• It has come to our attention that some users may have been "banned" when they tried to change their passwords after the site was hacked due to a glitch in the old vBulletin software. This would have occurred around the end of February and does not apply after the site was converted to Xenforo. If you believe you were affected by this, please contact a staff member or use the Contact us link at the bottom of any forum page.

Negative equity, a workable, acceptable solution?


GDPR

1
Joined
Jul 5, 2008
Messages
224,093
Using figures produced by David McWilliams on the total mortgage market in Ireland and in particular on the problem of people in negative equity, I have come up with the following costs for a pretty well instant solution.

David McWilliams » The land of the financially blind

Of the 112 billion in total mortgages and based on Bank of Irelands figures, approximately 60 billion value of those mortgages are in negative equity and on average to the tune of 140% in loan to value.

The basic idea would be that the banks write the mortgage down by 50% and take a 50% interest in the property. The figures involved would be 30 billion written off with the banks getting 22 billion worth of property in exchange.

Total book cost to the banks would be 8 billion of value written off their books, they have the cash to be able to do this without any further input from the state, in addition they’d have to carry 22 billion in property assets at today’s value on their balance sheet.

The benefit to the mortgage holder would be mortgage costs immediately cut in half and a lot less stress in their lives. The costs obviously the loss of half their property, with total saving of 2.2 billion pa in mortgage repayments

The benefits to the economy would be;

Releasing, at a guess, 1.5 billion into the economy allowing for the fact that the total of 2.2 billion in mortgage savings was unaffordable in the first place.

This sort of extra spend would add 1% to our growth rate and generate 8 to 10,000 jobs in the economy, giving a saving/contribution of maybe 500 million to the national budget.

Worth doing?
I would certainly think so, but why isn’t something like this happening, where are the problems or objections?

On the other hand maybe I made a complete balls of the figures and someone will be along to tell me so.
 
Joined
Jun 9, 2007
Messages
19,084
The problem might be that the banks are so holed under the water-line (witness, for example AIB's desperate attempts to charge for customers even breathing in their presence, refusing to pass on interest rate cuts, etc.) that they are not going to volunteer to write off such a significant proportion of debts.

There will also, of course, be the objection of moral hazard by those who did not take on 110% mortgages with the wedding thrown in - why should they pay to subsidize the gambling failures of others? Not that I am arguing that myself, but I see merit in it.
 

GDPR

1
Joined
Jul 5, 2008
Messages
224,093
The problem might be that the banks are so holed under the water-line (witness, for example AIB's desperate attempts to charge for customers even breathing in their presence, refusing to pass on interest rate cuts, etc.) that they are not going to volunteer to write off such a significant proportion of debts.

There will also, of course, be the objection of moral hazard by those who did not take on 110% mortgages with the wedding thrown in - why should they pay to subsidize the gambling failures of others? Not that I am arguing that myself, but I see merit in it.
The general economy, on which we are all dependent, needs it, moral hazard or no and losing half your property along with whatever you've already paid won't be much fun either.

As I understand it the banks can afford it without need for more cash input.
 

Andycap

Well-known member
Joined
Feb 22, 2012
Messages
1,277
How do you pick what mortgages to write down?

All these stats are great on a portfolio basis but actually cutting deals requires subjective decisions on individual loans. Not as easy as you make out.
 

GDPR

1
Joined
Jul 5, 2008
Messages
224,093
How do you pick what mortgages to write down?

All these stats are great on a portfolio basis but actually cutting deals requires subjective decisions on individual loans. Not as easy as you make out.
Any mortgage in negative equity and that should not be difficult to establish nor the value of the property in today's market. I don't think there would be any great difficulty, if the political will was there to force the banks to act.
 

Peppermint

Well-known member
Joined
Oct 1, 2010
Messages
7,472
It is an idea worth looking at, but I think negative equity would stop most banks from entering such an arrangement.
Why would you take on half a property worth €100,000 say when you have someone who owes you €250,000 on the same property? Just keep shaking the 'owner' for the €250,000 seems to be the banks current approach.

This would have to be forced on banks, they wouldn't volunteer for it. I don't see any banks being forced to do anything, any time soon....
 

Andycap

Well-known member
Joined
Feb 22, 2012
Messages
1,277
Any mortgage in negative equity and that should not be difficult to establish nor the value of the property in today's market. I don't think there would be any great difficulty, if the political will was there to force the banks to act.
Negative equity does not mean inability to pay.

Why should those people be handed a state subsidy from everyone else?

Furthermore, how do u value every property? There is no market.

Sadly, the only equitable solution is to bankrupt everyone who fails into arrears and can't pay.
 

GDPR

1
Joined
Jul 5, 2008
Messages
224,093
Negative equity does not mean inability to pay.
No it doesn't and obviously no property owner/mortgage holder would be forced into any arrangement.

Why should those people be handed a state subsidy from everyone else?
It's a problem for the economy and if we're all to benefit from an improving economic situation, the economy needs some solution like this.

Furthermore, how do u value every property? There is no market.
We know pretty well exactly the decrease in property values from year to year and from area to area, there really is no problem with valuations, again if the will was there a formula could be agreed.
 

Andycap

Well-known member
Joined
Feb 22, 2012
Messages
1,277
I disagree. The fact there is no market means property prices are inaccurate.

As for swapping debt for equity in an illiquid house on banks balance sheets, its no practical. The bank has tk fund its assets with liabilities. Liabilities cost money. The correspondinv asset wud not be generating income so how do the fund the cost of carry in the long term?

How do u decide which 50% of the house belongs to the bank & which 50% belongs to the mortgagee?
 

GDPR

1
Joined
Jul 5, 2008
Messages
224,093
I disagree. The fact there is no market means property prices are inaccurate.

As for swapping debt for equity in an illiquid house on banks balance sheets, its no practical. The bank has tk fund its assets with liabilities. Liabilities cost money. The correspondinv asset wud not be generating income so how do the fund the cost of carry in the long term?

How do u decide which 50% of the house belongs to the bank & which 50% belongs to the mortgagee?
I take your points, but I would say the asset has long term growth potential and as for funding, as I understand it they are stuffed with funds at the moment, but they're being allowed to just sit on them. Time they were told to get off the pot.
 
Last edited:

Dan_Murphy

Well-known member
Joined
Feb 22, 2010
Messages
3,811
What would the benefit of this be compared to just making all mortgages non-recourse?
 

GDPR

1
Joined
Jul 5, 2008
Messages
224,093
What would the benefit of this be compared to just making all mortgages non-recourse?
It would be more controlled, not available to everyone, just those in negative equity so no property dumping and mortgage holders involved would be paying on average, at least 70% of current value for 50% of the property, which helps with the moral hazard argument.
 

GDPR

1
Joined
Jul 5, 2008
Messages
224,093
It is an idea worth looking at, but I think negative equity would stop most banks from entering such an arrangement.
Why would you take on half a property worth €100,000 say when you have someone who owes you €250,000 on the same property? Just keep shaking the 'owner' for the €250,000 seems to be the banks current approach.

This would have to be forced on banks, they wouldn't volunteer for it. I don't see any banks being forced to do anything, any time soon....
Absolutely, in the interests of the country there is no doubt they'll have to be forced into it, but that's what Governments are for.
 

Con Gallagher

Well-known member
Joined
May 25, 2010
Messages
2,413
Surely distressed mortgages are a greater priority than those in negative equity? Negative equity is only a problem if someone wants to move or refinance. Why should those who bought 20 years ago subsidize those who bought in the last ten years? And what would banks do with legal ownership of property when they already have the equitable interest and a contract that the mortgage will be repaid in full plus 30 years of interest? I don't see the benefit to the parties, even though it may have a positive effect on the economy.
 

hmmm

Well-known member
Joined
Oct 4, 2006
Messages
2,834
Releasing, at a guess, 1.5 billion into the economy allowing for the fact that the total of 2.2 billion in mortgage savings was unaffordable in the first place.

This sort of extra spend would add 1% to our growth rate and generate 8 to 10,000 jobs in the economy, giving a saving/contribution of maybe 500 million to the national budget.
Will you people ever get it into your heads that there is no way to create money out of thin air. Any extra spending power for those in negative equity has to be paid by someone else.

If 1.5 billion less is paid by those who benefit, the taxpayer has to pick it up instead. It is not "free" for the banks to carry 30 billion of negative equity on their balance sheets, those balance sheets are being financed by the taxpayer who is borrowing those billions and paying the interest cost every year. One less euro being paid by a mortgage holder is one more euro that the taxpayer has to pay.

And no, I'm not interested in paying your mortgage but thanks for the kind offer.
 

GDPR

1
Joined
Jul 5, 2008
Messages
224,093
Surely distressed mortgages are a greater priority than those in negative equity? Negative equity is only a problem if someone wants to move or refinance. Why should those who bought 20 years ago subsidize those who bought in the last ten years? And what would banks do with legal ownership of property when they already have the equitable interest and a contract that the mortgage will be repaid in full plus 30 years of interest? I don't see the benefit to the parties, even though it may have a positive effect on the economy.
The benefit to those in Negative equity and who are struggling to pay, not always the same group I agree, would have their mortgage payments cut in half, good for them and good for the economy, in terms of releasing spend. It could be done for those in negative equity simply because they are an easily identifiable group and therefore it could be offered quickly and easily.

As for the benefit for the banks, in the longer term there would be some benefit from facing up to their problems, but in the here and now, who cares, they owe the nation and its economy big time, so shut up and do what you're told would suffice there I would think.
 

hmmm

Well-known member
Joined
Oct 4, 2006
Messages
2,834
The benefit to those in Negative equity and who are struggling to pay, not always the same group I agree, would have their mortgage payments cut in half, good for them and good for the economy, in terms of releasing spend. It could be done for those in negative equity simply because they are an easily identifiable group and therefore it could be offered quickly and easily.
Why do they get bailed out and not, say, anyone who has lost money in a pension? How about those who bought shares which have collapsed in value? How about people who have been renting for the past 10 years, do we give them a rebate? Or how about giving your 1.5 billion a year to those who have recently lost their job?

What's so special about your negative equity group that they deserve a taxpayer funded handout?

I've already shown you that your "releasing spend" comment is completely wrong.
 

GDPR

1
Joined
Jul 5, 2008
Messages
224,093
Will you people ever get it into your heads that there is no way to create money out of thin air. Any extra spending power for those in negative equity has to be paid by someone else.

If 1.5 billion less is paid by those who benefit, the taxpayer has to pick it up instead. It is not "free" for the banks to carry 30 billion of negative equity on their balance sheets, those balance sheets are being financed by the taxpayer who is borrowing those billions and paying the interest cost every year. One less euro being paid by a mortgage holder is one more euro that the taxpayer has to pay.

And no, I'm not interested in paying your mortgage but thanks for the kind offer.
A misreading of the situation I believe.

The cash is already there, we gave it to them, they're just sitting on it.

Whether you are interested or not shouldn't really matter, it's the economy, stupid, I think is the way it has been said before.
 

hmmm

Well-known member
Joined
Oct 4, 2006
Messages
2,834
A misreading of the situation I believe.

The cash is already there, we gave it to them, they're just sitting on it.

Whether you are interested or not shouldn't really matter, it's the economy, stupid, I think is the way it has been said before.
We didn't give it to them to shower goodies on one small part of the population. We gave it to them to prop up their balance sheets and to use it to address the worst elements of the debt crisis.

We didn't give it to them so that the residents of Dublin 4 could get parts of their massive negative equity subsidised by the taxpayer.
 

GDPR

1
Joined
Jul 5, 2008
Messages
224,093
Why do they get bailed out and not, say, anyone who has lost money in a pension? How about those who bought shares which have collapsed in value? How about people who have been renting for the past 10 years, do we give them a rebate? Or how about giving your 1.5 billion a year to those who have recently lost their job?

What's so special about your negative equity group that they deserve a taxpayer funded handout?
They are an ongoing drain on the banks as it is and as it happens, given their age group, they are also the group most likely to spend.
Quite apart from whatever they've already paid out on their property, having to pay 70% value for 50% of a property, isn't exactly getting off the hook and you could put in something that would force them to take up the remaining 50% by way of new mortgage when the first one runs out or sell the property, at their choice when the time came, long after the economy and therefore the property market have stabilised.

All that is needed here is a little imagination and a will to force the banks into action.
 
Top