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.
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.
Latest mortgage arrears data offers some hope - but only a glimmer - The Irish Times - Fri, Aug 24, 2012
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.