Standard Financial Statement or SFS – for people in mortgage arrears

If you go into arrears on your mortgage or you talk to your lender because you believe you are a ‘pre-arrears’ candidate then you will be asked to fill in a ‘Standard Financial Statement‘ or SFS which is part of the Mortgage Arrears Resolution Process (MARP) which started last year.

Engaging with the lender is a key tenet of this and filling in the SFS and liaising with the lender on aspects of it. The information in this is what will be used to negotiate the repayment that you will pay in cases where lifestyle adjustment does not allow you to make the full payment.

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Are investment property owners ‘hard pressed’?

PTsb are going to take away investors tracker mortgages unless they go to capital and interest payments, that story was broken by Charlie Weston in the Independent today. That is a business decision by them, but for the business affected (landlords) it creates a new problem.

How can they do this? Isn’t it part of the new rules that banks can’t take your tracker from you? Yes and no, if you bought a property as an investment you are not covered by the Consumer Credit Act 1995 (you are not acting as a consumer) or the Code of Conduct for Mortgage Arrears. So any renegotiation can result in the loss of a tracker, staying on interest only (if you are with Ptsb – and others will follow suit) will require moving to a variable rate.

We’ll look at a standard example: Take Joe, he is married and earns €45,000 p.a. and his wife Kate makes €30,000 they bought an investment property with their SSIA’s (€30k deposit on a property for €300,000 in 2006). …

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Why a borrower bailout is not likely

The EBS is on the block and there have been countless headlines regarding the idea that debts might get written down by Wilbur Ross if the Cardinal Capital group (who he is backing) are the successful bidder. I have said that I doubt this will happen and will set out why in this post.

EBS carried out a PCAR (prudential capital assessment requirement) test in March 2010, it showed that they required €875 million in funding to come up to scratch. Thus far they received €100m in cash from the state and a further €250m in a promissory note leaving a gap of €525m to fill. The bids being touted are in the region of €550m meaning that whoever buys in is effectively bridging the gap and paying a small premium as well.

Take a look at a balance sheet and you’ll see that no matter what happens, that in the end assets=liabilities. That is an accounting identity, in our example we have a hypothetical bank which has assets and liabilities worth (for example sake) €100 million Euro.

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‘Plan B’ for arrears

There is a strange situation occurring in the Irish property market, arrears are rising rapidly, stock of repossessed homes is on the increase, and yet the number of repossessions is dropping; there is a contradiction in here somewhere.

Per quarter the number of properties being repossessed is dropping, banks are taking back fewer and fewer houses, this would normally be a sign of prosperity, people with jobs and a stable property market would mean that there would be some equity in the property as people pay down debt and are able to afford their payments, but that isn’t the case, quite the opposite, Irish households are heavily indebted and arrears are rapidly rising.

The largest number of properties being taken back is actually that of voluntary surrender (and abandonment), so there is no ‘repossession’ monster lurking in the Irish market because we have decided that we don’t want it to exist, this will come at a cost as we incrementally strip banks of their ability to enforce mortgage contracts.

The stock of property …

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Mortgage Arrears for the first half of 2010

We expected a 10% increase in mortgage arrears for the first half of this year, moving the total from 32,321 households to 35,531, however it increased 10.73% and the final figure was  36,438 [statistics for the last four quarters are below].

There is an ongoing inability for banks to deal effectively with people in arrears, both in terms of having the operational capacity or liquidity to offer debt relief in some form, and on the other side we have the Financial Regulator who is incrementally stripping away their power to enforce the mortgage via repossessions.

The arrears of the second half 2010 will go up again, there is no sign of either a slowing growth in arrears, or of a slow down in the rate of growth.

The only growth area in our economy at present seems to be in the deterioration of debt quality . . . but for the second half of the year it will not only be an ‘unemployment’ lead increase, rather it will be with the additional impact of lenders creating the problem via mortgage …

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Hand back the keys and walk away.

What we are not saying is that people should try this, this post is merely pointing out that this kind of thing could happen and that a failure of enacting sensible policy soon enough could encourage people to look for solutions such as what we describe here as a means to solving their personal debt issues.

We don’t endorse handing back the keys, we are not suggesting that people do it or consider it, but merely looking at the pro’s and cons of doing so and demonstrating a method whereby a person could potentially try to fool the system while doing so.

The Cons are basically that you lose your home, and assuming that in this case the person is in €100,000 of negative equity then they are also hit with a judgement for the shortfall plus expenses, for the following twelve years that debt can come back to haunt you. Your actual credit may be restored in year seven but that doesn’t mean you are off the hook.

Consider the position of Joe Bloggs, he is deeply in debt, …

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An ounce of prevention beats a pound of cure – banks need to change how they deal with arrears

Currently banks are not interested in dealing with customers who ‘might go into arrears’, they tend to brush them off – instead focusing on the people who are already in actual trouble. This doesn’t seem rational to me from a business perspective – and this approach would fail any standard test of common sense – if you knew a storm was coming would you carry an umbrella? If you knew and were warned in advance that it was going to be a blazing hot day would you get some sun-cream? Oddly the Irish mortgage lenders defy logic when it comes to knowing that certain clients are going to fall into arrears, and this is going to ruin thousands of credit histories that could otherwise be maintained. Credit aversion might be the name of the day now, but these same consumers may feel differently in five years time.

Any credit crisis we have encountered on individual levels has always had …

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