Talking with a strategic defaulter…

That strategic defaulters do or don’t is just a sideshow about quantifying their numbers, for several years we have been dealing with them on the advisory side of our company. Banks have large legal departments and teams chasing borrowers, and in turn the borrowers will from time to time hire their own professionals as a counterweight to the process, what you are about to read isn’t intended as justification, ethical reasoning or anything else, it’s just an insight into the thoughts of a strategic defaulter, why they did it and what has happened so far.

The person in question is a white collar professional and the director of a relatively well known company, she agreed to speak to us on the basis that we kept her identity private. She has a family home and six investment properties.

Karl: Did you make a concious decision to default on your loans? If so why?

Yes, because the bank were insisting I go on interest and capital repayments on the investment properties and the figures just wouldn’t add up so I chose to default.

Karl: Do you ever feel the slightest bit of guilt about breaking your contract even though you could be paying the bank?

No, none at all. The banks have broken every other contract not only with people but also with businesses as well, they have no morality card to play on this front.

Karl: When you hear about people less well off than you who are getting their homes taken or for whom are not as expert at playing off the banks what do you think?

Such is life. On one hand I do feel sympathy with them but on another people have to face up to their problems with the banks and face up to them, you have to fight fire with fire, the only thing they understand is non-compliance, being nice about it doesn’t work. If they want to go for your home then let them, don’t ignore them, engage but say ‘no’ early and often.

Karl: Has the bank ever threatened you with repossession?

Yes, regularly, the most recent threat was about a month ago. This is one of many, before that they told me in February they were ‘moving in on me’ and there was a threat made in mid 2012 as well. My response has always been ‘you do what you have to’, personally I’d be happy to see them repossess the investment properties, but they won’t do that because they don’t want to crystalise their losses, keeping me on the hook suits them.

Karl: What is your response to the banks?

I just tell them that personal income has reduced, this is partly true, and that rents didn’t come in, which from time to time is also true. I’m not really overly concerned about what they do or don’t think, this isn’t about them, it’s about me and my decisions, they wanted blood from a stone, I simply ensure that they know that.

Karl: Why do you think they haven’t moved in on you yet?

Because if they move in on me and recognise the loss the likelihood of getting a penny of the shortfall is slim, I know fully that this is a delay tactic on their part not mine so let them run with their own misguided plans.

Karl: Will you go for personal insolvency?

I’d like to come to an informal arrangement, and I do actually want that, I don’t want to opt for personal insolvency, it’s a pain in the arse from what I can see of it. I also don’t want to kick the can down the road so soon it will be time to make a decision, either we make a deal or they go for me or I go bang on my own. I’ll still be less than aged 50 when I’m back out so can make some kind of a comeback I’m hoping. They also know I have time on my side, it isn’t like I’m 65 so the process of dragging it out is their solution not mine. I’m also not willing to take 100% of the loss, the loans were priced for risk, that risk is at least in part theirs not all mine.

Karl: How much have you put aside by not paying the money you took in?

I have about €12,000 in cash put where the banks won’t find it but then there are also expenses being covered, and part payments being made from time to time to get them off my back. Sometimes I have vacancies and do try (still) to get properties rented out quickly.

Karl: Are the ‘expenses’ all related to the properties or are any personal?

Some is personal, because sometimes my personal income doesn’t cover me so I use the rent. I also stay tax compliant and have my local property tax up to date, had I not use the rents I would have had to face Revenue and I’d rather have the banks on my back to be honest.

Karl: You are, by your own admission, a strategic defaulter. Do you think there are many others like you?

Without a doubt, on investment properties it’s endemic, I don’t think it’s fair to paint normal ‘family home’ owners as strategic defaulters, there probably aren’t many of them. But on the RIP’s (residential investment properties) we are (landlords) all at it. If I tried to pay the contractual amount of capital and interest it would be impossible, so instead I’m at this stand off instead which I hope will force the banks into making a more reasonable deal. Ultimately these loans, on a full repayment basis, are unsustainable, so either write them down or get nothing from me, the choice is simple.

Karl: When you hear ‘banks are going to get tough’ on borrowers, do you think they are being honest?

No, they won’t repossess me or anybody else, they’ll get wiped if they take all the houses back, their true plan, the one they won’t talk about publicly, is to keep everybody on contract and pray the property market recovers some day and then in fifteen years or so move in on people or at least have borrowers who can break even in a sale. They don’t want to get burned any more than I do.

Comments

  1. MarcoM

    An excellent and most relevant piece, Karl!

    One word captures the essence of the attitude of your interviewee: “.. they (the banks) don’t want to crystallise THEIR losses”. Excuse me, lady. The loss is still yours! This is what psychologists call Cognitive Dissonance.
    The reason this attitude exists is because of a massive BLUNDER by the government. They decreed that banks are not allowed to repossess the primary home of (most) people who are seriously in arrears. I am not sure why they chose to do this, but I suspect the government doesn’t want front page stories of weeping women holding babies outside their repossessed home.
    The consequences of this socialist soft belly approach are:
    * Cutting supply of family homes to the housing market which (as Karl points out), artificially causes prices to rise in Dublin
    * The banks are likely to need further capital because they cannot recoup as much as they should from these strategic defaulters. [even Credit Default protection on the “solid” Bank of Ireland trades at 330bp, which still implies a 1 in 4 chance of default in the next 5 years!)
    * The tax payer ends up footing the bill; austerity will have to continue for longer while the banks remain loss-making (and we own most of them!).

    I am loath to defend the banks; I was livid when they raised the SVR after the ECB cut. But I have no sympathy for your woman in the interview. Together with her RIPs, she should also lose her primary home and her Company Directorship if she doesn’t keep paying. The government, through their incompetence, is responsible for this, more so than the banks!

  2. HARRY MARKOPOLOS

    The Banks whom you sell products (mortgages) for, are the main culprits in this Mr Deeter.
    I don’t see why you are taking the side of the banks over the side hundreds/thousands of distressed clients that you sold products for Mr Deeter.
    Do your loyalties lie with corrupt/criminal bankers Karl?
    And if so, why??
    If this lady bought 6 buy to lets to provide income for herself,
    she probably stumped up hundreds of thousands of her own money in deposits, stamp duty and mortgage payments.
    Now she has only €12k (that the bank will probably take) to show for it?
    The bankers destroyed this woman’s wealth/pension Karl.
    They destroyed the wealth/pensions of millions of people.
    They destroyed the country.
    Wake up and smell the coffee man.
    You are trying to defend the un-defendable.
    Are you sure you are not suffering from banker induced Stockholm Syndrome Karl?

  3. David McCarthy-Smith

    What year was Irish Permanent, via High Court, ordered to allow Mortgagee to select their fire Insurer (I. P. formerly restricted to their ‘sweet deal’ Insurer). The change was late ’80s or early 90s? Anybody the url to Court Case change? Thanks

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