In researching this blog I spoke to representatives from The Association of Mortgage Intermediaries in the UK, the Mortgage Bankers Association of America, and Loan Value Group, they all had similar sentiments on rescue schemes to date.
Mortgage Rescue Help was another plan in the UK, that was meant to assist about 6000 in the short term, the actual figure as of Q3 2010 was 629 or about 1:10 of the intended target group.
In the USA the ‘Home Affordable Mortgage Programme’ (HAMP) was aimed at helping 5m borrowers, in fact, 5.5m have entered foreclosure, 1.7m repossessions, and only 467,000 have restructured – that is less than half of the 1.3m who have applied for modification because people and lenders are cancelling the arrangement and more than 1 in 10 who do get a modification are going on into outright default.
Moral hazard is oft used, that if you don’t pay your loan I won’t either. However that is not true, I spoke to Frank Pallotta of Loan Value Group in the US, their firm is a specialist finance house that creates programmes used by large banks to prevent people from defaulting. And he said that people who are in negative equity are the group that will be at risk of moral hazard, so that creates a far smaller pool of loans.
That makes sense, why would a person with equity in their home willingly sacrifice it for a write-down? One which to obtain would mean destroying that which they worked hard for and sacrificing their credit history in the process? It doesn’t add up so simply.
Half of the properties in Ireland have no mortgage on them, and of the 790,000 mortgages about 250,000 of them are in negative equity, but that negative equity is of varying degrees and a person who is €5,000 in negative equity has a far different view of their situation than a person in €150,000+, on top of that, you have to accept that like any scheme, there would be a implementation date and an underwriting process.
So if you said on a Monday, we are taking all arrears cases today and we will look at the loans individually and decide what level we are writing them down to (bearing in mind from an operational standpoint that banks already have the SFS [standard financial statement which is standardized document across all lenders under the interim report from the Expert Group] which would make the task relatively simple given the uniformity of the information available), then you do a level of underwriting which is the inverse to the that which was done at the time of the loan sanction. If a person can get their loan to a point where they feel they have a shot at getting on the right side of it again they’ll do it.
Moral hazard is also a false pretense given that we set out in law an inability for banks to start legal proceedings in less than a year, that is actually moral hazard central, live for a year mortgage free if you want! How many people are intentionally going into arrears to obtain that €10,000 after tax bonus?
The Deferred Interest Scheme has a strong likelihood of becoming another souvenir in the annals of failed policy. To say otherwise is effectively taking a view that the best minds in the USA and UK are not up to scratch compared to our own policy makers – who borrowed elements of the idea from the UK and USA. Charlie Weston recently reported that the savings to the average entrant would be about €750 of a savings over the course of 5 years.
Already the scheme is failing and it hasn’t even been formalised, because KBC (12.5% market share), NIB, Ulsterbank, Start, Nua, Leeds Building Society, Halifax, Bank of Scotland Ireland, Fresh, GE Money, Springboard and Stepstone have not signed up.
Who has: EBS, Bank of Ireland, AIB and PTsb, in other words – the covered institutions, the banks that will agree to anything and sign up to all state requests in order to maintain their government support. If you want a clear example of moral hazard, look to the incentives in those relationships to get a true understanding of it.