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Thread: Negative equity, a workable, acceptable solution?

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    GDPR Deleted
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    Default Negative equity, a workable, acceptable solution?

    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.

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    Politics.ie Royalty toxic avenger's Avatar
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    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.

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    Quote Originally Posted by toxic avenger View Post
    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.

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    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.

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    Quote Originally Posted by Andycap View Post
    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.

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    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....

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    Quote Originally Posted by tonic View Post
    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.

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    Quote Originally Posted by Andycap View Post
    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.

    Quote Originally Posted by Andycap View Post
    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.

    Quote Originally Posted by Andycap View Post
    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.

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    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?

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    Quote Originally Posted by Andycap View Post
    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 by GDPR; 11th November 2012 at 04:48 AM.

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