Mortgage Debt for Equity swaps

A popular idea that has been discussed in the past (and if Niamh Hennessy’s article proves correct may become working reality) is that of banks taking equity in the family home in exchange for reducing the debt on the property.

I’d like to go through this by looking at the differences in cost, the difference to the mortgage holder and to take a look at why it may not be a great idea.

The bank balance sheet currently looks like the picture to the right, the value of the asset (the loan) is based upon the amount of finance advanced, not the value of the underlying security.

Remember: When you put in your deposit, you are the first equity owner, if prices fall the owners equity is wiped out first which is why ‘negative equity’ is a talk about current value versus the mortgage secured and not just current value versus market value.

People who’s property fell 40% but who have no mortgage cannot crystallize …

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Repay Bond holders in full (with mortgages)

You can’t hope for isolated solutions in world where everything is bound together, which is the foundation for taking a more pragmatic look at a solution for Irish Banks and households, because one inherently is reliant upon the other.

That our banks were underwritten by all of our citizens (minus any consent in that debt bondage process) is a given, however, it would be a mistake to think that there can only be a one way flow of funds or solutions between the two parties.

The conundrum thus far is that the ECB don’t want to see any bond holders ‘burned’, while at the same time this nation should not be guaranteeing any facet of the securities markets any more than we should have protected bank share holders; and then we have the third and fourth legs on this table of madness, the IMF who (counter to the ECB) want burden sharing and an overly indebted society incapable of paying back the money they borrowed.

Somehow within this morass we …

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Using rebuild costs to determine if you can buy below costs.

With so few transactions occurring it is hard to get an idea of values when the most common approach is the ‘comparative method’ (we cover some of the pros/cons in our investor reports) which tends to be most accurate when there are lots of sales happening [and for the same reason can be pro-cyclical].

A useful tool for potential property buyers is to see if they can purchase ‘below cost’, this is particularly useful when there are not enough transactions on the market to get good information or if you want to have a gauge you can use on your own.

Construction costs calculated every year by the Society of Chartered Surveyors in their ‘house rebuilding insurance guide’ and by using their estimates as a guide it can help potential buyers discern a good deal when they see one.

For instance, a 1,200 square foot 3 bed semi-detached in Dublin will cost (using their rebuild estimate of €177 per square foot) €212,400 to build.

If you are thinking …

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The Morning Show: Distressed property auction

We were featured on TV3’s ‘The Morning Show with Sybil & Martin’ in a piece they did on the recent Allsops auction. Angela Keegan of MyHome.ie and Karl Deeter of our own company took part.

The general view we have is that if you mark down prices enough then people are willing to buy what they see as value, that means that either prices remain too high or sentiment is such that appetite is not there at the current price level (we suspect the former weighs heavier than the latter!).

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PTsb Overpayment form & is it good value?

There has been some coverage of people saying that the PTsb offer of a discount for overpayment is not good value, that the bonus should instead be in the region of 25%.

I don’t know where that figure has been taken from, having tried to work it out several times we just can’t make it stack up.

The form that you need in order to opt for this over payment is here.

Is the idea of an overpayment any good?

In the PTsb scheme you have to consider ‘net interest’ rather than just stating that it isn’t a great idea. The figures I have done are based on the clients position rather than what the bank may or may not make – in the same way that I don’t query the margin a shopkeeper gets on a Mars bar – which is where some focus has been on this.

Rules of scheme: you can’t pay more than 50% of your mortgage, every 5k gets a …

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