Resolving Residential Mortgage Distress: Time to Modify?

New IMF WP by Jochen Andritzky here.

Summary: In housing crises, high mortgage debt can feed a vicious circle of falling housing prices and declining consumption and incomes, leading to higher mortgage defaults and deeper recessions. In such situations, resolution policies may need to be adapted to help contain negative feedback loops while minimizing overall loan losses and moral hazard. Drawing on recent experiences from Iceland, Ireland, Spain, and the United States, this paper discusses how economic trade-offs affecting mortgage resolution differ in crises. Depending on country circumstances, the economic benefits of temporary forbearance and loan modifications for struggling households could outweigh their costs.

24 replies on “Resolving Residential Mortgage Distress: Time to Modify?”

The IMF paper, notwithstanding it conclusion, reads like a grudging acceptance that the creditor philosophy of- ‘kick them out immediately’- is actually not entirely in creditors interests.

While a lot of weight and emphasis is given to reestablishing house price and consumption levels post-crisis, very little weight is give to the societal cost argument. The quote below being about the only reference to societal cost.

“Moreover, foreclosures have social costs. Besides price distortions, foreclosures are associated with social cost from families relocating, such as worse educational achievements (Nelson et al.,2011). Unoccupied foreclosed homes can also attract crime (Immergluck and Smith, 2006b).”

Can the IMF not put some figures the cost of forced relocation of families?

Another quibble I would have are the comparison of mortgage arrears with the UK model (experience), that leaves Ireland and Iceland as serious outliers. Well, one supposes that if the UK had a similar bust experience, rather than two minor ‘housing cycles’, then the UK comparative model might be more appropriate.

One small gem of information, relevant to the current debate re LTV in Ireland was the LTV of loans in Spain (Table 1, Initial Conditions):
“A low Average loan-to-value ratio of 65 percent provided a buffer against negative equity”
Imagine the howls of outrage if Patrick Honohan suggested 65% instead of 80% LTV.
Still, Ireland comes out rather well in the comparisons, and on balance its decision to eschew the calls to -kick them out now- has not only been vindicated, but is seen as making good economic sense, and good social sense with a small s, as the IMF does not do social.

“The utility of comparing the experience of such disparate countries in relation to housing busts is open to question.”

Nope. Its pandering to a particular set of economic ideas and policies – while ignoring some critical aspects.

Lending and borrowing (a mortgage) is a two-some activity where one might expect a balance of reciprocity between the actors, whereas the practice is that the scale is tipped very much in favour of the lender.
The borrower assumes an overwhelming share of the financial risk, the lenders almost none – provided they have been careful, that is. Which in the case of Ireland, the lenders have manifestly failed, leaving their borrowers out on a very thin financial limb – or no limb at all.

The various proposals for mortgage ‘workarounds’ described in the paper are all predicated off the original risk model: a steady increase in home formations and income stability (or steady advancement of). The opposite has happened.

Millions of additional waged-labour opportunities (at very low income levels) have appeared in Asia in the last two decades, resulting in significant loss of employments and incomes in our developed economies. The inevitable, and predicted outcome: mortgage defaults are almost 5 times above the level forecast by the standard production/consumption economic model. Yet the modellers persist in proposing solutions that cannot work with their out-of-date and clearly malfunctioning model. What is actually required are unconditional mortgage debt writedowns and writeoffs. But these are, for the moment anyway, completely unacceptable – for backward-facing reasons.

I noted, twice, in the article that the author equated economic ‘growth’ with the steady increase in credit emission and debt accumulation …???

So, this so-called mortgage crisis will continue for some time? Sure will.

ps: has the spellchecker been turned off?

Sweeping shyte under the carpet doesn’t stop it smelling.

Thinking it’s not shyte, just some magically vanishing, temporally decaying dust, delays the inevitable reality – in the absence of either/both inflation or wage increases. Not much sign of either.

Losses gotta land somewhere…

Similar enough to be support generalisation. Different enough to draw useful contrasts. Sufficiently contrary to ECB policy to draw another low quality put-down.

Debt needs growth in order to be manageable.
Without growth , debt is worse than japanese knotweed.
A lot of these IMF models are nonsense in the absence of growth.

“Resolution policies may need to be adapted” . Is this a sly dig aimed at the ECB? The big question is how to allocate the losses when too big to fail keels over. And across the high income countries deleveraging has barely started.

“Debt needs growth in order to be manageable.”

Indeed it does, but my direct experience with economists, politicians and economic commentators (not all, mid – just an awful lot!) is that they do not appear to have cognitively internalized the fundamental nature and logic of industrial and global scale economic growth – that it is, in the long-term an impossible physical proposition and that all the modelling we have experiencing, and are experiencing, utterly fails to capture the absolute physical limitations. So the economic theorists and modellers just advise “carry on” and attempt to displace themselves away from the widespread human carnage caused by the imposition of policies based on their woefully inadequate ideas.

I am not accusing the author of the IMF article of any of this, but where are the ‘new’ (aka: alternate) ideas? They are not alluded to in the article, but they are ‘out there’. Unfortunately the debt-reduction alternates appear to possess the same level of economic and political toxicity as those spent-fuel rods slowly rotting in Fukishima. Those rods are not going away any time soon, and neither it seems are our accumulated state, corporate and private debts. But the good news about those debts is they can be eliminated: that radioactive stuff in Fukishima will be still around in 10,000 years!

Just how long do we have to wait until a real dose of economic and political reality penetrates those ideologically fortified frontal lobes?

By the way, thanks for that John Kay article: very well crafted.

Ireland is a wild, wild outlier in terms of mortgage repossession both for PPR and BTL in the international context. How can anyone with any common sense fail to realize that this makes the Irish public less apprehensive about the possibility of over-borrowing or over-paying for a property – and therefore another bubble far more likely to inflate?

Perhaps the Central Bank need to introduce LTI and LTV limits immediately, before things get out of hand again as opposed to, say, phasing them in over five years so there is a mad scramble to ‘get in under the wire’ each year before the new incremental tightening…

“Moreover, foreclosures have social costs. Besides price distortions, foreclosures are associated with social cost from families relocating, such as worse educational achievements (Nelson et al.,2011). Unoccupied foreclosed homes can also attract crime (Immergluck and Smith, 2006b).”

Allow me to present an alternative view: “Lack of foreclosures have social costs. Besides price distortions (i.e., higher property costs than would otherwise obtain), absence of foreclosures are associated with social costs from families unable to afford to buy and therefore relocating at the whim of landlords, such as worse educational achievements.”

This passage is indicative of a bias in favor of those who are already “in” property that they do not own as opposed to those who are shut “out” (renting and unable to afford property that is artificially inflated by absence of foreclosures and a government desire to keep people in “their” homes . . . that they cannot pay for).


I can’t remember which Kay article that was – these are 3 of my favourites, all on

-Don’t blame luck when your models misfire
-Why we struggle with our roulette wheel world
-No mathematical model can describe ‘the world as it really is’

Minsky is the man for 2015

Just so we can be clear:

What the oh-so-caring-leftists are complaining about is that not enough of those who lost their jobs in the recession, and have consequently been struggling to pay their mortgages, have been evicted from their homes. That Ireland has done this on a far smaller scale than other countries seems to be really upsetting them.

I’d suggest that the widespread opposition to such a policy in Ireland has little to do with secular economic theories (which come and go like the wind and which are generally worthless), and more to do with Ireland’s deep-rooted Christianity (which is eternal). This is especially the case at Christmas. If the left-liberals can persuade Ireland to get rid of this 2,000 years-old ideology and become a totally secularised state, I’m sure that the bureaucrats will face a lot less opposition to forcing through a policy of mass evictions, and our oh-so-caring leftists will be a bit less upset.

However, an alternative solution to the problem of people falling behind on their mortgage repayments is to get them back to work. Fortunately, this seems to be now happening. As unemployment falls, I’d fully expect the problem of people falling behind on their mortgages to fall in tandem.

Although as a Christian I could not condone it, I have no objection to leftists espousing a policy of mass evictions. That is their democratic right. Just so long as they spell it out clearly in their election manifestoes.

There needs to be more of a focus on who can pay some or all of their mortgage but are declining to do so because of strong political resistance to tackling the problem (with an election imminent) and have been refusing to do so in growing numbers for several years now. The extent of long-term non-performance is very serious. The borrowers concerned must believe at this stage that they will get away with it. That means the rest of us (who have paid our mortgages and who also have votes) are having to pay for what are, undoubtedly in some cases, spongers. With unemployment falling, non-performing loans should be falling but long term non-performance appear to be on the increase. Disappointed not to see more focus on that aspect of the issue.

JTO might be interested to know that the Christian state of Ireland is currently busy evicting people who have been paying their rent, but is still not evicting those who have not been paying their mortgages with anything like the same enthusiasm.

Other than that, the forebearance shown to people not paying their mortgages is not cost free. It just imposes that cost on to someone less immediately visible. Christ might not have approved.

Little has changed in Ireland since 1922 and prior. The poor were expendable under the British and if conditions were really miserable they could dig coal in England. In the Ireland since 1922 they still opt for the now Irish relief program and go to England and work in a menial service job. Mortgage defaulters are card carrying members of the much vaunted Irish property owning class and not people to be toyed with. Plus ça change, plus c’est la même chose.

Even the British get emotional when the foreigners raise the rent.

Joseph Stiglitz: Economics Has to Come to Terms with Wealth and Income Inequality
The role of land in wealth creation is touched on.

@ Hugh Sheehy +1

Don’t forget the efficiency with which tenants can be turfed out of their family home. Jesus probably emptied Herod’s temple of moneychangers slower.

The other thing which is notable in the paper, as in most discussions of property, is the idea that high prices for housing is good. “Recovery” in prices, rather than a reduction in families’ spending power on anything else.

Cheaper and better housing should be government policy in any county, but especially in a country as underbuilt add Ireland, and even in Dublin, cheaper housing should be a target. But for that you have to have a govt who has the population’s best interests at heart.

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