Mortgage to rent in as bad a shape as the mortgage market

I think Ciaran Lynch hit the nail on the head when he said the ‘mortgage to rent’ scheme risks ‘becoming a flop‘. The issue here comes down to the creditors treatment of borrowers.

We have already posted a letter from Pepper showing how they are willing to do write-downs for customers. This is there for anybody to see, it isn’t here-say or rumour. In that case the loans of GE Money (a sub-prime lender) were sold to another company at a big loss.

The buyer of the loan buys it for say, 36c on the Euro meaning a loan for €100,000 is purchased for €36,000. What happens next is that they write to the borrower and say ‘hey borrower, if you pay me €50,000 and make all of your payments then we’ll call it quits’.  Meaning the borrower gets a €50,000 debt write off for either paying their loan or selling up.

This is a strong incentive to do the right thing, and it is a glorious example of capitalism in practice, one company is destroyed, their assets sell at a loss, the new buyer then goes and makes €14,000 profit on the €36,000 purchase price (although not in all cases obviously).

This all becomes unhinged when you have crony-capitalism, we have a first rate example of this because we bailed out our banks meaning they didn’t have to make these painful decisions and the investors that voluntarily lined up to face the firing squad never had to do so… and thus we have banks where there is little incentive to deal with the problems they have outside of making it appear to be that way.

This is a tall charge, however, it has taken nearly four years to get lenders to the point their collections teams are at now, and the issue is that in doing so they have become operationally defunct on the credit side of things, while they are trying to lend, they don’t have the money or capacity to do so.

With PCAR2 coming up in Q1 (or early Q2) of 2013 who wants to be involved in a channel of business that swamps up 30% reserves on every advance? Answer: nobody here. We need new banks.

The mortgage to rent scheme is a good example of how something can be a good idea that doesn’t work, sadly in the Irish mortgage market this seems to be the norm, we have bad ideas (split mortgages that charge interest) that will probably go ahead, good ideas (mortgage to rent that don’t occur) and then we have the best answer of all which is write-downs (which we can’t or won’t do).

What a mess. Rant over.

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