We had a busy month in the financial commentary world. A list of our press mentions is below
23rd May 2010: Sunday Tribune: Safe for a while against rate hikes
23rd May 2010: Sunday Times: A bad time to invest? Q & A with Jill Kerby
23rd May 2010: Sunday Tribune: Mortgage rate increases
16th May 2010: Sunday Times: Keep hold of your home
16th May 2010: Sunday Tribune: Mortgage group mull over Negative Equity Loans
16th May 2010: Sunday Tribune: Recession Rates
14th May 2010: Newstalk 106: Ivan Yates talks to Karl Deeter about Property Prices
15th May 2010: Independent: Property prices must fall to attract investors
13th May 2010: RTE Drivetime: Iain Nash and Karl Deeter talk to Mary Wilson about Negative Equity Loans
11th May 2010: Today FM, Matt Cooper on negative equity, featuring Alison O’Riordan and Karl Deeter
In response to ideas on solving negative equity issues.
The fact that people are in negative equity is not a big issue. Mortgages are still the same and at the end of the term of the mortgage you will own the house whatever its value. It will go up and down between now and you eventually owning the house.
You will still pay the same amount of money including interest over the next 30+ or whatever number of years even if the property is worth €100,000 more or less than you paid for it when you bought it.
The problem arises when you cannot afford to pay for your mortgage or your credit cards or whatever other debts that you have. In the past while property values were rising people simply remortgaged to clear debt and pay for a lifestyle, often they were paid to do so and switched to low cost trackers. The problems started when borrowers racked up additional debt, while property values and income levels income levels were falling. Instead of 35% – 45% of net take home pay being required to service the debts it is now closer to 75 – 80% for some, for many others it is worse than that, in that their regular debt payments are greater than their income. In addition the debt to property value is greater than 100% and there is no appetite for lenders to refinance personal debt into a property that is worth less than the sum of debts.
The issue for borrowers is that they cannot meet the repayments on their short term debts and are falling into arrears. This brings its own set of problems and the potential outcome for secured borrowers is repossession of goods, including property. For unsecured borrowing there are potentially judgements, instalment orders and possibly prison.
I do not advocate the implementation of a debt forgiveness scheme but perhaps the following could a ways of helping people through their current issues. There is no silver bullet as no individual situation is the same as any other, it may be similar but like an influenza bug there are many different strains and they affect people in different ways. Therefore it is impossible to prescribe one form of treatment that will clear up the woes of everybody.
The interested parties in this are numerous and they include, the borrower (debtor), lender (creditor), society in general, the judicial system, the government.
Giving a carte blanche clean slate to anybody will rightly infuriate others who kept their nose clean but we do need to be forgiving as people make mistakes. Others milk the system for all it is worth and it can be hard to identify those from people who are genuinely in need of help.
For a homeowner who is in negative equity, arrears and/or down on income and/or loaded with personal debt, the likelihood is that they are paying something against their unsecured debt because they do not have the full amount of the mortgage. Rather than pay half a mortgage payment they pay the smaller debt to get rid of it and hopefully keep the phone calls to a minimum for a few more weeks. They don’t pay the mortgage because they think or the lender has told them that it’s all or nothing.
So potentially a solution – renegotiate all debt into a single plan on an interest rate that is manageable using the asset as security. This would result in the high interest charging debts being cleared, possibly at a discount. Even if the payment was set at interest only for a period it would give the person some time to try and get themselves back up and running.
The issues with this solution are:
Asset is less than debt – In addition, the security is lower than if the institution was only dealing with the mortgage and not any additional debt consolidated. That is a risk but asset values rise and fall and if there are capital payments to be made then this ratio of debt to asset will fall. It is only an issue if you are trying to realise the asset. In addition include a MIG or Indemnity bond on each one therefore insuring against default.
If you are trying to realise the asset, i.e. if repossession is obtained, then the current remedies remain in place.
Why would any lender want to take on criticised loans when the potential for default is greater? Most people want to pay but are making payments to he who shouts loudest and not what is most important.
Potential for default greater if the person has defaulted before. If you have 100 people who are in a difficult situation and are given a reprieve it is unlikely that all 100 will get into the same difficulty again. Looking at specialist lenders who would have been seen as last chance for a lot of people, they don’t have 100% default, it is at worst 10%. So if one in ten of the potential repossessions and judgements happen that would mean that 90% of those that enter this process are keeping to the rules.
Potential for serial borrowing recurring. That is where credit reporting needs to be so tight and include all legitimate means of borrowing money. Anybody who enters this process should submit to a financial review bi-monthly with their ability to obtain credit locked until their debt to income and debt to asset ratio fall below a certain figure pre-agreed.
Possibility of subsequent generations having to pay for this. The alternative is worse.
Potentially the interest rate is too low to cover costs of managing this. That would be up to the institution, whatever it is called, to ensure that it does not become a drain on the state and ultimately taxpayer.
Interest rate required to cover costs may be too high. If a person does not have the ability to repay everything then accrued interest can be capitalised, this is increasing the debt but at least there is an income on it.
Unsecured debts being partially written off. This is currently happening; lenders are making a decision based on the fact that it costs them to chase defaulters when they could be looking at other means of earning income.
Ultimately it is the same as before in that banks are refinancing personal debt into mortgages, isn’t that what has us in this mess? It is, but if access to additional credit is completely shut off and we can see that peoples attitudes have changed then why would it not work?
The benefits of this:
Lenders do not have bad debts on their books
As lenders have reduced bad debts their rating improves
As their rating improves they pay less for their borrowing
As lenders pay less for their borrowing then so do we.
Lenders do not have to crystallise losses meaning that we do not pay.
Lenders do not become large scale property owners, which they would do, were mass repossessions or Jingle mail to occur.
Lenders do not spend a fortune writing, calling and calling to customers who can not pay
Large scale repossessions are avoided therefore ensuring that the glut of properties on the market is not added to.
Borrowers can see a way out of their current predicament.
If the lender retains the individual as a client and they then have an income, albeit a reduced one.
The courts are not filled with debt cases.
This biggest obstacle to this is finding a bank that will take the risk, the lender with the least exposure i.e. the bank with the mortgage, could take it. Another possibility is setting up a NAMA type vehicle to take up the running of these accounts or alternatively using an institution already in situ that should be focused solely on lending and not other banking services.
Other solutions are:
1. Repossession and lenders use indemnity bonds that they took out when lending to people. Insurance companies will bear the brunt and ultimately pass the cost on in the form of higher premiums to the end consumer and the original borrower in the form of a judgement. Ultimately we all pay. Why has nobody mentioned the MIG in any discussion relating to arrears and repossessions?
2. Repossession and lenders obtain judgements for the balance; likelihood is that if you can’t pay when you are living in the home it will be harder when you are homeless. The lender is less likely to get any money than if you are in the house.
3. Repossession and lenders sell a property at a price lower than current market value, further depressing property prices and adding more property into an oversupplied market.
4. Repossession and the state will have to house the former homeowner. Higher costs to the state.
5. Short sale and borrower takes a term loan with the lender for the balance. Personal debts remain and the borrowing becomes unsecured with the term loan now forming part of the unsecured debts owed by the borrower.
6. Part of the debt is transferred to a non interest bearing holding account with a manageable amount being paid by the borrower. Other personal debt will remain and the banks now have non performing loans on their account, albeit for a much lower amount than they currently have.
7. Transfer of ownership to the bank and lease back of the property by the homeowner, lenders become property owners with the interest on the debt being serviced by rent and the balance of the shortfall being paid off by the tenant.
8. Transfer of ownership to the bank, lease back and an option to purchase at a given date in the future.
you have earned the ‘Golden Response’ award! Never has our blog seen a response as long or detailed. Fancy writing a post or two? 🙂
I mean that btw.