Debt forgiveness & Writedowns, one in the same?

Below is a comment made by the Regulator at UCC while talking to a group of compliance officers.

“Reform of the bankruptcy regime could allow borrowers to earn a fresh start by discharging their debt over a reasonable period of time, Mr Elderfield said. However, he cautioned against debt forgiveness for the thousands of mortgage holders currently behind with payments on their loans.

Addressing compliance officers in Cork, he said it was understandable that some people wanted to go beyond rescheduling debt to consider some form of debt forgiveness.

“However, the cost of any support will need to be borne by the taxpayers or by the banks and therefore, in many cases, effectively the taxpayer as well, and this raises questions of fairness for taxpayers who are not in debt and, at a time of immense budgetary pressure, affordability for government finances.

“There is also the risk that any scheme would create perverse incentives and in fact make …

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Primetime: Housing & Mortgage piece, 5th October 2010

We were delighted to appear on RTE’s Primetime with Miriam O’Callaghan, whe I converted the video the sync went weird so you can find the original here.

Primetime looked at the property market news of a 40% drop in prices from peak to date and after the package piece they had an ‘in studio’ piece. The debate centred around property and mortgages as well as some of the issues regarding negative equity.

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KBC move to 90% LTV

This is a very healthy sign for the mortgage market, and in our opinion it could mean that 2010 might mark the low point for credit that we have been watching out for.

In 2009 KBC under-lent, they had €1bn and didn’t lend out anywhere near that, they are also here to stay, and prior to the crisis they had about 1/8th of the market share. The fact that they are rolling out a higher loan to value is a very confident sign that

Banks have a few internal policy tools to control lending 1.    Curtailing the amount of lending – we see that already, mortgage lending is about 85% down from the peak of 40bn p.a. , peak wasn’t exactly a gauge of normal, but half of that would be normal, and even on that basis it’s down 75% – that story still has to play out 2.    Rate increases: this has the same effect as central bank rate increases, it reduces lending and everybody has increased their margins by at least 1% in the last year, you and …

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Banks won’t offer 25% off your mortgage for your tracker

The story today from the Examiner by Stephen Rogers is worth a read, but at one point the IBA chief Ciaran Phelan states  “Banks may still attempt to offer terms to customers to woo them off trackers, but we believe that tracker customers would need a break-deal offer in excess of 25% to make it worth their while.”

I don’t know where that calculation comes from – because it ignores the time value of money on a future debt and also doesn’t take into account current debt pricing issues. For instance, rates on all sorts of financial products are rising, if you have non mortgage debt this is a concern. It is the ‘weight’ of debt rather than the ‘rate’ which is the problem for the majority of people.

By that I mean: a person who is struggling with several debts may be well served by letting go of their current tracker, but that doesn’t mean they have to abandon it, a bank could just as easy turn around and say ‘we’ll give you …

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AIB Rate hike: where is it now and where is it going?

AIB have announced an increase in their Standard Variable Rates (SVR’s) as well as in their Loan to Value Standard Variables (LTV-SVR’s: which are tiered variables based upon your loan to value), effective from August 10th. Caroline Madden of the Irish Times and Charlie Weston from the Independent both carried the story today, this comes only days after Allied Irish Bank announced that they lost over €2,000,000,000 in the first half of 2010.

Their SVR now stands at 3.25% but where is it headed? For that it is important to look at several different factors, firstly, their cost to income ratio has gone from 48% in 2009 to 63% for 2010. That means that it is costing them €63 to turn over €100 in income, this is a 32% increase on last year in costs which is a bad indication.

There are a multitude of factors playing into this:

1. Guarantee/ELG costs:

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How Negative Equity can cause arrears.

A recent report by Moody’s pointed out that increased negative equity will cause a rise in arrears. The commentary surrounding this (in Ireland) takes the view that correlation is not necessarily causation. That people in negative equity won’t automatically go into arrears unless they cannot pay, that negative equity of itself is only an issue if you lose your job or have to sell. This is a valid opinion but it ignores the operational aspect of a household in respect of the way that they react when financial difficulty occurs.

There are several hundred thousand households in negative equity, and about 35,000 in serious arrears, how many of those people would not be in arrears if they were not in negative equity? The answer is: how ever many would have sold their house as a solution.

The first thing many people do if they know they are going to be headed for a situation where they stand no chance of paying their mortgage is to put their home up for sale, in …

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PTsb increase rates for the third time in a year

15:48 At 16:00 the press release about PTsb increasing rates will be released.

Had the company waited another week the headline ‘third time in a year’ would not have applied. It was this day last year that PTsb first increased rates on their variable clients by 0.5% or 50 basis points, it was a ground-breaking decision at the time, they were the first institution to do this and it opened the floodgates for every other bank to follow suit. PTsb were not in NAMA and they made their case, but it was rapidly criticised (in particular by Gerry Ryan who very decently gave the affected consumers a platform on his show).

The average mortgage balance in Ireland is €230,000 this time last year when the applicable rate was 2.69% the repayments would have been €1,053 per month on a 25 year mortgage. In the three rate hikes (totalling 1.5%, bringing the standard variable to 4.19%) the repayments will rise to €1,238 which will mean a total of €185 per month or €2,220 per year of …

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Sunday Times ‘Money’ Section mentions Irish Mortgage Brokers

We were very pleased to see that we were mentioned in the Sunday Times ‘Money’ section this week in an article by Niall Brady in which he examined the implications of reduced competition and increased regulation in the financial services market in Ireland.

For our part we were asked about mortgage credit and had this to say: ‘Karl Deeter of Irish Mortgage Brokers said: “Lenders are using every blunt instrument in the box to frustrate loan applications. One of my clients was turned down on the pretext her employment wasn’t secure. She works in reinsurance and, because of last year’s record floods, her employer recorded a loss. It is part of a global reinsurance giant, though, that makes €3 billion in profits a year. That’s the type of stupidity that borrowers are dealing with.”

First-time buyers must have at least a 10% deposit and a record of saving to back it up. “Banks aren’t interested in parental gifts or guarantees,” said Deeter. “They …

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Hugh Hendry, my favourite sceptic

There is almost nothing that Hugh Hendry isn’t sceptical about, and that makes for an excellent sounding board, when you want to double check a bullish premise listen in, the same goes for a bear call. I watched him go toe to toe with Joe Stiglitz once and was impressed, he knows his brief. In this clip from Bloomberg he talks about his belief that the Euro is finished. (hat tip on the clip to creditwritedowns)

Hendry also talks about his belief that the noose is getting tighter in Asia, I would concur, there has to be a rebalancing and even a managed economy like China’s cannot stop that from happening, the Euro will go through a competitive devaluation and we can all go back to competing in the ‘new normal’.

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