IMF: "Forbearance made matters worse"

The IMF has published a report:



Summary: In housing crises, high mortgage debt can feed a vicious circle of falling housing prices and declining consumption and incomes, leading to higher mortgage defaults and deeper recessions. In such situations, resolution policies may need to be adapted to help contain negative feedback loops while minimizing overall loan losses and moral hazard. Drawing on recent experiences from Iceland, Ireland, Spain, and the United States, this paper discusses how economic trade-offs affecting mortgage resolution differ in crises. Depending on country circumstances, the economic benefits of temporary forbearance and loan modifications for struggling households could outweigh their costs.

I have said this before. The lack of a threat of repossession and the restrictions on lenders from chasing borrowers in arrears, meant that some borrowers did not address their problem early on. As a result, their problem became too big.

The ISI takes a lot of flak for the slow uptake of formal agreements like DSA/PIA's but the lack of consequences for debtors mean there is no incentive to enter a formal procedure and have spending levels imposed.
Forbearance and other can-kicking methods for debtors must have left this country with 100's of thousands previously credit worthy people who now have no chance of getting credit in the foreseeable future.
People need to address their issues, move on and over time build their credit worthiness again.

pat2 said:

The ISI takes a lot of flak for the slow uptake of formal agreements like DSA/PIA's but the lack of consequences for debtors mean there is no incentive to enter a formal procedure and have spending levels imposed.
Forbearance and other can-kicking methods for debtors must have left this country with 100's of thousands previously credit worthy people who now have no chance of getting credit in the foreseeable future.
People need to address their issues, move on and over time build their credit worthiness again.

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..........
Looking back , I think Banks were so geared to lending that when the Tsunami of arrears/negative equity hit them ,they hadn,t the expertise to control it.
Not having clear Repo/Insolvency pathways did not help.

Today,
From what I read the (older) arrears situation is not improving , a lot of the (solved) mortgages are (solved) by adding the arrears onto the term of Mortgage.One third of these (solved) accounts are re-slipping into arrears. I see little chance of this Mortgage issue being controlled.

A Big Bang option?{just me looking outside the norm!}
Reduce all mortgages by 50% of the negative equity part of the mortgage.
Eg Mortgage k300 value k200 , negative equity K100.
Write off K50 so new Mortgage = k250.
I can find umpteen reasons not to do something drastic as above but I see no long term profit in the way things are.
At this stage I am open to any suggestions .

Gerry, there is no logical reason to take the approach as suggested by you. lets put aside any moral "sharing the pain" arguement and purely address the current risk approach from the bank's perspective!
The loans are all enforceable at their current amount. Affordability is the key concern rather than negative equity. An equitable and realistic solution will have to be agreed for those who do not have and are unlikely to have affordability to cover their full loans. This may involve writing down (in time) some of the balance. The banks cannot apply a "one size fits all solution". The solution must be tailored to individual circumstances. Some of those solutions must involve enforcement whch although unpalitive is necessary.

44brendan said:

solutions

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I strongly agree that affordability should be the main criteria, and I was only raising (hares!).

Given the mess on Mortgage lending ,I wonder if I was in an k300 mortgage on a house worth k150 ,would I accept being screwed on my Variable Rate Mortgage ? , would I live for the next 20 years on a very tight budget ?.Would I accept that I am (duty bound) to keep repaying on a mortgage that had been initially inflated by Mortgage Lenders priming the Market?
So from the Banks Pragmatic perspective , I would hope they learn sense! and deal (softly) with clients who repay fairly for some years to then give them a writedown.
I definitely exclude the chancers.

This game is far from over methinks! and it will need Soloman to work it out.

Gerry Canning said:

...A Big Bang option?{just me looking outside the norm!}
Reduce all mortgages by 50% of the negative equity part of the mortgage.
Eg Mortgage k300 value k200 , negative equity K100.
Write off K50 so new Mortgage = k250.
I can find umpteen reasons not to do something drastic as above but I see no long term profit in the way things are.
At this stage I am open to any suggestions .

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Alternative: repossess all houses in mortgage arrears and put them on the market. The price of housing will plummet. Sell them to the highest bidder.

Result: same number of people in housing accommodation, everyone paying their mortgage, the new buyers get a big discount compared to the alternative.

Now, I'm not suggesting the above is the answer -- I'd just like to know what's so special about the people currently not paying their mortgages that you'd like to give them a ton of free cash, versus all the people who would love to have mortgages but don't/can't.

Another thought on the above -- the various factors (including government and bank collusion) keeping our prices high are going to come back to haunt us. I'm reading about Polish software engineers initially attracted by much higher wages in Ireland, now considering going back to Poland for a fraction of the salary, but where they are able to buy a good quality new 2-bed apartment for a mortgage of €400/month. Our competitiveness is getting hammered by all this foot-dragging on mortgages.

dub_nerd said:

Another thought on the above -- the various factors (including government and bank collusion) keeping our prices high are going to come back to haunt us. I'm reading about Polish software engineers initially attracted by much higher wages in Ireland, now considering going back to Poland for a fraction of the salary, but where they are able to buy a good quality new 2-bed apartment for a mortgage of €400/month. Our competitiveness is getting hammered by all this foot-dragging on mortgages.

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.............
dub-nerd.
Your comments I cannot disagree with ,and in anything like a normal situation make sense.
However this whole mess is now so tangled that multiple repos etc I think would create too much social upheaval.
I think repoing and putting repo,d houses on market would simply end up in a Vulture fest! since the only people who could buy would be vultures etc etc.

Tough one , I think we need Solomon to help us.!

Gerry Canning said:

.............
dub-nerd.
Your comments I cannot disagree with ,and in anything like a normal situation make sense.
However this whole mess is now so tangled that multiple repos etc I think would create too much social upheaval.
I think repoing and putting repo,d houses on market would simply end up in a Vulture fest! since the only people who could buy would be vultures etc etc.

Tough one , I think we need Solomon to help us.!

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So leave people in houses now way beyond their means just because they bought at a certain time, whilst others like myself were saving hard and wary of taking on excessive debt. Now that'd be a valuable lesson for us all

Delboy said:

So leave people in houses now way beyond their means just because they bought at a certain time, whilst others like myself were saving hard and wary of taking on excessive debt. Now that'd be a valuable lesson for us all

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Definitely NOT saying to leave any non payers in situ , as you say that would be grossly unfair .
I just see the whole mess as bigger than what should be sensible !

I have the utmost sympathy for us who did not go (stupid), and maybe paying on the double for those who made errors and expect a free lunch!
Surely from Day one , the private Banks should have paid the price , now we have their debt and maybe we will also have a double -hit of baling out non-payers!
It is now engineered that we have (saved)
Banks ,yet may also be squeezed into saving undeserving neighbours.

We couldn,t have made this up!

dub_nerd said:

Alternative: repossess all houses in mortgage arrears and put them on the market. The price of housing will plummet. Sell them to the highest bidder.

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Almost every home that's repossessed means somebody seeking alternative accommodation. There's already a huge shortage in social housing so househunters would find themselves bidding against landlords, Local Authorities and Housing Associations as the evictee would need to be housed somewhere. If anything, bidding wars will start and prices could rocket until there is a surplus of social housing. It's a messy situation, I don't think forbearance is the answer but I also think mass repossessions will bring many househunters wetdreams to reality.

pat2 said:

Almost every home that's repossessed means somebody seeking alternative accommodation. There's already a huge shortage in social housing so househunters would find themselves bidding against landlords, Local Authorities and Housing Associations as the evictee would need to be housed somewhere. If anything, bidding wars will start and prices could rocket until there is a surplus of social housing. It's a messy situation, I don't think forbearance is the answer but I also think mass repossessions will bring many househunters wetdreams to reality.

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You're assuming the evictee would be immediately entitled to identical accommodation at someone else's expense. The evictee would be back in the market for a house they can afford, or that the Local Authority is willing to provide. Forbearance means they get to stay in a house they can't afford.