(there, I thought I’d just put that there right at the start in the hopes that others can offer more sane and reasonable thoughts)
In simple terms Eamon Quinn is 100% correct.
The time of extending and pretending is long since past.
Bubble salaries are not coming back. Assumptions made by banks about couples earning bubble salaries plus a growth level for the next 30 years were completely daft. Mortgage contracts whose underlying assumptions were based on these scenarios should be thorn up and renegotiated in light of a more realistic current and expected future outlook.
Mr Honahan has already alluded to this ‘contract fundamentalism’ as a severe problem in preventing banks from realising that they were the authors of their own misfortune, whilst they are still clinging to the vein hope that their mortgage contracts should remain in tact. Time has suggested that this stance is wrong.
Some would suggest that it takes two to tango and borrowers have a part to play. Undoubtedly this is true however the facts are that banks and credit markets control the seas of the property markets and borrowers swim where they are allowed.
Borrowers play very little role in determining the extent of credit allocation to the various property markets, banks make that call and borrowers can play their part but only if the lending bank allows it so. Banks as a result hold the keys to the property market. Always have and always will.
Given that every banking player active in the property market went bust (had the international players being stand alone operations they too would have had a similar fate) then its fair to say that banks have played their part in contributing to the problems left behind as a result.
The most significant problem, as I have suggested here for the past 7 years was pricing. All roads lead to pricing and nothing other than pricing. The current Banking Inquiry will no doubt rarely visit the underlying problem but rest assured it is and was the primary cause of the ongoing mortgage problems. Housing was mispriced for the period between 2001- 2008. Plain and simple.
Its mispricing can be seen in the extent that long run rental yields moved away from norms. Between 2001 to 2007 the cash cost of renting moved broadly speaking in line with CPI rates +/- 1%. The Daft.ie indices point to a very strange period where housing supply was outstripping demand, in some years by a multiple of 300% or more, and yet underlying house prices were rising instead of falling.Something weird was going on.
We now know that the driver of the market and price dislocation was excessive credit released to the system by the banks which had the effect of driving up the underlying prices and driving down yields to rates significantly below 10 year Bund levels for instance at the time (late 2006 for instance).
Quite clearly in a market where banks dictate the prices being paid and where rental yields for a hugely risky class, went below the risk free rate, suggests banks were badly offside as they continued to pour more and more credit into a market that was screaming stop a long time before 2008. The problem is of course that banks don’t actually know how to price the property market properly and bonuses and pay tend to get in the way of logic and discipline.
All things considered the pricing error sits on the banks balance sheets. Its not going away until a decision is made to rectify it and that decision means taking losses and lots of them. The losses have been paid for by the people and the Govt decision to recapitalise in 2011, not allowing the decision to be madein relation to the 100k mortgages suggests either cowardice, stupidity, political influence or a combination of all three.
Fro the article:
“If they [bank reserves] are as healthy as they say, the reluctance of the banks to write down home loan debt remains inexplicable.”
Of course they are not as healthy as they say they are.
But there is another reason for banks acting completely in their own interests on this issue.
The banks know that if they play their cards right with evictions, they will be able to shake down the government to buy the houses on a one by one basis, for a far better price than the banks would get if the government ordered a compulsory sale (to government) of all mortgages in excess of 720 days; in which case about 30% of loan value would probably be reasonable.
But the banks have not reserved 70% or anything like it. Why?
The want to ‘declare profits’, be seen as successful and get back to individual bonus payments for themselves.
Its that simple.
The banks are still playing the government, the DOF and the central bank for fools. Nothing new there!
Maybe it is a sign of maturity or fatigue, but there does not seem to be much debate any more on the proposition that those who unwisely bought property at the peak of the cycle should be subsidised by those who did not.
@ Tull: Its neither maturity (in very short supply) nor fatigue (common), but a realization by those of us who understand what caused our current economic downturn that the probability of meaningful financial re-structurings to prevent a future financial mess is, like current interest rates, stuck at the zero bound.
By way of contrast, the probability of a meaningful resolution of our residential mortgage problems is actually negative – can such an entity exist?. This virtual, negative position will continue for some time due to the widespread and firmly held (eg. concete embedded) belief that all debts can and shall be repaid: regardless of circumstances – and or else! History tells us otherwise. But who reads history? JtO seems to know!
@Tull
Nothing at all to do with the banks of course. Good man.
@Tull
re: No subsidising of the unwise buyers of property:
Gosh, I thought the holders of all those dud loans had been or are still being subsidised!
Time for a NAMA for residential property.
JR,
actually, I agree with that idea, take the strategic defaulter, repossess the houses, put them on the open market for sale. For non strategics, look at schemes such as mortgage to rent etc.
If a person has no chance of ever paying a market rent on a house due to changed circumstances, time to move on.
“there does not seem to be much debate any more on the proposition that those who unwisely bought property at the peak of the cycle should be subsidised by those who did not”.
Neither should anyone who bought EZ bonds unwisely be subsidised by those who did not when the writeoffs happen.
Seafoid,
I was missing your daily dose of doom.
On the one hand the banks received capital injections which should have been used more actively to write-off bad debts.
On the other hand dealing with bad mortgages normally involves re-possession of family-owned property, an option that is anathema in Ireland. A whole bunch of forebearance and re-structuring schemes have been proposed that don’t involve repossession. These have had only partial success.
On yet another hand, there is no doubt that many of those who purchased homes between approx 2004-2007 were “ripped off” – encouraged and cajoled into buying over-priced properties. Broad sections of Irish society were involved in this rip-off and/or benefited from it – the government, the property sector, the construction sector, the media. Of course there were also those who went along for the ride and lost everything. Here’s two anecdotes:
Case A. A young couple, who have put off purchasing a home for years because they believe that properties are over-priced. However now they plan to have children, and prices are still going up so maybe their fears of a bubble are misplaced? They purchased a house in Dublin in 2007. Neither of them lost their jobs so they are still servicing thier mortgage. But they are furious.
Case B. Another young couple who made a fortune in the late 90s by buying an old house and doing it up for resale. Great way to make money and beats working for a salary. So they did it again, and scored again. After that, a couple of apartments bought off the plans in new developments. Another success, let’s keep going. When 2008 came along they were the proud owners of 7 Dublin apartments, mostly puchased off the plans at ridiculous prices. AFAIK many of these apartments still haven’t been built.
In the interest of “justice” some of the capital sent to the banks should arguably be used to compensate the couple in case A who were arguably victimized by Irish society.
“”In the euro area we are already in the danger zone – at least with regard to public debt standing at 91 percent and corporate debt at 105 percent,” Jens Weidmann said in the text of a speech to be delivered at a conference in Frankfurt.” ”
The speech is clearly aimed at more than Greece, possibly Italy being target number one.
He goes on to say about Greece: (from Kathimirini)
“The Bundesbank chief also expressed skepticism about the public statements of Greek government officials. “Generally speaking, I get the impression that the statements given by various members of the government can be very different, depending on the day and the audience,” he said. “Ultimately, that doesn’t inspire much confidence.””
That must be exactly what Draghi thinks about the ECB council members.
Tull
I miss normal growth rates. NZ was the OECD standout last year with 3.2%. Never has so much been printed for so little. The US struggled to get 2.5%.
Weidmann was happy to stand back and have other EZ economies load up on debt to generate growth pre 08. As long as German exports were humming he didn’t act. He was happy for the ECB to transfer private debts to sovereign balance sheets post 08. He knows economic growth in a financialised system is driven by debt. He is a hurler on the ditch when it comes to solutions.
Why are the banks not restructuring mortgages and continuing to address arrears on a ‘case by case basis’, i.e. can kicking per Eamon Quinn?
The answer is that the law allows them to do so. Mortgages are full recourse (unlike many US states where recourse is limited to the property), the banks have a veto over personal insolvency arrangements, the bankruptcy conditions and periods are too severe. The law created a legal frame for debt slavery rather than economic recovery.
The Government sold debtors out under threat from the banks. It is as ugly and as simple as that. The banks are not interested in wider economic recovery. They are only interested in their individual recovery. The Department of Finance is still too busy patting itself on the back to see the economic and social benefits that will flow from insolvency reform. If the Governor of the Central Bank had not stuck it to the Government they would have us straight back into another property bubble at the behest of the banks.
Another structural failing is that the slow process of legislative reform was, at the outset and for a number of years, left in the hands of lawyers to be driven by lawyers at lawyers’ pace and with lawyers’ emphasis on technicalities rather than overarching principles.
It was drafted based on research conducted primarily by lawyers with little economic input. Apart from the authors of the Law Reform Commission’s report on Report on Personal Debt Management and Debt Enforcement acknowledgements name 69 people. Only one was an economist – David Duffy of the ESRI. At the same time we were bemoaning the lack of economic expertise in the Department of Finance our entire reform of the bankruptcy regime was been carried out with very little expert input on the economic consequences of the reforms.
With regard to Moral Hazard, the greatest hazard posed is that the banks will lend recklessly rather than that individuals will borrow recklessly.
Corporations which should have failed or been restructured were preserved along with full pension entitlements for all those employees.
A proportionate balance has to be struck between minimising moral hazard for individuals and avoiding moral hazard for banks. To be frank, I think tales of ‘won’t pay’ strategic defaulters are exaggerated because ultimately personal insolvency arrangements come at a very high price in terms of future access to credit.
16 replies on “Mortgage Debt Restructuring”
Moral hazard! Doom!
(there, I thought I’d just put that there right at the start in the hopes that others can offer more sane and reasonable thoughts)
In simple terms Eamon Quinn is 100% correct.
The time of extending and pretending is long since past.
Bubble salaries are not coming back. Assumptions made by banks about couples earning bubble salaries plus a growth level for the next 30 years were completely daft. Mortgage contracts whose underlying assumptions were based on these scenarios should be thorn up and renegotiated in light of a more realistic current and expected future outlook.
Mr Honahan has already alluded to this ‘contract fundamentalism’ as a severe problem in preventing banks from realising that they were the authors of their own misfortune, whilst they are still clinging to the vein hope that their mortgage contracts should remain in tact. Time has suggested that this stance is wrong.
Some would suggest that it takes two to tango and borrowers have a part to play. Undoubtedly this is true however the facts are that banks and credit markets control the seas of the property markets and borrowers swim where they are allowed.
Borrowers play very little role in determining the extent of credit allocation to the various property markets, banks make that call and borrowers can play their part but only if the lending bank allows it so. Banks as a result hold the keys to the property market. Always have and always will.
Given that every banking player active in the property market went bust (had the international players being stand alone operations they too would have had a similar fate) then its fair to say that banks have played their part in contributing to the problems left behind as a result.
The most significant problem, as I have suggested here for the past 7 years was pricing. All roads lead to pricing and nothing other than pricing. The current Banking Inquiry will no doubt rarely visit the underlying problem but rest assured it is and was the primary cause of the ongoing mortgage problems. Housing was mispriced for the period between 2001- 2008. Plain and simple.
Its mispricing can be seen in the extent that long run rental yields moved away from norms. Between 2001 to 2007 the cash cost of renting moved broadly speaking in line with CPI rates +/- 1%. The Daft.ie indices point to a very strange period where housing supply was outstripping demand, in some years by a multiple of 300% or more, and yet underlying house prices were rising instead of falling.Something weird was going on.
We now know that the driver of the market and price dislocation was excessive credit released to the system by the banks which had the effect of driving up the underlying prices and driving down yields to rates significantly below 10 year Bund levels for instance at the time (late 2006 for instance).
Quite clearly in a market where banks dictate the prices being paid and where rental yields for a hugely risky class, went below the risk free rate, suggests banks were badly offside as they continued to pour more and more credit into a market that was screaming stop a long time before 2008. The problem is of course that banks don’t actually know how to price the property market properly and bonuses and pay tend to get in the way of logic and discipline.
All things considered the pricing error sits on the banks balance sheets. Its not going away until a decision is made to rectify it and that decision means taking losses and lots of them. The losses have been paid for by the people and the Govt decision to recapitalise in 2011, not allowing the decision to be madein relation to the 100k mortgages suggests either cowardice, stupidity, political influence or a combination of all three.
Fro the article:
“If they [bank reserves] are as healthy as they say, the reluctance of the banks to write down home loan debt remains inexplicable.”
Of course they are not as healthy as they say they are.
But there is another reason for banks acting completely in their own interests on this issue.
The banks know that if they play their cards right with evictions, they will be able to shake down the government to buy the houses on a one by one basis, for a far better price than the banks would get if the government ordered a compulsory sale (to government) of all mortgages in excess of 720 days; in which case about 30% of loan value would probably be reasonable.
But the banks have not reserved 70% or anything like it. Why?
The want to ‘declare profits’, be seen as successful and get back to individual bonus payments for themselves.
Its that simple.
The banks are still playing the government, the DOF and the central bank for fools. Nothing new there!
Maybe it is a sign of maturity or fatigue, but there does not seem to be much debate any more on the proposition that those who unwisely bought property at the peak of the cycle should be subsidised by those who did not.
@ Tull: Its neither maturity (in very short supply) nor fatigue (common), but a realization by those of us who understand what caused our current economic downturn that the probability of meaningful financial re-structurings to prevent a future financial mess is, like current interest rates, stuck at the zero bound.
By way of contrast, the probability of a meaningful resolution of our residential mortgage problems is actually negative – can such an entity exist?. This virtual, negative position will continue for some time due to the widespread and firmly held (eg. concete embedded) belief that all debts can and shall be repaid: regardless of circumstances – and or else! History tells us otherwise. But who reads history? JtO seems to know!
@Tull
Nothing at all to do with the banks of course. Good man.
@Tull
re: No subsidising of the unwise buyers of property:
Gosh, I thought the holders of all those dud loans had been or are still being subsidised!
Time for a NAMA for residential property.
JR,
actually, I agree with that idea, take the strategic defaulter, repossess the houses, put them on the open market for sale. For non strategics, look at schemes such as mortgage to rent etc.
If a person has no chance of ever paying a market rent on a house due to changed circumstances, time to move on.
“there does not seem to be much debate any more on the proposition that those who unwisely bought property at the peak of the cycle should be subsidised by those who did not”.
Neither should anyone who bought EZ bonds unwisely be subsidised by those who did not when the writeoffs happen.
Seafoid,
I was missing your daily dose of doom.
On the one hand the banks received capital injections which should have been used more actively to write-off bad debts.
On the other hand dealing with bad mortgages normally involves re-possession of family-owned property, an option that is anathema in Ireland. A whole bunch of forebearance and re-structuring schemes have been proposed that don’t involve repossession. These have had only partial success.
On yet another hand, there is no doubt that many of those who purchased homes between approx 2004-2007 were “ripped off” – encouraged and cajoled into buying over-priced properties. Broad sections of Irish society were involved in this rip-off and/or benefited from it – the government, the property sector, the construction sector, the media. Of course there were also those who went along for the ride and lost everything. Here’s two anecdotes:
Case A. A young couple, who have put off purchasing a home for years because they believe that properties are over-priced. However now they plan to have children, and prices are still going up so maybe their fears of a bubble are misplaced? They purchased a house in Dublin in 2007. Neither of them lost their jobs so they are still servicing thier mortgage. But they are furious.
Case B. Another young couple who made a fortune in the late 90s by buying an old house and doing it up for resale. Great way to make money and beats working for a salary. So they did it again, and scored again. After that, a couple of apartments bought off the plans in new developments. Another success, let’s keep going. When 2008 came along they were the proud owners of 7 Dublin apartments, mostly puchased off the plans at ridiculous prices. AFAIK many of these apartments still haven’t been built.
In the interest of “justice” some of the capital sent to the banks should arguably be used to compensate the couple in case A who were arguably victimized by Irish society.
@Tull
Just in time to make your weekend:
http://www.independent.ie/business/world/ecbs-weidmann-says-euro-zone-debt-in-danger-zone-31099141.html
“”In the euro area we are already in the danger zone – at least with regard to public debt standing at 91 percent and corporate debt at 105 percent,” Jens Weidmann said in the text of a speech to be delivered at a conference in Frankfurt.” ”
The speech is clearly aimed at more than Greece, possibly Italy being target number one.
http://ec.europa.eu/eurostat/documents/2995521/6483082/2-22012015-AP-EN.pdf/765eba70-6a88-4771-8af7-48f6665e3c67
He goes on to say about Greece: (from Kathimirini)
“The Bundesbank chief also expressed skepticism about the public statements of Greek government officials. “Generally speaking, I get the impression that the statements given by various members of the government can be very different, depending on the day and the audience,” he said. “Ultimately, that doesn’t inspire much confidence.””
That must be exactly what Draghi thinks about the ECB council members.
Tull
I miss normal growth rates. NZ was the OECD standout last year with 3.2%. Never has so much been printed for so little. The US struggled to get 2.5%.
Weidmann was happy to stand back and have other EZ economies load up on debt to generate growth pre 08. As long as German exports were humming he didn’t act. He was happy for the ECB to transfer private debts to sovereign balance sheets post 08. He knows economic growth in a financialised system is driven by debt. He is a hurler on the ditch when it comes to solutions.
Why are the banks not restructuring mortgages and continuing to address arrears on a ‘case by case basis’, i.e. can kicking per Eamon Quinn?
The answer is that the law allows them to do so. Mortgages are full recourse (unlike many US states where recourse is limited to the property), the banks have a veto over personal insolvency arrangements, the bankruptcy conditions and periods are too severe. The law created a legal frame for debt slavery rather than economic recovery.
The Government sold debtors out under threat from the banks. It is as ugly and as simple as that. The banks are not interested in wider economic recovery. They are only interested in their individual recovery. The Department of Finance is still too busy patting itself on the back to see the economic and social benefits that will flow from insolvency reform. If the Governor of the Central Bank had not stuck it to the Government they would have us straight back into another property bubble at the behest of the banks.
Another structural failing is that the slow process of legislative reform was, at the outset and for a number of years, left in the hands of lawyers to be driven by lawyers at lawyers’ pace and with lawyers’ emphasis on technicalities rather than overarching principles.
It was drafted based on research conducted primarily by lawyers with little economic input. Apart from the authors of the Law Reform Commission’s report on Report on Personal Debt Management and Debt Enforcement acknowledgements name 69 people. Only one was an economist – David Duffy of the ESRI. At the same time we were bemoaning the lack of economic expertise in the Department of Finance our entire reform of the bankruptcy regime was been carried out with very little expert input on the economic consequences of the reforms.
With regard to Moral Hazard, the greatest hazard posed is that the banks will lend recklessly rather than that individuals will borrow recklessly.
Corporations which should have failed or been restructured were preserved along with full pension entitlements for all those employees.
A proportionate balance has to be struck between minimising moral hazard for individuals and avoiding moral hazard for banks. To be frank, I think tales of ‘won’t pay’ strategic defaulters are exaggerated because ultimately personal insolvency arrangements come at a very high price in terms of future access to credit.