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  1. Colin Murphy

    Loan securitisation was the method that most banks used to raise funds prior to the Sub Prime lending crisis in the US. The problem in a nutshell was that the assets being sold had no guaranteed value and were based on a subjective valuation which had we now know had no real basis in fact.

    Our banks still have a problem in that approximately 10% of their loan book is non-performing and if recent trends are to continue this percentage is likely to increase.

    Our banks are capitalised to take into account the fact that a certain percentage of loans will never be repaid but we don’t know the level that this has been set at.

    If our banks were able to sell their loan book, thus moving it off the balance sheet it would reduce the capital requirements and allow the banks to stop storing cash and use to to start cash flowing through the economy.

    People are also saving what they can and as a consequence the cash flowing through the economy is falling. This will continue until we reach a tipping point and as it stands there is nothing being done to halt this.

    If the mortgages were guaranteed to offer a return then it is likely that they could and would be sold. So a potential solution without the need for debt forgiveness :

    Take an example of two 35 y/o non smokers with a 200k loan with a 35 year term. If the rate on the loan was fixed at 4% for 35 years and the interest was capitalised each year for 35 years, the debt would amount to approximately 800000 by the end of the 35 years. If a life policy was taken out in the clients names for 1.3M for 40 years it would cost approx 270pm and if this premium was charged to the debt at the outset and capitalised at a rate of 4% pa the total debt would amount to 1.3M in thirty five years.

    If this debt could then be sold for 315000, the loan would be cleared from the banks balance sheet and the life premiums would be paid in advance for forty years. The company buying the debt would have the life policy assigned and if the client dies within the 40 year life term they get the proceeds and the property reverts to the clients estate.

    If the client does not die that is a risk that they take, however the mortgage now becomes a saleable commodity as it carries some risk but it is more likely one party to the loan will die before the 75th birthday.

    If that risk is too great, then the mortgage holding banks takes out a whole of life policy and prices the debt accordingly.

    The machinations of this could be worked out by an actuary but the mortgage holder lives in the property without paying anything other than property tax and potentially a benefit in kind for living in the property mortgage or rent free, it frees up their disposable income to spend on goods and services which have VAT charged on them and it allows the bank reduce their capital requirements.

    The government borrows less, the bank borrows less and the property holder spends more. Win, win, win.

    And the words debt forgiveness need never be used.

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