IMHO: "The state should supplement the mortgage for those who can't pay"

Brendan Burgess

Brendan Burgess

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David Hall has an article in yesterday's Sunday Business Post (Subscription required)

This is how it could work.

Mary and Joe are married with two kids. They have a €200,000 mortgage, property valued at €120,000 and €1,100 due per month in payments. The mortgage has been extended to the maximum possible term. They live in Kildare, and their council would have to pay them up to €750 per month in rent supplement if they lost their home and had to rent accommodation.

Under our proposals, Mary and Joe are determined to have “affordability” of €300 per month, as per an Affordability Certificate, which could be issued by the Insolvency Service, by Mabs or the IMHO.

The mortgage is then split into two tranches:

Tranche A: €140,000, attracting capital and interest repayments of €770 per month.

Tranche B: €60,000, parked at 0 per cent interest for the lifetime of the loan.

The €750 is funded by Mary and Joe’s €300 plus €470 from Kildare County Council. This is less than what the council would have to pay if they were liable for rent supplement. The repayments are subject to interest rate variations and reviewed every two years for a new Certificate of Affordability.
 
It is certainly cheaper to keep people in their homes and for the state to pay MIS instead of letting them be repossessed and the state paying them rent supplement.

But this solution, and most solutions, fail because they are not based on a definition of what a sustainable mortgage is.

A mortgage is sustainable for the lender, while the borrower can pay the market rate of interest on the current value of the property.

Using the above example, if the lender gets 4% of €140,000 or €470 a month, then it's of no benefit to them to repossess this property. All they will do is lend the money onto someone else at 4%.

So freeze the €60,000 NE for 3 years and switch the €140,000 to interest only.

If the state wants to supplement this mortgage, then they should contribute only €170 per month.

They should not be paying €470 per month to pay down the capital outstanding on the mortgage!

But what most debt advocates miss out on is the following
30,000 families are in arrears over 2 years.
Around 40% have positive equity and should not receive any state aid.
That leaves around 20,000 in deep arrears and negative equity.
75% of those are in employment and so would not get rent supplement. They are simply choosing not to pay their mortgage.
That leaves around 5,000 who would benefit from any such scheme. A bit more if you include those in less than 2 years' arrears.

Most debt advocates claim that everyone in default, is in default "through no fault of their own". That is rubbish. There are many Misguided Mortgage Holders out there. The only way to get them to engage and pay their mortgage is to make repossession easier.
 
Brendan Burgess said:
It is certainly cheaper to keep people in their homes and for the state to pay MIS instead of letting them be repossessed and the state paying them rent supplement.

But this solution, and most solutions, fail because they are not based on a definition of what a sustainable mortgage is.

A mortgage is sustainable for the lender, while the borrower can pay the market rate of interest on the current value of the property.

Using the above example, if the lender gets 4% of €140,000 or €470 a month, then it's of no benefit to them to repossess this property. All they will do is lend the money onto someone else at 4%.

So freeze the €60,000 NE for 3 years and switch the €140,000 to interest only.

If the state wants to supplement this mortgage, then they should contribute only €170 per month.

They should not be paying €470 per month to pay down the capital outstanding on the mortgage!

But what most debt advocates miss out on is the following
30,000 families are in arrears over 2 years.
Around 40% have positive equity and should not receive any state aid.
That leaves around 20,000 in deep arrears and negative equity.
75% of those are in employment and so would not get rent supplement. They are simply choosing not to pay their mortgage.
That leaves around 5,000 who would benefit from any such scheme. A bit more if you include those in less than 2 years' arrears.

Most debt advocates claim that everyone in default, is in default "through no fault of their own". That is rubbish. There are many Misguided Mortgage Holders out there. The only way to get them to engage and pay their mortgage is to make repossession easier.
Click to expand...
...............
Agree the State ;

1. Should not be involved in reducing the Principal borrowed.
2. If the full cost to state of having the 40% who are in positive equity sell out is shown as more than
is gained by not selling out eg extra cost work/schools/etc then a case can be made to aid them for a period, but only for a period.
3. The 20% in deep arrears must not be aided until their situation is checked, as you say most are working and it is unreasonable to have state pay out willy-nilly.
4. 75% may well be in work , but are they getting close to boom time hours/wages?
The genuine ones could benefit from Split Mortgages etc.

I do not believe most debt advocates claim {everyone is in default through no fault}
I do agree there are too many miss-guided Mortgage Holders but am firmly of the view that most can and would welcome workable solutions.
You may well be correct Repo threat will force people to sort things.
 
Brendan Burgess said:
If the state wants to supplement this mortgage, then they should contribute only €170 per month.
They should not be paying €470 per month to pay down the capital outstanding on the mortgage!
Click to expand...
Absolutely. At best, this idea smells of moral hazard. At worst, it could actively incentivise reckless borrowing and tactical delinquency.
 
Brendan Burgess said:
Most debt advocates claim that everyone in default, is in default "through no fault of their own". That is rubbish. There are many Misguided Mortgage Holders out there. The only way to get them to engage and pay their mortgage is to make repossession easier.
Click to expand...

We have arrears problems because of the unprecedented nature of the property bubble ten years ago. Most repossession advocates don't seem to realise that for every borrower there was a lender ,supervised by a regulator and a central bank. The repossession advocates and the banks want the borrower to take the hit for the combined madness that was the borrowing / lending during the crazy days. Here's a novel idea. How about we use the tools that are already at our disposal to solve the arrears problem. Most restructures do not involve splits and we have only had 200 PIA's since the launch of the ISI. Why is that?
 
demoivre said:
We have arrears problems because of the unprecedented nature of the property bubble ten years ago. Most repossession advocates don't seem to realise that for every borrower there was a lender...
Click to expand...
The only unprecedented aspect I've observed is the increasingly popular notion that the lender is supposed to act as the borrower's nanny. At the same time, it seems like every other post here is railing against the unfairness of not being granted a 130% negative-equity mortgage. We can't have it both ways.
 
Trasneoir.

The Lender is not supposed to act as anyones Nanny.
But it is fair to point out that Mr Professional/supposedly Regulated Lender fanned the Mortgage flames. When he was beaten , he passed the embers back to us. We have bailed him out and still have to work out the arrears .
It means you and I have thus far acted as Nannys to Mr Bank.

Few enough are looking for this 130% .
From what I view most are trying to find workable solutions.

If paying something from Public purse is cheaper for us than the cost of public housing , let us go for it.
And to be clear , I would hammer the leg lifters that refuse to engage/pay.
 
There are 10 members of my and my extended family members who were working at the height of the boom and are still working TG. All are on reduced wages/salaries since then. All are paying the same level or higher of mortgages/rents though. In order to maintain their payments, they live to work. Three families have childcare costs.....we know how expensive that is... all have cars 10+ years old and scarce prospect of saving to improve that position.

They have barely anything to spend in the local economy or on treats or everyday enjoyments. It is one tough slog , and there are many like them. So what do they need? They need a boost in income, money to spend. Even then, they would not be back to income levels when mortgages were granted unless they get 12-14% increase. Now I don't see that happening.

Mortgage Interest relief would aid their situations.

What will happen in 2017 when MIR ceases for the category of first time buyers who are the only ones entitled to it currently ? Another surge in arrears..?
 
110quests said:
What will happen in 2017 when MIR ceases for the category of first time buyers who are the only ones entitled to it currently ? Another surge in arrears..?
Click to expand...


The vast majority if not all the purchasers whose MIR ceases in 2017 would have benefited from the crash in the property market and their properties would all be in positive equity.
 
As of 2015 ....3 out of 3 still in negative equity , Dermot. No joy there. I'm sure the positive equity situation depends on geography even though this place is within 35 mls of the city.

Equity +or - will not defray the extra to be paid by the mortgage payer. Unless incomes rise substantially there will be a shortfall as there is no discretionary spend available. So MIR re instatement might prevent arrears arising .
 
trasneoir said:
The only unprecedented aspect I've observed is the increasingly popular notion that the lender is supposed to act as the borrower's nanny
Click to expand...

Really? Bailing out the banks to the tune of €64 billion for their monumental incompetence was unprecedented, but it's a minor detail so not surprising you overlooked it.
 
What do you say to those people who wanted to purchase a house back in the day and were outbid by people paying crazy money to outbid them. Some people never got the chance to purchase their own homes and are now looking at the people who outbid them, looking to being helped by the state with taxpayers money?
 
trasneoir said:
The only unprecedented aspect I've observed is the increasingly popular notion that the lender is supposed to act as the borrower's nanny. At the same time, it seems like every other post here is railing against the unfairness of not being granted a 130% negative-equity mortgage. We can't have it both ways.
Click to expand...

If we went down the route that David Hall is suggesting I can see the figure of defaulters rising.
 
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110quests said:
. Three families have childcare costs.....we know how expensive that is... all have cars 10+ years old and scarce prospect of saving to improve that position.

. It is one tough slog , and there are many like them. So what do they need?
Click to expand...


The childcare costs are a normal fact of life for couples and should have been considered when taking out a mortgage. As for your comment on life being a tough slog, buying a house, having a mortgage and young children is always a tough slog, nothing has changed there. But for some people at the height of the celtic tiger madness a lot of people seemed to think they could have it all and the holidays too. Some people in the not so distant past couldn't even afford any kind of car.
 
Just to point out that Hall is also suggesting that the people who get bailed out and remain on in the house (no matter how large or how desirable the location) should also retail ownership of the house.
Just keep that in mind!
 
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Grizzly said:
What do you say to those people who wanted to purchase a house back in the day and were outbid by people paying crazy money to outbid them. Some people never got the chance to purchase their own homes and are now looking at the people who outbid them, looking to being helped by the state with taxpayers money?
Click to expand...

It would seem to be vastly unfair of course. But it has to be looked at as a whole. As in what is best for society. Not sure that evicting lots of families would seem like a good idea, not if another solution can be found.
 
Bronte said:
It would seem to be vastly unfair of course. But it has to be looked at as a whole. As in what is best for society. Not sure that evicting lots of families would seem like a good idea, not if another solution can be found.
Click to expand...
Eviction is a loaded word in this country...I prefer 'relocation' myself;)
 
Brendan Burgess said:
Around 40% have positive equity and should not receive any state aid.
Click to expand...


What is the rational for this?

If someone is in positive equity to the tune of €10k but is unable to afford their full mortgage payment do you think hey should have to sell up and use the equity to fund maybe 10 months of rent in Dublin and then receive rent supplement?

Brendan Burgess said:
That leaves around 20,000 in deep arrears and negative equity.
75% of those are in employment and so would not get rent supplement. They are simply choosing not to pay their mortgage.
Click to expand...


Again what is the basis for this? Surely a household can have someone in employment but the household income be such that hey are unable to pay their full mortgage payment. Some of these households would qualify for Rent Supplement as it is available to those working less than 30 hours per week.
 
Waver said:
What is the rational for this?

If someone is in positive equity to the tune of €10k but is unable to afford their full mortgage payment do you think hey should have to sell up and use the equity to fund maybe 10 months of rent in Dublin and then receive rent supplement?
Click to expand...

Yes! The banking system is a highly unfair and inefficient form of social welfare.

[/QUOTE]

Again what is the basis for this? Surely a household can have someone in employment but the household income be such that hey are unable to pay their full mortgage payment. Some of these households would qualify for Rent Supplement as it is available to those working less than 30 hours per week.[/QUOTE]

Well, if the household cannot afford their mortgage then they should not be entitled to remain in the house. Nobody is arguing that the State should not provide assistance to those that could not otherwise afford to house themselves.
 
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