Moral hazard of banks writing off debt

Gerry Canning said:
It is a pity that Home -Loans were not on a non-recourse basis ie you can hand back the keys and loan then is Banks problem.
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I disagree with this, because then home loans would be prohibitely expensive.

There was nothing wrong with Irish banking and mortgages prior to the Celtic Tiger.

The problems were manfold, not enough stress testing, people being allowed lie on their application forms, any kind of forged p60 accepted, any kind of self employed figures, accepted, an eagerness to loan as much as possible, bonuses for bank staff based on how many loans and products they could dish out, people being greedy, people borrowing not only the mortgage, but the deposit, costs, new car, credit card, the regulator pretending and ignoring the problem.....

Banks lending criteria should have been to stick to the old tried and tested way of doing things. And light touch regulation doesn't work.
 
ashambles said:
Was there a large amount of NE around in the 80s? In the UK yes, Ireland I'm not so sure. .
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No there wasn't a large amount of NE in the 80's. I know Irish people who got burnt in the UK crash, loads of keys were handed back then. You would have thought that Irish banks and regulators would have learnt from what happened over the water, but not so.
 
Liam2014 said:
I see three options

Option 1 : Continue repayments and be a feudal type serf for the banks for the next 28years. Total payments to bank over next 28 years work out as €625,623


Option 2: Stop paying the bank. Take a career break with her sister and the two of them go bankrupt in England.

Option 3: Bank Deal. If the bank play ball Mary's future husband is prepared to take over Jills half of the property. (€180k) and continue to make repayments. Total life time costs of €530,092 over 28 years to own apartment
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The spread sheets would be very interesting.

Can you clarify. Option 1 actually can be afforded by everybody, but option 2 or 3 is better as it will cost less? Also how much is the remaining mortgage and the interest rate.

Can the women with the 4 year old actually go to the UK and go bankrupt. I note that the Gardai now have a 3 year option of a break in service, paid, and no doubt a lot of them will be heading to the UK, not sure if they can though, because of the nature of their jobs. But we did have a divorced wife of a civil servant who took a career break and went to the UK to go bankrupt.

Not sure what is great about option 3, is there some kind of right down expected there?

What about the future problems of Jill's partner. He has 'interest' only mortgages, but she is paying down 'his' mortgage on 'his' home, but she considers it 'theirs'. When it's paid off, the bank on the two investments will come after 'his' house, not 'their' house. Messy.
 
Liam2014 said:
Jill is committed taking on board her husbands debt once she goes bankrupt by then marrying him.
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Wouldn't she be better off if he went bankrupty too, or if he got rid of the investments via an arrangement with the bank for debt writedown.

There are four separate people here, and at least one child. It would be interesting for you to post up a money makeover thread for each of them separately.

Whatever they do decide on, they might need professional help.
 
Liam2014 said:
That's partly why I am on this site. I'm trying to work out is there any reason it cannot be done. I can't see why not. Ivan Yeats is happly clappy these days.
The reason it will work in this situation is because both Mary and Jill are both in stable long term relationships.
I'm sure it's not the best for Mary's credit rating to go bankrupt! But if her husband, (they get married after bankruptcy) applies for a mortgage in 2015 with wife (cleansed bankrupt Mary, with permanent Civil service job) surely they would be a low risk to the bank and would be approved?

It works for the other sister too, Jill. Because presently her and her partner are unable to service all their debts. Jill is committed taking on board her husbands debt once she goes bankrupt by then marrying him. Her permanent wage will make their situation sustainable. Together with no bankruptcy they will both sink.
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It's not that easy. You have the prove that the UK is your centre of main interest. If you simply take a career break, then it is pretty obvious that you are simply a bankruptcy tourist and a Court may not recognise it especially if creditors object. Not sure Ivan Yates is the best comparison. These presenters are self employed. He didn't take a career break. He left Newstalk. Of course he was lucky to be able to walk back in. Most PAYE people aren't in that situation.
 
Yates apart from being self employed, had as far as I know a financial link to the UK via his companies to Wales (where he went bankrupt)
 
Liam! Option 3 must be addressed fully with the Bank in question. i.e. There is nothing to be agined for mary in meeting the full mortgage repayments of a jointly owned property in considerable negative equity. This is money down the drain. However, UK bankruptcy is the nuclear option and as you can clearly see from many threads on this forum and elsewhere, a 12 month period of bankruptcy in the UK is not a holiday camp and should only be a last ditch approach. Primary approach is to give the bank an outline of the situation and that if a deal cannot be agreed amicably then the bankruptcy option will be taken. However, you need to assess whether the UK receiver will take into account the fact that both parties are on a acreer break as he may well regard that as a future income sream as both parties are intending to return to work. i.e. make sure that your advice to the parties is fully correct and covers all angles before putting them in a position that could prove to be determental to their ultimate financial situation.
 
Moral hazard just to repeat (from wiki) "is a situation where a party will have a tendency to take risks because the costs that could result will not be felt by the party taking the risk".

If public servants make a habit of taking risks on investment properties because they can take a year unpaid and get back to square one, it would quickly mean no bank would lend to a public servant on anything except what's clearly a PPR.

The bank can in future (we hope) expect to feel the costs of risk due to lending to people who see a way out if the investment collapses in value.
So even if the public servant wants to take on the risk because they won't feel the full cost of a big mistake the bank won't fund it - in theory.

If the bank for some reason didn't care about public servants going bankrupt in the UK then that would be a moral hazard problem. But I think they do care.

It's interesting how often you see people working out how much a mortgage will cost only after they take it out.

Since the spreadsheets seems to be concentrating on the lifetime cost of the loan, then the proposed repayments have to be put in the context of salaries over the same period, presumably around 110,000 a year gross or 71,000 net (including the 6000 rental). Over a 30(?) career + maybe 20-30 year retirement those salaries all going well will pay out 6-10m gross maybe 4m-7m net? The mortgage doesn't seem quite as daunting against those numbers.

I wonder how sympathetic the two investors (assuming the apartment was an unlucky step to eventually buy two PPRs) reaction would be if the renter came in with an equivalent spreadsheet and decided to not pay her 500 euro a month rent as renting could cost 300,000 over 30 years with inflation? Why shouldn't a renter find a way to avoid her debt as much as the owner?
 
ashambles said:
Moral hazard just to repeat (from wiki) "is a situation where a party will have a tendency to take risks because the costs that could result will not be felt by the party taking the risk".
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The banks were the greatest exponents of moral hazard, €64bn worth. I think all this media attention for the recent write downs is nonsense as anyone who enters the ISI is going to have debt written down anyway.
 
Bronte said:
Where is your evidence for this?
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another example for the record

http://www.independent.ie/irish-new...te-renting-out-house-court-told-30131916.html
Couple have paid nothing off €735k mortgage in three years despite renting out house, court told
Counsel for the bank said the couple, now in Raritan, New Jersey, had borrowed €630,000 in October 2009 on 109 Wainsfort Manor Drive, Terenure, D6W and had stopped making repayments.
“I can confirm that the occupants of the property are paying rent to the borrowers but those entire monies are being withdrawn in America,” he said.
In an application for possession of the house counsel told the court the total outstanding debt was now €735,499. He said the two defendants unfortunately had not engaged in good faith with the bank.
“They are using any avenue as a delaying tactic so they can receive more rent and use it in America,” he said. “They are collecting the rent, spending it and leaving the bank out to dry.”
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Delboy said:
another example for the record

http://www.independent.ie/irish-new...te-renting-out-house-court-told-30131916.html
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What's that an example of? That has nothing to do with what is being discussed since it doesn't look like BOSI is offering them a debt writedown and indeed are trying to repossess the property. Says more about banks incompetence since even the judge said they didn't follow the court's directions and they allowed the borrowers to appeal a crdit decision yet again after three years of getting nothing.
 
it's an example of strategic defaulting I'd reckon! And this thread veered off in that direction so I thought it was as good a home as any to put this one into
 
Delboy said:
it's an example of strategic defaulting I'd reckon! And this thread veered off in that direction so I thought it was as good a home as any to put this one into
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If it is an example of strategic defaulting, it's a pretty poor one since they are about to lose the house! Strategic defaulting is not paying your mortgage because you think you will get a writedown and keep your house. These guys are not paying because they don't want to the system is there to protect them. This case does show how ridiculous it is that a bank can't more easily reposess a house when it is obvious that the borrower is taking them for a ride. Why the bank said they could appeal the last decision is beyond me though. Talk about incompetence.
 
They're defaulting on the mortgage, they've a strategy of renting the property and pocketing all the proceeds.

It's a common method of strategic default.

They could be making an income of around 20,000 euro a year from an asset they doesn't belong to them.They don't really care that eventually they'll lose the asset, their only concern is the income they make until that happens.

They can safely assume if the house is sold with a short fall to escape any repercussions.

Amazing the bank allowed this to happen in late 2009 though. A massive loan to hand out when the banks had more or less locked down on lending.
 
ashambles said:
Amazing the bank allowed this to happen in late 2009 though. A massive loan to hand out when the banks had more or less locked down on lending.
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I'm certainly not amazed by anything the banks do. They created this mess and are now creating another mess with these random debt writedown policy, which as discussed at length already is encouraging people to engage in strategic default type practices.
 
ashambles said:
They're defaulting on the mortgage, they've a strategy of renting the property and pocketing all the proceeds.

It's a common method of strategic default.

They could be making an income of around 20,000 euro a year from an asset they doesn't belong to them.They don't really care that eventually they'll lose the asset, their only concern is the income they make until that happens.

They can safely assume if the house is sold with a short fall to escape any repercussions.

Amazing the bank allowed this to happen in late 2009 though. A massive loan to hand out when the banks had more or less locked down on lending.
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But that has nothing to do with moral hazard of debt write downs. Anyone at anytime can decide to rent their property and not pay their mortgage. That could have happened during the boom as easily as now so it doesn't show anything. It's not even strategic defaulting as there is no end strategy. It's just defaulting as they know they will lose the house and it's up to the banks to deal with it. Wouldn't compare them to normal struggling families living in their house trying to pay their mortgage.
 
Sunny said:
But that has nothing to do with moral hazard of debt write downs. Anyone at anytime can decide to rent their property and not pay their mortgage...it's not even strategic defaulting as there is no end strategy.
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I didn't mention moral hazard for this case.

Do you not think a plan to make perhaps 100,000 for no outlay is a strategy. The end game is money. Would you not like 100,000 given to you for nothing?
 
Sunny said:
But that has nothing to do with moral hazard of debt write downs. Anyone at anytime can decide to rent their property and not pay their mortgage. That could have happened during the boom as easily as now so it doesn't show anything. It's not even strategic defaulting as there is no end strategy. It's just defaulting as they know they will lose the house and it's up to the banks to deal with it. Wouldn't compare them to normal struggling families living in their house trying to pay their mortgage.
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It's not 'their' house until the mortgage is paid, just throwing that in as an aside! I mean, by that logic, a family could buy a home and default after just a few months of living in it... does that make it their home.

Do the people in this case 'know' they will eventually lose the house? Perhaps they felt a deal might eventually be struck whereby all in default would get a write down. Thats the scenario outlined by the landlady Karl Deeter used for his article in the link I posted on a previous page.
If they know they are going to lose the house, why are they now contesting the case and trying to drag it out? I presume at this stage, the rent is no longer been paid
 
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