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Mortgage arrears, cost of a possible solution.


GDPR

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Following on from my ground breaking, not to say epoch making, thread, on a possible solution to the negative equity problem, I now offer my solution for those in serious arrears on their mortgage.

http://www.politics.ie/forum/economy/199809-negative-equity-workable-acceptable-solution.html

By my calculations a solution to the NE problem would take up 8 billion of the covered banks spare capital, but a side benefit of this solution would be a reduction in those same banks capital requirements to the tune of 3 billion (by reducing their loan books, on the face of it, by up to 30 billion). As I understand it AIB, BoI and IP are over capitalised respectively by 7%, 4% and 10/12%

Assuming my figures to be correct, they would in effect have only used up 5 billion of that spare capital, which as far as I can find out stands at some 14 or so billion between them (guesswork to some extent), leaving up to 9 billion for further use in helping this economy to move along the road to full recovery. If anyone knows different, please do let me know the how and why as I'm out of my depth here.


http://www.centralbank.ie/publications/Documents/Mortgage Arrears_181111_Web.pdf
Latest mortgage arrears data offers some hope - but only a glimmer - The Irish Times - Fri, Aug 24, 2012

Some figures

17% of all mortgages are in some sort of arrears

30% of those are also in negative equity

68% of all mortgages are with the covered banks, 63% by value, while only 48% of arrears by value are with the covered banks.

There is a total 18 billion of mortgage value in arrears in all banks.
5 billion of this is also in negative NE, therefore already covered by my NE suggestion, leaving 13 billion to deal with. The covered banks portion of this 13 billion (based on the BoI figures) has an average LTV of 80%, if you exclude those on less than 50% loan to value who are very much less likely to be in any trouble at all with their mortgage.

To apply a solution to those in arrears to bring their loans to a 50% LTV and thereby reducing their repayments by an average of 37.5%, would mean the banks investing in another 5 billion of property value at today’s prices.

A “rental” charge of say 1% could be made on the value of the property taken over by the bank, this would add maybe 85 Euro pm for each mortgage holder as against a saving of maybe an average of 600 Euro pm on their mortgage payment. A considerable improvement in their situation, amounting to about 6,000 Euro saving per year on outgoings and thereby releasing some or most of that to the domestic economy, to a total value of maybe 500 million or more per year.

All figures in both posts are based on total mortgages in Ireland while the cost affordability is based on the spare cash in the covered banks only. In fact the covered banks are responsible for only 63% by value of all mortgages in the country and therefore if they only look after their own, so to speak, the costs would be reduced by some 37% for both arrears and negative equity, but then so would the benefits to the economy.

There are many ways something like this could be handled, NAMA for example could get involved as a holding bank for the property while releasing funds back to the banks. A charge could be made, as I already said, to the property owner to service the cost of holding whatever percentage of the property was necessary to bring their LTV to 50%. A sell up or buy back rule could be set for the end on the new mortgage term or any number of tweaks could be built in to keep the moral hazard argument at bay. There are also many holes to be filled in my sketchy plan, please feel free.

Suggestions, comments, hammer blows or your bile, all, as always, most welcome.
 


Con Gallagher

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It's 5 billion and it's the banks, but they will get 5 billion in property assets for that exchange.
I see, so customers on sustainable variable interest mortgages will subsidize the unsustainable. Gotcha!
 

GDPR

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I see, so customers on sustainable variable interest mortgages will subsidize the unsustainable. Gotcha!
No subsidy involved, in fact no cost involved, just an exchange of mortgage debt for equity in the property.

As a dependent on this economy as we all are, you will benefit by the increased spend of those who now have more cash in their pocket. It could be win win.
 

seanmacc

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You raised a very good point about the banks being over capitalized.

It must also be noted in the banks profit and loss accounts and balance sheets they are treating impaired loans as if 100% of them cannot be recovered.

Our banks are cooking the books at the moment in this way because it suits them to do so.
 

EvotingMachine0197

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So, if I understand this correctly, an arreared mortgage would be restructured from whatever the LTV is currently, say 80%, to 50% with a 1% interest surcharge applied to the new repayments based on the 50% LTV.

Then, in return, the bank gets the asset value differential as a result of the restructuring plus the 1% surcharge.

How does the bank get shot of the asset value?
 

GDPR

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So, if I understand this correctly, an arreared mortgage would be restructured from whatever the LTV is currently, say 80%, to 50% with a 1% interest surcharge applied to the new repayments based on the 50% LTV.

Then, in return, the bank gets the asset value differential as a result of the restructuring plus the 1% surcharge.

How does the bank get shot of the asset value?
They could hang on to it as a form of capital and enjoy whatever growth there will be over the years while someone else looks after their asset, sell back to the mortgage holder in time or as I said, someone like NAMA or other holding bank might get involved to release the value back to the bank in cash.
 

EvotingMachine0197

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They could hang on to it as a form of capital and enjoy whatever growth there will be over the years while someone else looks after their asset, sell back to the mortgage holder in time or as I said, someone like NAMA or other holding bank might get involved to release the value back to the bank in cash.
Or indeed, the homeowner could buy it back if personal circumstances improve, I suppose.

But won't the loss in repayment cash revenue tend to drain the bank's capital ratio, or does the acquired asset value count towards that?
 

GDPR

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Or indeed, the homeowner could buy it back if personal circumstances improve, I suppose.

But won't the loss in repayment cash revenue tend to drain the bank's capital ratio, or does the acquired asset value count towards that?
As far as I can see, the asset does count as capital.
 

Con Gallagher

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As far as I can see, the asset does count as capital.
So an apartment with a €300k mortgage, is now worth €150k on the open market. Before your plan the bank at a contract whereby a punter said he'd repay €600k over 40 years, but post your plan, what asset do they have?
 

EvotingMachine0197

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So an apartment with a €300k mortgage, is now worth €150k on the open market. Before your plan the bank at a contract whereby a punter said he'd repay €600k over 40 years, but post your plan, what asset do they have?
The OP specifically excluded NE mortgages as they are dealt with in another thread.
 

EvotingMachine0197

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Fine, but could not a property with positive equity (or equity as it used to be known) not just go interest only for a while?
Well, it's not the same thing.

Going interest only is not a restructuring, it only delays payments within the same mortgage term, say 20 years, so the inevitable repayments start to build up to quite large numbers.

Also, IO does nothing to help the bank, they get nothing in return for interim revenue loss and the still high risk. That would certainly be a problem for their capital ratios.
 

GDPR

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Am I right in thinking u suggested getting the banks to half their loan for half the property?
No.

These people are in arrears only, not in negative equity and the bank would only reduce the loan by the amount of the asset they are taking over.

Example:

Property value 200,000
Outstanding loan 160,000

Load reduced by 60,000 to 100,000 or 50% LTV.
Bank takes 30% interest in the property, this interest valued at 60,000.

Mortgage repayments reduced by 37.5% or about 350 Euro pm, 4200 Euro pa.
 

Taxi Driver

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The banks from the stress tests have enough capital to cover €5.7 billion of losses on their Irish owner-occupied mortgages. You have already given away €8 billion under a negative equity debt forgiveness scheme.

Now you are proposing some form of debt-for-equity scheme for mortgage arrears for those in positive equity. This assumes that people want to give up equity in their homes. Someone who has positive equity may not want to do so. International evidence of debt-for-equity schemes suggests that the uptake is extraordinarily low.

There are easier ways to reduce the monthly payment.
 

GDPR

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The banks from the stress tests have enough capital to cover €5.7 billion of losses on their Irish owner-occupied mortgages. You have already given away €8 billion under a negative equity debt forgiveness scheme.
The covered banks, AIB, BoI and IP are over capitalised by 7%, 4% and 12% as I understand it and by my calculations that would equate to about 14 billion. The NE plan would only use up 5 billion of that due to the banks reducing their loan books by 30 billion, leaving them still over capitalised by 9 billion. If my figures are wrong, please show where.

Now you are proposing some form of debt-for-equity scheme for mortgage arrears for those in positive equity. This assumes that people want to give up equity in their homes. Someone who has positive equity may not want to do so. International evidence of debt-for-equity schemes suggests that the uptake is extraordinarily low.
Obviously no one is going to be forced to do this, but if you're behind on your payments and a reasonable solution is offered and rejected, it may be difficult to explain that in a repossession case.

There are easier ways to reduce the monthly payment.
There may well be, but I can only post on my notions, others, I'm sure, can speak for themselves.
 

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