Waiting to go bang. The need for new forbearance.

We have seen a new type of potential mortgage problem that hasn’t shown up on the radar as of yet, it’s with larger residential investors (typically 15+ properties).

The issue has started to show as a problem that will be a 2013 onwards one and it hasn’t begun to kick in due to low interest rates and ongoing interest only agreements which if changed will cause instant insolvency in the borrowers.

Take the following example, it’s very like a real case we just worked on.

Mr X has 20 properties, for the sake of ease I made the main sums consistent with the facts but averaged everything else to show how it works.

Currently it looks like a cash cow, in one of our recent cases it is because the person has section 23 properties that reduce the tax liability, but that puts them against a cash cliff in 2014 when it runs out. Put the s23 aside, the taxation of this portfolio would be approximately as follows:

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Property Tax is a good thing, but only one type of it.

We had an opinion piece in the Sunday Times this week in the ‘Money’ section, it was about property tax and the different types that the state have to choose from, property tax could be a very beneficial option for Ireland but only if it is implemented correctly and done on the correct basis, otherwise it just becomes straightforward ‘revenue raising’.

You can read the article by clicking on the image to the left, which is the .pdf version of the text below:

Everybody hates the idea of a property tax—except me. I believe it is the solution to much of what went wrong in Ireland and it could have prevented many of our present and future economic ills. The only caveat is that we must have a corresponding reduction in income taxes. Otherwise it would merely be another form of revenue raising by the government.

There are three options the state could choose from—a property tax, which includes …

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Property Tax 2009: non-principal private residencies €200

The Local Government Act 2009 introduced a €200 annual charge for owners on non-principal private residences

The charge applies mainly to owners of private rental property and holiday homes.  It also applies to vacant residential property unless newly built but unsold (handy if you are a developer, lousy if you are the owner of a newly un-lettable gaff).  Liability to pay the charge is assessed by the owners themselves.  Ownership of a non-principal private residence on the ‘liability date’ (31st July 2009) determines liability to pay the €200 charge.

Payment is due by 30th September 2009. A €20 per month late payment fee will apply from 1st November in respect of each month for which payment is overdue. This bit is interesting – because normally surcharges and penalties for any unpaid tax are much much lower, this amounts to an ongoing 10% fine for every month – while €20 may not seem excessive, it is certainly (when viewed in percentage terms) extreme. Especially given that there is not much being published …

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The best monetary decision will be that which is taken

I have looked back at market crashes, the Dutch Tulip Bulb crash, the Railway crash in the USA, the Great Depression, the Oil Crisis in the 70’s, The 1987 Stock crash, the S&L crisis, the dotcom bust and our most recent and several things have become clear.

The ‘solution’ is whatever was done at the time thus meaning we try to find the answers of tomorrow by looking back at what worked in the past and applying it to the new situation, it is one of the most basic human methods of learning. Children will get a burn from a fireplace once and it is then engraved in their minds that fires are hot and can burn you. Thus we see the same happening with monetary policy and with businesses.

The question though is this: What if what we did in the past was wrong? Does it make a solution that appeared to work relevant? If for instance I was the sole solution provider for the Great Depression …

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