, you have a good doggie!

    And about those hinky mortgages. Well, the banks get to eat their own vomit on that one – as do borrowers who lied. Gov can always pass legislation to protect the taxpayer – if they were minded, which they are not. Where a mortgage is re-written – to reflect reality, any seller lucky enough to get a ‘windfall’ makes a ‘voluntary’ cap gain donation through ROS! I think that might be aka being Cyprussed – its official policy now!

    For all you nice folk who get a bit squishy about letting reckless borrowers ‘off the hook’. Now where did our domestic banks get the money they lent out ? Why from other private banks – is all! Nuff said!

    Its like abusive parents being let off and their abused kids being punished instead. And some of you are concerned about morality! How about the Rule of Law? How about Honour, Integrity and Fair Dealing? Have they been Cyprussed also?

  27. Small correction in 34. ?

    Borrowers and lenders must provide a full and transparent disclosure of their financial affairs as part of the debt restructuring process.

  28. There is plenty of time …… to sort out all the respective insolvencies, bank and borrower. This Depression is merely starting.

    Far more credit was given than can ever be repaid. Jubilee? The Hebrews knew of the need for a restart to debt slavery …. The bickering over responsibility is an Irish pastime. Theses are being written now and will be for more decades, on how the parties are trying to avoid cold hard contact with reality.

    Perhaps Rothschilds, advisors to the Irish Government, could assist? The quid pro quo would have to be ….. interesting … ? Anyway, rest assured, be at peace, that much hardship is coming and as usual, the inarticulate and ill connected will suffer most. Economists, who managed to create the disaster, will do well. My cousin got a great job in Brussels, thanks to the efforts of Garret the Good and her own brilliance. The day will come though, when realization that all the assets are still there, just under used because of a lack of imagination and political will!?

    Tell those who are suffering, from lack of an ambulance or hospital bed, that there is no demand? That is an obvious conversation. As global cooling caused by a solar minimum, increases, wet summers will destroy crops, mostly across Europe. Banks do not eat, people do. All banks can do is to corrupt those in power to mismanage investment.

    Being satisfied by “an invisible hand” is what economists seek, usually as cheaply as possible. Neglecting suffering is their religion, as they preach about concepts. The starving find concepts unsatisfying, guys! And gal, Catherine!

  29. The moral hazard brigade are not a uniquely Irish phenomen,a recent report from the CBO seeks to ally the fears of those suffering this phobia.
    It would appear from the above that the Irish CB is also desperately seeking to avoid any debt forgiveness for underwater borrowers,in contrast to media companies like Crosby Holdings and INM which both have enjoyed some rather generous debt forgiveness recently.

    “Several approaches to designing a principal forgiveness program would further address concerns about the costs stemming from moral hazard. The most effective approach would be to offer principal forgiveness only to borrowers who were delinquent at the time the program was announced, thereby excluding borrowers who become delinquent in order to receive principal forgiveness. Another approach would be to forgive a portion of the borrower’s loan in exchange for granting the lender a claim on future equity or home appreciation—that approach is known as a “shared appreciation” modification. For example, a borrower who owes $120,000 on a home with a current value of $100,000 may have the loan “written down” (reduced in value) to $95,000 in exchange for granting the lender the right to receive 25 percent of any future increase in the home’s value.”
    http://www.cbo.gov/sites/default/files/cbofiles/attachments/44115_PrincipalForgiveness_onecolumn.pdf

    @Eureka at least he left his sexual origination out of it:)
    http://nymag.com/daily/intelligencer/2013/05/niall-ferguson-keynes-was-gay-for-germany.html

  30. Eureka,
    Rest assured that we won’t be continuing our current borrowing binge for much longer. Once the Troika leaves town, there will be nobody to lend us the money to rack up debts payable by the next generation.
    As for the quaint idea of reneging on debt, keeping the asset and burning bank equity owners, depositors and bond holders well that is largely us an ze Germans now. So it will end up as a transfer from One citizen to another. Guess which one will be wealthier!

  31. There is no need to stage morality plays but given the immense collateral damage for a significant minority of citizens, it’s well to keep in mind that the culture has usually rewarded those who saw virtue in plundering the public purse.

    Property and corruption have for long been handmaidens in Ireland and while the case of a former judge/ solicitor currently serving prison time for altering a will, likely reflects a rare occurrence today, when I was young in West Cork, the wealth of solicitor families in poor economic times, was understood by the ‘little people’ to reflect this system.

    It’s good to have a pilot scheme to help devise a credible system.

    It should be noted in passing that the corrupt system, which made land for development scarce in a country that is 4% urbanised, remains intact.

    Who would challenge the IFA? – – farmers children on grants, driving their own cars to university, is also not new.

    Terence Dooley in ‘Land for the People; The land Question in Independent Ireland,’ 2004, UCD Dublin, wrote: “In October 1933, the new Fianna Fáil government introduced its own extensive and complicated act, which provided the catalyst for record acquisition division statistics 1934-5 and 1935-6 and was very much as Patrick Hogan contended, a ‘political act’ that pandered to the small farmer and labouring classes in an attempt to secure votes. After the terms of the act became known, there was a rather dramatic growth in the number of Fianna Fáil cumainn from 1,265 in 1932 to 1,679 in 1933.

    This growth was partly the result of more organized and sustained efforts by Fianna Fáil organizers in the rural constituencies but it also owed much to the stimulus provided by the 1933 Act and the widely held belief that one would have to be a member of a cumann in order to benefit from division.”

    There wasn’t even a Mugabe-style pretence of restricting the patronage to “landless peasants” or labourers as they would have been known as in Ireland.

    The ‘cottage’ people were the low class of rural Ireland.

    Existing farmers in Galway and Mayo who were Fianna Fáil supporters, were given prime land and subsidised housing in West Dublin, Kildare and Meath.

    Emer Ó Siochrú wrote in her 2004 paper, ‘Land Value Tax : Unfinished business’: “It is astonishing to see just how much of the early State’s revenue – 5.4% in the early 1930s – was used to placate land hunger in rural areas to the relative neglect of pressing urban problems. This rural focus extended to providing subsidised housing for farm migrants from the West to the more fertile midlands and the rural labourer. Rural areas got more than ten times the social housing investment of urban areas. Local authority housing tenants moreover, were given the right to buy their house from the outset – a right only offered to urban flat tenants this year of 2004.”

  32. tull, all

    the other side is NOT some US Banks or just “ze Germans”, it is the people of Europe, of which the Germans are only about 25%. This is very important, when you think about doing an Argentina.

    Otherwise, I strongly believe, the main social conflicts will be within nations.

    I just say: median household wealth in East Germany is 21 k€, to put things into proper perspective.

  33. Francis,
    Given the current trend it will soon be just ze Germans. Slovenia looks to be about to join the bail out club followed ultimately by France & Holland. Eventually a good chunk of the debt will be monetized, extended or defaulted on. Germany will pay the bulk of the cost of that. That is assuming current policies.

  34. @francs was going link the Paul De Grauwe, Yuemei Ji paper but its a Saturday-Germany features in a few of the charts…..Ireland ?
    For any aspiring gold diggers head to Frankfurt…….
    Cheat sheet/cliff notes.
    “Which city has the most millionaires?
    MORE millionaires live in Tokyo than in any other city, according to a new report from WealthInsight, a consultancy. The city, which boasts 460,700 individuals with net assets of $1m or more (excluding their primary residences), is home to over a fifth of Japan’s millionaires. You might think that anyone interested in rubbing shoulders with the rich should therefore head to Tokyo. You would be wrong: Frankfurt, where there are 75 millionaires per 1,000 people, would be a better bet.”
    http://www.economist.com/blogs/graphicdetail/2013/05/daily-chart-7
    The “research” paper.
    http://ftalphaville.ft.com/files/2013/05/World-Cities-wealth-briefing.pdf

  35. Michael Hen,

    Do you have links to those papers? Here in Meath there was intensive “resettlement” by “westerners” and it’s a fascinating though rarely referred to part of our history. I only know about it from fireside version and would love to read up on it.

  36. @ Michael Hennigan

    An active FF member AND union official I know noted that a neighbour and FF colleague of his – a FF councillor and farmer – was able to get a 3rd level grant for his daughter while he had to support his own daughter in college at considerable financial hardship. The two girls are friends and the daughter of the FF councillor/farmer admitted that she didn’t even spend her grant. The amazing thing is that the FF member/union official I know was not angry or bitter about this, nor thought it was anything worth agitating against. He just accepted it. I really don’t know how to interpret this. Sometimes I think: is that the success of FF, i.e. the ability to have persons with (seemingly) conflicting interests happily members of the same group?

  37. @ Sarah Carey

    Emer Ó Siochrú here:

    http://www.feasta.org/documents/landhousing/coritax.html

    The Terence Dooley extract is from a book. He is a professor of history in Maynooth.

    @ Bunbury

    The NFA/ IFA even though run by big farmers, have been successful over the years in presenting itself as the voice of all farmers.

    My mother who came from a small farm did not fall for that when the farmers held their marches on Dublin – – they later evolved into tractorcades.

    It’s interesting in the US to observe how the wealthy can protect their interests by exploiting the racist and anti-gay sentiment of poor whites.

    In 1974, the Fine Gael-Labour Coalition Government announced plans to introduce 3 new capital taxes and farmers were brought into the income tax net for the first time.

    At a football game in Croke Park between Dublin and Kerry, a Dublin supporter held up a placard on Hill 16 with the slogan- ‘Come on the Taxpayers.’

    In 1978 PAYE had accounted for 87% of all tax and in the 1979 Budget, the Fianna Fáil Government introduced a 2% levy on the value of farm produce. It was vigoursly resisted by the IFA and the Government caved in and withdrew the measure.

    In March 1979, in the aftermath of the surrender to the farmers, an estimated 200,000 workers marched through the centre of Dublin in protest against a tax system where penal rates were levied on average earnings while wealthy people and farmers paid little or no tax.

    It was the apotheosis of the trade union movement as the representatives of all workers.

    The dependence on FDI of course was a big factor in this development. It is also worthy of note that industrial relations were as bad as the British experience in those days — pre-internet and both banks and post offices shuttered for months — not to mention ESB and bus strikes always seemed to either happen or be threatened.

  38. If you click the link and scroll down to talking point, you will find Sarah Carey hosting Philip Lane, Colm McCarthy and, er, me discussing the proposition of a European debt conference.

    http://media.newstalk.ie/archive

    Also:

    “Bank probe is the least we deserve”
    Colm McCarthy

    “After three limited official reports, each valuable in its own way, there has been no bank-by-bank inquiry into what went wrong. None of the banks has seen fit to report even to their own shareholders.”

    http://www.independent.ie/opinion/analysis/bank-probe-is-the-least-we-deserve-29260012.html

    Incidentally Sarah Carey would be asking some of the pseudonymous bloggers. I believe she once suggested balaclavas and name tags might serve.

  39. @Gavin Kostick – I clicked the link and scrolled down to Talking Point but it was a piece on Stephen Hawkings. Has the linked archive been updated and changed?

  40. Hi Gregory,

    This link should take you to the main newstalk website.

    http://www.newstalk.ie/

    Look nearly top right for the ‘Listen Back’ tab and click.

    Use the little red scroll bar to scroll down to Talking Point, Sarah Carey, and click.

    That should bring up the show.

  41. @ John G

    Googling works fine for the de Grauwe paper, and I have online access to the very most papers.

    My PhD thesis had 25 peer reviewed papers with my name on it, now h-index > 10, citations > 1000, GMAT in the upper 3% of my age bracket, with 4 days preparation, and under some time stress. There was a time in my life, when I ate 50 pages with 200 crammed statistical plots for breakfast.

    I warmly recommend people to take a GMAT test; you can do this anonymously, online, cost free. It gives you very valuable information about your ability to read, understand, and analyze quantitative and business text, quickly, and actually quite often also testing your general understanding, how business works. Not perfect, of course. It leaves out the emotional, people, character stuff, mostly.

    I brought this numbers not for bragging, I don’t need this, just to illustrate my very robust confidence, that I understand the publishing, numerical, business, stuff in pretty good quality, without revealing too much of my personal information : – ).

    But to make perfectly clear, that I am not doing sour grapes, by denigrating things I don’t know or understand or cannot perform the mechanics, analysis in real time, when I say that

    a) the numbers/ (dynamic) equation are only about 20% of the whole picture, are just the beginning

    b) that real time data are near always heavily contaminated with measurement, availability issues, and

    c) That other factors, like law, moral, and what do certain things and actions do to the long term habits and traditions of people are much more important

    For quite a while I also ridiculed the Austrians (theory economists) for “not knowing numbers”, and that they seem to be incapable of doing the equations. For a short time in my life, I held Krugman in significant regard.

    Those horrible highly simplistic multiple regression analysis, like de Grauwes Table 6 (just to grab the first example at hand, on my screen) of highly correlated time series, look like kind of an intellectual insult, until you look at it from the other side: how would I make and present the analysis of unprecise data to others.

    With that in mind, I understand the seemingly barbaric simplistic 4 bracket analysis of Reinhart/Rogoff, and I do not like what the HAP did.

    I also had and have the advantage, that I can follow my self interest, in not fooling myself. I am not nailed down to any prior stand, or because I have to sell any product or idea to anybody else.

    I did follow the interest / CDS rate developments dynamically, and in quite some detail and interest / engagement in dynamic modeling. There was money to be made, and I can trade. I am not a communist : – )

    Given all that, I see this de Grauwe paper as a honest different possible interpretation. My firm interpretation is, that the development pretty closely resembled my risk interpretations, driven by mostly other information than pure economic data, ergo, no real possibility to make money.

    The recent de Grauwe “national wealth” calculation I see as dishonest. But I provided details for that assessment here already.

    On this millionaires in Frankfurt point, I believe, there is some very creative accounting underneath there. Have you ever been there? Would you like to live in this barren office land? But who then decides which of the adjacent boroughs, like Bad Soden, are incorporated in what count?

  42. @ WGU: Thanks for that link. Interesting exchanges.

    CMcC: “The losses have already occurred”. I have two understandings of this: (1) the loan money has been spent (on materials, labour, etc.), and (2) the loaned money + interest cannot now be repaid by the original borrower. And there is some ‘level of risk’ (of non-payment) here – like 101%!

    So, the situation is one of an ‘unpayable’ private institutional debt obligation which has been transferred involuntarily to individual taxpayers (and their non-taxpaying dependents) and their government has given a personal guarantee on their behalf. This seems very dodgy indeed.

    GC: “Alesina, Alberto …” Now there is a name to be ‘concerned’ about – cf. Bocconi; Economics, School of; U of Milan! I respectfully suggest interested folk read up on these guys.

    Now – I’m assuming, that the ability to repay a debt + interest obligation has something to do with one’s forward income – which I am also assuming is a probabilistic event. Sure, if I’m in a permanent, whole-time, pensionable employment (public service stuff) this carries a low probability of ‘default’. But if most folk do not ‘enjoy’ this situation – then the probability of default must be a tad higher – yes? But when that probabilistic future event actualizes into reality – that is, a significant level of un-employments and lowered incomes – now what? Whither that debt + interest obligation repayment?

    When is a loss*, NOT a loss? Are some economical folk ‘assuming’ some unicornal, aggregate ‘growth’ which will turn those virtual loan losses into real repayment gains? What’s the probability of the appearance of that Unicorn?

    * Ordinary folk may have a completely different understanding of this term: that is, different from economists, accountants and financial folk.

    @ GC: ‘Thinking, Fast + Slow’. Good, but not great! Argyris and Schon got there in 1974 [‘Theory in Practice’]. But Veblen, 1899, is even better: [‘The Theory of the Leisure Class’]. Human folk do not change: they just do it differently!

  43. @francis as the good lady herself said…

    “In terms of statistics, households in countries such as Spain, Cyprus and Greece might be wealthier than ours,” Chancellor Angela Merkel told the mass circulation newspaper Bild in an interview published on Friday. “But be careful: Statistics are misleading.”
    http://www.spiegel.de/international/germany/chancellor-merkel-rejects-findings-of-ecb-wealth-report-a-895365.html
    Here is the paper referenced above,congrats on the exam results 🙂
    http://www.social-europe.eu/2013/04/are-germans-really-poorer-than-spaniards-italians-and-greeks/

    @Michael H fantastic link to Feasta.

  44. @ Brian Woods Snr

    Thanks for the comments and additional reading.

    I was wondering, how come you call me GC – which you’ve done before -when my initials are GK? I have a theory about it but I thought I’d ask rather than put something speculative out there.

  45. The GC vs GK confused me as well — my initials are actually GC although many use GO’C and I am not too fussed about it. I assumed it was not for me despite the GC.

  46. Dear me! Freudian behaviour! Or the brain is moving faster than my fingers! Will try harder – honestly!

  47. @ Francis
    Well done on the scores. Are you sure this is the right thread for your post?

    Look – life is really simple. 90% of people believe that they are pretty much equal to everybody else all things considered.
    But there are about 10% of people who think that they are better than everyone else. They are usually bankers and are usually quite stupid. They need to be kept in check.
    Goodnight

  48. @Michael

    “It is astonishing to see just how much of the early State’s revenue – 5.4% in the early 1930s – was used to placate land hunger in rural areas to the relative neglect of pressing urban problems. This rural focus extended to providing subsidised housing for farm migrants from the West to the more fertile midlands and the rural labourer. Rural areas got more than ten times the social housing investment of urban areas.”

    Not really astonishing. The rural dudes were more organised politically . Like pensioners today shafting under 25s.

    There’s a very interesting history that goes back before the Land League about how the poorer tenants in the West began to flex their political muscle.

    And Ireland has a dreadful record on urban engagement right up to the present day. It’s not like the urban middleclass care much about their poor neighbours either. Limerick is the créme de la créme on that score. And don’t something like 90% of prisoners come from 3 Dublin postcodes ?

    The whole story of “respectability” in Ireland, who went into the religious run gulag system etc is another fascinating angle.

  49. Eureka

    You are right; we veered off topic pretty far.

    It wasn’t me; John Gallagher did it, LOL.

    What triggered me was John G mentioning the de Grauwe OMT paper, which now has its own thread here, and that apparently a lot of people read the ECB OMT specification on the 6th of September in very different ways.

    They read “unlimited”; we read “strict conditionality, and immediate termination of SMP”.

    My view is, that folks like de Grauwe and Paul Krugman are living in some academic sandbox of simple (ISLM) models, and do not realize, that this is just a pretty small piece of the whole picture / problem.

    I do not know, what size the grey hair faction here has, and how many of you worked in a large (> 10 000 people) high tech company. With quite a number of people with much higher paper and patent counts than me. But often with a very limited knowledge how the business or the wider world works. Many of them get increasingly bitter, when their career is going nowhere, they are even often not asked for their opinion anymore, in their field of expertise, because others can’t stand their ideological rants any more.

    a) How do you tell people, that their general knowledge and ability is actually not that great, and that this is pretty often the consequence of their very selective information processing? In an “objective” form, and with minimal embarrassment, hurt feelings?

    You would be surprised, how many intelligent people are running pretty simple belief systems, they formed in their 20ties, on the “social question”, how investment works, etc. And how much information they filter out, reading some article / paper, if it doesn’t fit into their patterns.

    Paul Krugman, with an h-index of 124, is one of those bitter old men, who cannot understand, why nobody, who can decide anything, is touching him with a nine foot pole.

    b) How do you find out, for yourself, without others looking, whether that calcification process has already started for yourself too?

    Is there any “economic intelligence test” out there?

    And I find this GMAT pretty suitable for that, but I am also curious about other suggestion from folks here!

    People in this blog know, that English grammar is certainly not my specialty, but one, at least me, can train the way this test checks on this, very quickly : – )

    In a sample with a size of more than a dozen, I found the results pretty highly correlated with what I thought about the people.

    c) I would say that 80 % of the people believe they are substantially cleverer than they really are. For myself I was surprised that this special test turned up much better than I expected. Based on other experiences as well, several times actually obtained systematically, I have become actually more confident about myself in recent years.

  50. @francis thanks for that….one area that is worth looking at is what type of housing market do Irish people want/need.If you are going to “fix” something perhaps a discussion on what the its gonna look like after,or is the intent simply to put humpty dumpty back together again.
    Historically,landlords were mom and pop operators but that is changing,some of the more astute and opportunistic US funds are rolling up the higher end resi buildings.The most likely exit strategy is a REIT.
    The pursuit of the “American Dream” semi d house,white picket fence,high % home ownership,has been actively encouraged with tax incentives etc.

    “The highest propensity to live in semi-detached houses was reported in the Netherlands (60.7 %), the United Kingdom (60.3 %) and Ireland (58.3 %) – see Figure 1.”
    http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Housing_statistics

    Thanks GC,great topic and I tracked down a copy of that paper on RMBS from the recent conf. Hope it went well.
    In finishing,I know very very yank but Shelia Blair is a brilliant and highly intelligent person,Francis she may just may be smarter than you..,,
    http://www.pewtrusts.org/our_work_report_detail.aspx?id=85899443825

  51. Little boxes on the hillside,
    Little boxes made of ticky tacky
    Little boxes on the hillside,
    Little boxes all the same,
    There’s an AIB one and an Ulster one
    And a BoI one and a Danske one
    And they’re all made out of ticky tacky
    And they all look just the same.

    And the people in the houses
    All went to the banks for mortgages
    Where they were put in boxes
    And they came out all the same
    And there’s doctors and lawyers
    And taxi drivers and second homes
    And the mortgages are all made out of ticky tacky
    And they all looked just the same (AAA).

    And the bankers all play on the golf course
    And drink their martinis dry
    And they are all in deep shit
    And the banks don’t know what to do
    so the bankers go to The troika
    And then to the universities
    Where the mortgages are put in boxes
    And significantly in excess of 15% are FUBR

  52. @seafoid ah the theme song from “Weeds” great link……i came across this paper on the Irish Housing Mkt.
    So in fairness there has been some debate and discussion on reforming the Irish housing market,pity its going to be a bit late for all those in negative equity.In some peoples opinion resolving these issues is the biggest challenge facing the country.
    http://www.dit.ie/media/newsdocuments/2012/HousingMarketsReformReport.pdf

    At this point we are miles off topic so what the hell,as a avid reader of Olli’s blog here his latest…..worth a …
    http://blogs.ec.europa.eu/rehn/

  53. @Gregory Connor

    “@Zhou En Lai — See page 8 (Modification H) in the document — that procedure is not consistent with the term “secured debt” as I understand that term.”

    Page 8 of document says:
    “H Significant Mortgage Restructure options including split mortgage, negative equity trade down and other solutions”

    This is something that should happen within a voluntary framework for debt resolution. It is not compulsory. It only suggests that mortgage debt will have to be restructured if a mortgage is unsustainable. It suggests that the holder of secured debt should agree to vary his legal position to make the debt sustaionable (and presumably thereby maximise repayments). That is not inconsistent with secured debt to my mind as it is only looking for variation by agreement.

  54. @ Zhou

    ”A major flaw with this framework from the outset has been the absence of provision for mortgage write-off or write-down which is an essential element of any plan to give meaningful relief to those in unsustainable debt situations,” the credit union statement said.”

    Not surprising. The thing is going to drag on for years, most likely. It has gone beyond the point where single efforts work.
    Any chance of an “el gordo” day where PS salaries are cut by 10% or whatever, FUBR debt is written down and banks are recapped, all similtaneously ? Dragging it all out over the next 20 years will be far more expensive.

  55. re the Direland link — The debt/GDP figure for Ireland includes IFSC offshore debt of foreign banks which gives a figure which is just silly. So that makes the text unreliable if the author does not understand the basic data he/she is relying upon.

  56. @zhou how can they reject a voluntary pilot programme ?
    had a quick look at Retail Interest Rate Statistics: March 2013 -linked.
    “The weighted average interest rate on outstanding loans to households for house purchase stood at 3 per cent at end-March 2013, remaining relatively stable over the past year with a twelve-month average of 2.96 per cent. The corresponding interest rate reported by all credit institutions resident in the euro area declined to 3.49 per cent at end-March 2013, falling by 36 basis points since March 2012.
    • The average interest rates on outstanding mortgages in Ireland have more closely reflected movements in the ECB’s main refinancing rate (MRO) than comparable euro area rates over the last number of years (Chart 1). This relationship is principally derived from the higher proportion of “tracker” and variable rate mortgage products in the domestic market.”

    I’m NOT an expert by any stretch on the above numbers-first time i even looked at them-but if they are accurate-very limited options….quite the spread in rates for loans to non-housing purposes too.

    http://www.centralbank.ie/press-area/press-releases/Pages/RetailInterestRateStatisticsMarch2013.aspx

    @BWsnr-seated try sedated-yikes!

  57. Reply to Zhou En Lai — This was the paragraph that seems inconsistent with secured debt definition, but again my lack of legal knowledge makes me unsure. I note that it does say “for the benefit of the borrower not the unsecured lenders” (not exact words) so perhaps that satisfies the legal definition of secured debt. Certainly this text does vary from the standard definitions of security and priority?:

    On a case by case basis and in the context of affordability and the reasonable living arrangements of the borrower, the secured lender will consider a range of significant mortgage restructure options. These arrangements are for the most challenging cases and the reduced payments provided are intended for the benefit of the distressed customer and not for the benefit of any other lender. However on a case by case basis, the secured lender, for a period of two years, may accommodate the servicing of other loans alongside the mortgage on a proportional basis to the remaining sums outstanding. After the two year period, the available cashflow will be used to service the repayments on an appropriate family home. All unsecured debt will be eligible for such treatment with the exception of the two circumstances below:

  58. Zhou En Lai — Note in particular that under this paragraph’s requirement, the mortgage lender can choose (or not) to accommodate the unsecured lenders, even though those lenders have equal claim priority. All the mortgage lender legally has is security over the house — that is not a claim priority on the borrower’s income, just a secured claim on the property asset. As I noted in my original entry.

  59. @Gregory Connor

    I am having difficulty understanding what you see as being at odds with the existing priorities and the current legal position.

    Perhaps the term “secured debt” is what is causing difficulty? I do not think that it is a useful phrase. Whilst it is used as a defined term in legal document as it has no intrinsic legal meaning that I am aware of.

    Essentially you have debt, and you have an asset which is mortgaged or otherwise pledged as security for that debt.

    “Secured debt” is used as shorthand to denote the debt which the security is for the benefit of. However, the character and nature of the debt does not change. The debt is still the same as other debts.

    What changes is the character of the asset which is pledged as security. That asset (or the proceeds of sale thereof) cannot be applied towards the payment of other debts without the consent of the lender holding the security. The asset is not available to unsecured creditors in a bankruptcy or in formal insolvency proceedings.

    Whilst there is a fundamental change in the character of the debtor’s ownership of the asset so pledged, the character of the debt itself has not changed.

    Because the creditor can call on the security he has more commercial leverage over the borrower depending on the importance of that asset to the borrower.

    Nevertheless, there is no legal justification for the borrower to prioritise the repayment of secured debt out of the borrower’s income. The borrower may prioritise becasue he is afraid of losing the asset. However, his other creditors are entitled to say that they are entitled to be paid and to seek judgment, to register judgements, to garnish wages and income and to institute bankruptcy proceedings.

    Indeed, in the case of companies, once the company becomes insolvent it cannot continue trading so as to favour a secured creditor to the detriment of other creditors. The company must reach agreement with creditors or be wound up. The fact that there is no law against reckless trading for individuals in the same way as for companies has allowed creditors holding security to frighten borrowers into mistreating other creditors.

    When the Law Reform Commission were very very slowly drafting their deeply flawed report on personal insolvency law reform, the banks actually had the hard neck to suggest that debt which was backed by security should be treated as being of different character to debt not backed by security. They wanted the portion of the debt which exceeded the value of the underlying security to be treated differenlty, i.e. not only did they want to get the proceeds of sale of the underlying asset, they wanted to get an added advantage in relation to remaining part of the debt.

    To he best of my recollection, the LRC rejected this ridiculous and spurious low-ball position of the banks as being without any legal or commercial justification and as having no precedent elsewhere. Unfortunately, rejecting that totally spurious position put forward by the banks turned out to be the high-water mark for the LRC standing up to the banks.

  60. What would be a change in how secured creditors are treated would be to require secured creditors to allow part of the equity in the property to be realised or liquidated and then to be applied to debt which does not have the benefit of the security.

    If a bank were required to allow the borrower to sell part of their property for part of the sale proceeds to be used to pay debts to unsecured creditors, then that would be inconsistent with the security given by the debtor to the bank.

  61. @ GC: Apologies for my mixing up – G* and all! I had a brief word with the other G about it.

    “The debt/GDP figure for Ireland includes IFSC offshore debt of foreign banks which gives a figure which is just silly.”

    A lot of folk read that blog. So if there is an error – and you say its a big one, then it needs correction. What should that d/gdp value actually be?

    If you go to the comment box, you will be requested to register. You will get an e-mail with a login password. The ‘owner’ of the site is Eric Janzen – one of the few commentators who correctly predicted the ‘crash’. Its important the value is corrected.

  62. Zhou En Lai

    In financial markets the term secured debt has a clear and specific meaning. If the loan payments on a secured loan are not made, the lender legally owns the asset. There is no insolvency process needed. This is the definition used in the Financial Markets and Institutions textbooks, etc. I am not familiar with any differences in the terminology in legal jargon. In finance, the term is clear and well understood. Check out, e.g, the FT where one can see secured and unsecured interbank borrowing rates. The secured rates are lower by X basis points.

    The term is used in the same way in consumer lending in the USA – if you do not pay a car loan and the car is an asset secured on the loan then the loan company can simply and legally enter your car and drive it away (they keep a spare key for all their secured loans). This may differ across states (I have no direct experience of this!).

    Irish law and legal terminology is perhaps different so perhaps that is why the term seems ambiguous to you. To a US-trained finance academic like myself, secured debt has a clear and simple meaning.

    I agree with you that secured and unsecured gives no differential priority to loans, except in practice. Corporations always favour their secured loans in practice since otherwise the secured asset will quickly be repossessed. But this is due to the revealed preference of the borrower not the legal right of the lender. What happens when the security aspect of the secured asset is removed — that changes the effective (not legal) priority due to the altered incentives of the borrower.

  63. I saw today that the ILCU rejected the plan, meaning one of the important parties to this were perhaps not fully consulted or decided to change their mind.

    As for the CB ability to enforce any such plan (beyond endorsement), does anybody have the foundation to it? Can’t seem to find it in any compliance/regulatory space.

    Nice to see it made it a whole week before falling apart.

  64. @ Gregory C: Thanks for that. Will print out and have a read. I posted a copy of the link in a comment on iTulip.

  65. Here’s the statement form the credit unions…they appear a little upset…

    “The framework as currently constructed appears to us to facilitate the banks in maximising their mortgage interest income by extending loan terms, reducing interest rates, writing off unsecured loans, and warehousing portions of mortgage debt. In the short term borrowers may gain some temporary relief as interest payments fall but at the end of a decade the borrower will look back to assess his/her situation and realise that he/she has merely been facilitated in paying the maximum amount of interest to the bank and there has been little or no reduction in the capital piece of the mortgage. Indeed it could be possible that the outstanding capital amount may have risen as the interest accrued on the warehoused piece will ultimately be added to the outstanding debt. A major flaw with this framework from the outset has been the absence of provision for mortgage write-off or write-down which is an essential element of any plan to give meaningful relief to those in unsustainable debt situations.”
    http://www.creditunion.ie/communications/news/2013/title,7464,en.php

  66. @ JG

    the Credit Unions must be worried their loans will be defaulted on if there is no relief on the mortgages.

    It’s like the man who is shouted at by his boss, goes home to scream at the wife, who hits one of the kids, who then takes it out on the dog…

    The CUs would be the dog in that scenario and the bondholders of course the bosses.

  67. @seafoid do you have “credit scores” or FICO in Ireland?
    Apols been a long time….reason I’m asking is that if you skipped or strategically defaulted on your mtg. stateside….the eh “waterfall” effect is ALL your unused credit would get shut off.
    In other words,the mortgage lender would report the missed or skipped pmt.’s to the agencies,say you had a CC with 1,000 limit,drawn down or used 200,after skipping a pmt or two that line would be reduced/eliminated, notwithstanding the fact you are paying the CC on time.

    Without an effective “penalty” or repossession framework why bother your ass paying a mortgage…shur the bank can’t do anything ?

    I think the CB is attempting to position “secured” lenders ahead of unsecured ones but without repo……not an easy thing to do…..

    Sorry,last question are credit unions typically unsecured small time lenders for non housing needs,with very high borrowing costs ?

  68. @ JG

    I don’t know. Maybe the banks did but when the boom reached terminal velocity the numbers were probably all made up.

    I was talking to a Swiss banker today who said the house prices in CH are based on sound fundamentals and it is great to put the pension fund into the deposit. People are really stupid.

    I’d say a lot of CUs are worried about where the repayments will come from. They used to link loans to deposits but I don’t know if that is still the case. Most distress cases probably gave up thinking about credit some time ago.

Comments are closed.