Banks to offer mortgages to facilitate moving house where negative equity is present

[Complainer]

It doesn't matter what you or economists or anyone else thinks about the housing market. If I am selling an apartment with a mortage of €250,000 for €220,000 and I find a buyer willing to pay that price, then that is the market price or the true value. This product simply allows that transaction to take place. It doesn't put an artificial price on the property.

That's true on the day of the transaction - but that doesn't mean that the market price will hold. We have of course seen huge falls in property prices already, and some people have a legitimate view that the market will still fall further.

This kind of mortgage is further interference in the market, and will prop up prices by encouraging and supporting transactions that wouldn't otherwise happen at all, for a number of years.

 

[Ash21]

I phoned EBS in regard to this and they said are NOT offering such product and there have been many calls about it.

We have an apt, one child and would like another but will need a bigger place and the biological clock is not on our side. We have paid off all loans and saving for the last few years but all equity has been wiped out and more. We need 60K to cover deposit, stamp etc to buy a 3 bed semi in our area which is close to work and family. But even though we are saving and saving this prospect feels like getting further and further away by the week. Houses are retaining their value and some cases going up in our area but apts continue to drop so the gap is widening. We looked at the rent and rent (too expensive), sell and rent options but still would prefer to buy if at all possible. A 400K mortgage over 20-25 is well within our means in terms of repayments. We will have to make a decision in about 6 months about what to do, so advice is welcome!

 

[Sunny]

That's true on the day of the transaction - but that doesn't mean that the market price will hold. We have of course seen huge falls in property prices already, and some people have a legitimate view that the market will still fall further.

This kind of mortgage is further interference in the market, and will prop up prices by encouraging and supporting transactions that wouldn't otherwise happen at all, for a number of years.

But so what if it falls further. (I am sure it will) I have sold the apartment so the person who has to worry is the one that paid €220,000. But even then he is buying an apartment at a level below the peak so the fall in equity is unlikely to be as servere than if I had stayed in the apartment after paying €250,000 for the apartment.

I admit it is a problem if the house I buy plummets in price but at least this time hopefully I am in a family home that is big enough to support a family and not in a one bed apartment.

 

[Complainer]

I admit it is a problem if the house I buy plummets in price but at least this time hopefully I am in a family home that is big enough to support a family and not in a one bed apartment.

And that's my concern. The negative equity has moved, and may well have grown, depending on the size of the trade-up deal and the size of the market drop. And if everything else stays stable, they may not have huge issues.

But what happens when one partner loses their job, or realises that working with two kids just isn't worth it, or the couple split up?

But it is not just about the impact on them. As we say from the last boom, giving too much money to people to buy houses is just unsustainable. This causes problems for everyone else who is seeking to buy or rent at that price too.

 

[Sunny]

And that's my concern. The negative equity has moved, and may well have grown, depending on the size of the trade-up deal and the size of the market drop. And if everything else stays stable, they may not have huge issues.

But what happens when one partner loses their job, or realises that working with two kids just isn't worth it, or the couple split up?

But it is not just about the impact on them. As we say from the last boom, giving too much money to people to buy houses is just unsustainable. This causes problems for everyone else who is seeking to buy or rent at that price too.

I agree and I assume that is why the banks were never advertising these deals. I didn't even know they exisited in this Country but apparently two banks were offering them. They are certainly not suitable for everyone. But if they are very carefully underwritten, I don't see the problem. 100% mortgages started out as a niche product but banks and the regulator soon decided they were suitable for everyone. If the same happens here, I agree it will end in tears but if people haven't learnt their lessons after the last few years, they never will.

But the product itself is not bad. It's the use of the product that causes problems.

 

[Chris]

That's what this mortgage product is. A loan to cover the negative equity.
One of the reasons why people in negative equity cannot sell is that they need the banks permission if they can't pay off the entire outstanding mortgage.

If people were in a position to get unsecured debt to cover negative equity they would have been doing so already in order to move. Fact is that the vast majority of people are not in a financially secure enough situation in order to obtain such a loan.
Creating a 'Negative Equity Mortgage' product with some fancy justifications and underwritings is disaster waiting to happen. Are people really that short-sighted to understand that excessive debt levels caused this mess in the first place?!?!?!

 

[Sunny]

If people were in a position to get unsecured debt to cover negative equity they would have been doing so already in order to move. Fact is that the vast majority of people are not in a financially secure enough situation in order to obtain such a loan.
Creating a 'Negative Equity Mortgage' product with some fancy justifications and underwritings is disaster waiting to happen. Are people really that short-sighted to understand that excessive debt levels caused this mess in the first place?!?!?!

I don't understand your point. This product is basically a mixture of secured and unsecured credit. The bank is only secured to 100% of the value of the property. If they give out a 125% mortgage, they are effectively giving a 25% unsecured loan.

 

[mathepac]

... But the product itself is not bad. It's the use of the product that causes problems.

... This product is basically a mixture of secured and unsecured credit. ...

I think the thread is beginning to run away with itself and discuss something that does not exist - STB material?

Right now there is no "product", merely a facility sometimes made available on a case-by-case basis by two specific lenders, as detailed at the start of the thread.

 

[Sunny]

I think the thread is beginning to run away with itself and discuss something that does not exist - STB material?

Right now there is no "product", merely a facility sometimes made available on a case-by-case basis by two specific lenders, as detailed at the start of the thread.

I agree. Thats why I said earlier

People are getting their knickers in a twist over this. There is no suggestion that the banks are going to make this widely available. Even the regualtor said they would have a dim view of it so will more than likely make the banks hold more capital against these loans if they allow them at all. Der Kaiser made a good point on the previous page. Something like this could help some people trade down and reduce their mortgage payments. However, I am not a fan of interfering with the housing market so will remain sceptical about it all.

As I said before, I will only worry when I see the product being advertised on buses.

​

 

[Pat Bateman]

So, the consensus seems to be that:

• This option shouldn't be packaged and marketed as a "product", but
• There's nothing wrong with making this option available to certain people in certain circumstances (i.e. negative equity, low LTV on desired property, secure jobs and low repayment to net salary ratio).

 

[Chris]

I don't understand your point. This product is basically a mixture of secured and unsecured credit. The bank is only secured to 100% of the value of the property. If they give out a 125% mortgage, they are effectively giving a 25% unsecured loan.

My point being that it should not be a product. As I said earlier, if you want to trade up, but are in negative, reduce the negative equity first.

So, the consensus seems to be that:

• This option shouldn't be packaged and marketed as a "product", but
• There's nothing wrong with making this option available to certain people in certain circumstances (i.e. negative equity, low LTV on desired property, secure jobs and low repayment to net salary ratio).

How is someone in negative equity suddenly going to end up with a low LTV in the next property?
Giving unsecured debt to purchase real estate is a terrible idea!

 

[PaddyW]

I think that this would be pure lunacy to offer a product like that. I went with KBC for my mortgage and even though it was only twice my salary, it took me an age to get it with all their checks etc. They seemed very careful about protecting themselves. I'm glad they were like that now.

 

[NorfBank]

I think that this would be pure lunacy to offer a product like that. I went with KBC for my mortgage and even though it was only twice my salary, it took me an age to get it with all their checks etc. They seemed very careful about protecting themselves. I'm glad they were like that now.

You have sort of hit the nail on the head PaddyW, it is very difficult to get a mortgage with a low loan to value property even if the applicants have "steady" jobs and a good income.

Even if this "negative equity" mortgage is introduced it will be so strictly underwritten that only a handful of people will qualify and these will more than likely be professionals with prospects of an ever increasing income. I'm thinking along the lines of a couple of doctors who are in NE to the tune of 50k but also have decent savings that will be usedto cover the stamp duty involved in trading up.

The thing is these type of applicants would usually have a strong enough income to get a personal loan to clear the NE and trade up anyway.

These negative equity loans will more than likely go the way of the Home Choice loan with a few approved every year if they are given the green light by the Regulator - doubtful.

 

[Chris]

Even if this "negative equity" mortgage is introduced it will be so strictly underwritten that only a handful of people will qualify and these will more than likely be professionals with prospects of an ever increasing income. I'm thinking along the lines of a couple of doctors who are in NE to the tune of 50k but also have decent savings that will be usedto cover the stamp duty involved in trading up.

You're very optimistic there and assuming that banks have learnt anything at all. This is exactly the same way that 100% mortgages were introduced. First aimed at the highly paid or public sector employees, but it didn't take long for it to become a common product.

 

[Neg Covenant]

If I have €20K saved, a tracker mortgage, negative equity of €60K and I want to trade up then there is no way I am going to pay down my negative equity with the €20K if I cannot use it to trade up. €20K on a tracker is the cheapest finance in Ireland. However, if I can move my reduced Negative Equity to a new house on a 20 year mortgage on a house which I don't intend selling then I will probably do it. The bank ends us with less negative equity in the loan in absolute terms and relative to the value of the bigger property. They also get rid of a tracker. The market becomes more liquid as I sell and buy a house and so is more likely to reach its nadir. Also, a liquid market allows banks to liquidate and resolve problem mortgages.

Anyone who thinks a mortgage product like this could inspire bubble behaviour is a tad out of touch with the national psyche. As Galbraith pointed out in his book on the crash of 1929, memory of loss is the greatest protection against bubble behaviour. Anyone who thinks these products would create an artificial floor by lowering the value at which houses are sold is seriously confused. In 2007 people were stuck in 2005. Now it's 2010 and people are stuck in 2008. The market has not reached the bottom but it still makes sense for a lot of people to buy and sell their homes.

 

[Complainer]

You're very optimistic there and assuming that banks have learnt anything at all. This is exactly the same way that 100% mortgages were introduced. First aimed at the highly paid or public sector employees, but it didn't take long for it to become a common product.

I agree with the point you're making, but public sector employees - really? The way I remember it, they were first aimed at a select group of professions (medical, legal). I don't recall 100% mortgages being ever targeted at public sector staff.

If I have €20K saved, a tracker mortgage, negative equity of €60K and I want to trade up then there is no way I am going to pay down my negative equity with the €20K if I cannot use it to trade up. €20K on a tracker is the cheapest finance in Ireland. However, if I can move my reduced Negative Equity to a new house on a 20 year mortgage on a house which I don't intend selling then I will probably do it. The bank ends us with less negative equity in the loan in absolute terms and relative to the value of the bigger property. They also get rid of a tracker. The market becomes more liquid as I sell and buy a house and so is more likely to reach its nadir. Also, a liquid market allows banks to liquidate and resolve problem mortgages.

Anyone who thinks a mortgage product like this could inspire bubble behaviour is a tad out of touch with the national psyche. As Galbraith pointed out in his book on the crash of 1929, memory of loss is the greatest protection against bubble behaviour. Anyone who thinks these products would create an artificial floor by lowering the value at which houses are sold is seriously confused. In 2007 people were stuck in 2005. Now it's 2010 and people are stuck in 2008. The market has not reached the bottom but it still makes sense for a lot of people to buy and sell their homes.

There is a bit of spinning going on here. There is no absolute drop in the negative equity. In the example you give, you are rolling in savings into the equation, but the savings are there all along. In fact, any savings will probably go on the stamp duty and will not help reduce the negative position at all. There may be a relative drop in the negative equity, but the risk of increased negative equity is real, if the market continues to fall.

What you describe as 'more liquid', I describe as 'people borrowing too much to buy houses they can't afford'. Your 'house that I don't intend selling' may well suddently need to be sold, when more kids arrive, or the job moves, or the job is lost, or the couple split etc.

 

[mathepac]

... Anyone who thinks a mortgage product like this could inspire bubble behaviour is a tad out of touch with the national psyche. ...

Anyone who thinks it won't inspire bubble behaviour is deluded or has failed to learn the lessons of recent history.

... As Galbraith pointed out in his book on the crash of 1929, memory of loss is the greatest protection against bubble behaviour. ...

Galbraith's hypothesis was false when his book was published (South Sea Bubble 1720, Dutch Tulip Bulb Market Bubble 1637, etc, etc,) and nothing that has happened since has succeeded in validating it.

 

[Neg Covenant]

....There is no absolute drop in the negative equity. In the example you give, you are rolling in savings into the equation, but the savings are there all along. In fact, any savings will probably go on the stamp duty and will not help reduce the negative position at all. There may be a relative drop in the negative equity, but the risk of increased negative equity is real, if the market continues to fall....

Of course paying down the debt will reduce negative equity.
Negative Equity = Value of House - Balance of Mortgage
A house has to be worth €410K to cost €20K in stamp duty. People can buy cheaper houses or save more than the example. Either way, the idea is to let people move negative equity, not to increase it.

What you describe as 'more liquid', I describe as 'people borrowing too much to buy houses they can't afford'. Your 'house that I don't intend selling' may well suddently need to be sold, when more kids arrive, or the job moves, or the job is lost, or the couple split etc.

The credit worthiness of the applicant will be assessed in the same way. The risks you mention are factored into that. This is not about letting people buy houses they can't afford but rather letting them buy houses they can afford. This is about making people pay off their negative equity over time but letting them move house in the meantime.

People who could afford a €300K house without negative equity may have to settle for a €250K house because of their negative equity. Whether people can afford a mortgage is generally dictated by job security, salary, disposable income and interest rates. Your suggestion that negative equity affects affordability ignores the factors that determine how affordable something is. It also ignores the fact that the product is aimed at people who already have negative equity and so it shouldn't make their position materially worse.

By your logic, the negative equity on the existing property will increase if the market drops in any event. Therefore any increase in negative equity on the new house should only be marginally greater, if at all, than it would have been on the existing house.

 

[canicemcavoy]

You're very optimistic there and assuming that banks have learnt anything at all. This is exactly the same way that 100% mortgages were introduced. First aimed at the highly paid or public sector employees, but it didn't take long for it to become a common product.

Can anyone please explain what government mechanisms have been put in place to avoid banks getting into a bubble scenario again where they require bailing out?

 

[Neg Covenant]

Anyone who thinks it won't inspire bubble behaviour is deluded or has failed to learn the lessons of recent history.
Galbraith's hypothesis was false when his book was published (South Sea Bubble 1720, Dutch Tulip Bulb Market Bubble 1637, etc, etc,) and nothing that has happened since has succeeded in validating it.

I take it you are not familiar with Galbraith's book?

The reason he wrote it was so those who did not remember the crash would still learn the lessons. Unfortunately, 78 years later which is uncannily close to the length of a human life, we have fallen into the same trap.

Please provide an example of any property bubble in history which crashed by more than 50% which was followed by another property bubble within the next 10 years?