Moral hazard of banks writing off debt

[bugler]

I basically agreed with your post until this last bit. You are not serious? To be honest if this crisis has done anything for me, it's made me realise being risk adverse is a good thing. Any of the people related to me that overborrowed and who will be getting right downs etc are in a whole heap of of a financial mess and total and utter stress for years.

They probably did it to an extreme degree. For instance, I haven't had any borrowings since college (I'm now 32). Never a car loan, never an unpaid Credit Card bill. I don't intend that to change. But as for a mortgage...

Give me one reasonable reason why I should not borrow 310k instead of 275k? There is no extra risk to the extra borrowing. If I hit trouble, the banks must come to an arrangement that works for me. I'm not the slightest bit worried about it, the Central Bank statistics give me all the comfort I need. I won't suffer because of it.

 

[44brendan]

Dedfinitely more of a "moot point" for the forseeable future Bugler. While the banking sector may over time revert to a less risk averse approach to lending, I don't see this happening in either the short or medium term! possibly your grandchildren may get this opportunity!

 

[Delboy]

Dedfinitely more of a "moot point" for the forseeable future Bugler. While the banking sector may over time revert to a less risk averse approach to lending, I don't see this happening in either the short or medium term! possibly your grandchildren may get this opportunity!

Now thats wishful thinking...this is Ireland!!!
A precedent is being set that dictates the family home is sacred, no matter how much of a gamble you made initially. And right now we are seeing a boom (some say bubble) happening in large parts of Dublin for decent sized 3 and 4 bedroom family homes...who's to say that some of the mortgages handed out now won't be in bother in 3 years time when we have a different interest rate picture

 

[44brendan]

A precedent is being set that dictates the family home is sacred, no matter how much of a gamble you made initially.

My view is that we are slowly coming out of this mind-set, with a progressive re-posession and sale pattern of mortgages that are totally unsustainable. My point was not that there may not be a future slump in hous prices, but that bank lending practises will be repayment led rather than asset led, as was the case up until the early noughties!

 

[Sunny]

Now thats wishful thinking...this is Ireland!!!
A precedent is being set that dictates the family home is sacred, no matter how much of a gamble you made initially. And right now we are seeing a boom (some say bubble) happening in large parts of Dublin for decent sized 3 and 4 bedroom family homes...who's to say that some of the mortgages handed out now won't be in bother in 3 years time when we have a different interest rate picture

What precedent? Historically, house repossessions in Ireland have been almost non-existant even during previous economic meltdowns like the 1980's when interest rates went through the roof. There is nothing new in this. Banks in Ireland have never wanted to reposess family homes. Everyone knew that.

If people decide that there is no risk anymore to getting a mortgage that they can't afford, then work away. I for one have no interest in playing a game of chicken with a bank and putting my family under extreme stress if things go wrong. Ask thousands of families currently dealing with abnks about arrears if they realise how lucky they are.

 

[Kine]

If I hit trouble, the banks must come to an arrangement that works for me.

This has been a very interesting thread, but the above quoted goes completely contrary to my experiences of dealing with the banks. Several years of stress later and still no workable solution from the bank. They may eventually get there, but not after my credit rating is destroyed and all financial resources have been used.

I have posted previously on how they are only interested in meeting the central banks statistics as opposed to assisting struggling borrowers - an interest only option for example, regardless of its sustainability over the long term in reducing the debt owed, allows the Bank to chalk up another "restructured" case and move towards the 75% target by the central bank. It is cheaper for the Bank to enforce its security and pursue for the outstanding (and call peoples bluffs on bankruptcy, PIAs etc) than simply write off a huge amount in one go.

 

[Kine]

If people decide that there is no risk anymore to getting a mortgage that they can't afford, then work away. I for one have no interest in playing a game of chicken with a bank and putting my family under extreme stress if things go wrong. Ask thousands of families currently dealing with abnks about arrears if they realise how lucky they are.

+1

Pretty much sums up my previous post

 

[Gerry Canning]

Bugler, I cannot disagree with you.

I suppose the big issue arose in the fluffy times when Mr Bank threw out the money on an expectation that prices would never fall dramatically.
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. Banks and customers would have to evaluate what they should now do, it would have forced a near automatic revaluation that would aid the good and not just the bad..
I would think Banks on non-recourse would have Loans down close to market value , we would have realised the (hit) and we could all move on.

I suppose it is a case of the (if only!)

 

[ashambles]

What precedent? Historically, house repossessions in Ireland have been almost non-existant even during previous economic meltdowns like the 1980's when interest rates went through the roof. There is nothing new in this. Banks in Ireland have never wanted to reposess family homes. Everyone knew that.

You're effectively saying that they're the riskiest loans a bank can give? If so how can Irish banks hold mortgage rates below those of unsecured loans.

Was there a large amount of NE around in the 80s? In the UK yes, Ireland I'm not so sure. Without NE you just sell and repay the loan.

I for one have no interest in playing a game of chicken with a bank and putting my family under extreme stress if things go wrong.

It's not about playing chicken, it's rational people thinking what happens if the worst case occurs. They may not go all out but it could push them to borrow more.

Most of today's borrowers are borrowing well under what the bank would like to give them. The banks have a limited pool of money to lend so they give it to the safest possible borrowers. The safest borrowers will have savings, good earnings, and are smart enough that they won't need a bank to tell them how much they can afford to borrow.

But thanks to what we're seeing, any buyer now should only pick AIB as a lender, and consider getting a larger loan because there's less downside if they can't afford the loan. If that's not moral hazard I don't know what is.

 

[bugler]

Dedfinitely more of a "moot point" for the forseeable future Bugler. While the banking sector may over time revert to a less risk averse approach to lending, I don't see this happening in either the short or medium term! possibly your grandchildren may get this opportunity!

It's not moot at all, Brendan. I am speaking here from experience. I have been mortgage approved for 275k in the past, but my salary would actually make it possible to borrow 310k or so (maybe a bit more since I was approved originally).

The old me was prudent, I only wanted to borrow 275k at an absolute maximum. I am not looking to live in a grand house or the most salubrious area (just as well here in Dublin). I was risk averse.

The new me has realised that there's no need (or indeed advantage) to being risk averse, as it is actually others who carry the risk. In fact, being risk averse places me at a distinct disadvantage if buying a house, because I'll invariably be bidding against someone who isn't so risk averse and so who has more purchasing power compared to me.

So I might as well borrow the 310k. Everyone seems to be agreed that to be trying to put a family out of their home because they can't make their full mortgage repayment is abhorrent, to the point where it effectively is not allowed if some sort of reasonable offering by the borrower can be made (and whether repossession is possible or not, the banks don't seem interested in doing it).

Rationally, this opportunity to borrow more at reduced risk to myself is a no brainer. These are the market dynamics, and you get no thanks for acting prudently.

The interesting question on the banking side is why, given that Irish banks effectively operate a quasi-unsecured mortgage lending model (the process of repossession is both lengthy and costly, to the point where it seems better in many cases to actually write off debt) are Irish mortgage rates and Irish mortgage lending not as unusual as the wider mortgage environment?

Mortgage rates should be very high given the extreme difficulty in enforcing security. LTVs should be restricted. But there's AIB without a care in the world lending me over 4 times salary at 92% LTV on a 35 year term, as though they can actually repossess the property if I can only service 75% of the mortgage (they can't and/or won't) I'm not sure if changes in this regard will filter through as the reality dawns on lenders, or if I should expect some sort of plan to deal more stringently with arrears once the CB/Govt/Banks feel enough largesse has been shown, changes that will make mortgage lending secured again.

 

[bugler]

If people decide that there is no risk anymore to getting a mortgage that they can't afford, then work away. I for one have no interest in playing a game of chicken with a bank and putting my family under extreme stress if things go wrong.

I'm not sure if your misreading of my point is deliberate or not, but allow me to clarify for you: I am not suggesting anyone take out a mortgage "they can't afford". I am merely stating that there is little to incentive to a borrower restricting their borrowings themselves. It isn't rational, there is little to no risk to borrowing to the maximum you can service. Any future shocks will be borne mostly by the bank, by state decree. And if your earnings go down 15%, well there is a clear directive to the banks that they need to play ball with you to keep you in your home. No risk, so no deterrent.

 

[Sunny]

You're effectively saying that they're the riskiest loans a bank can give? If so how can Irish banks hold mortgage rates below those of unsecured loans.

Was there a large amount of NE around in the 80s? In the UK yes, Ireland I'm not so sure. Without NE you just sell and repay the loan.


It's not about playing chicken, it's rational people thinking what happens if the worst case occurs. They may not go all out but it could push them to borrow more.

Most of today's borrowers are borrowing well under what the bank would like to give them. The banks have a limited pool of money to lend so they give it to the safest possible borrowers. The safest borrowers will have savings, good earnings, and are smart enough that they won't need a bank to tell them how much they can afford to borrow.

But thanks to what we're seeing, any buyer now should only pick AIB as a lender, and consider getting a larger loan because there's less downside if they can't afford the loan. If that's not moral hazard I don't know what is.

How are they the riskiest loans that banks can give? They are still secured and fully recourse loans even if the banks have always been reluctant to go enforcing their security.

Banks have no interest in repossessing houses. They never have. They don't want to responsible for the costs of repossession, maintaining and securing a property, possibly becoming reluctant landlords, having to find a buyer and they also have to step into the previous owners shoes with regard to tax so they have implications for payment of LPT, water chages, VAT, Income Tax and CGT when they move to sell the property. And at the end of all that, they will need to write off some of the debt.

Historically, even the Courts have been extremely reluctant to grant judgements on family homes and will usually drag the process out for an inordinate amount of time.

None of this has been a secret. People have always known that banks are reluctant to repossess so the moral hazard as people call it has always been there.

Reading posts here, it is like people assume that everyone who is now in trouble were somehow living beyond their means and deserve to be punished. For every scammer or reckless borrower out there, I am pretty sure there are 100 families who are genuinely struggling due to changed circumstances.

AIB have done deals to writedown about 100 mortgages which is less than 0.5% of their restructured mortgages. That means 99.5% of people who are in difficulty haven't had debt writedowns yet. It hardly screams moral hazard to me. Bailing out the banks with taxpayers money screams moral hazard to me.

 

[Sunny]

I'm not sure if your misreading of my point is deliberate or not, but allow me to clarify for you: I am not suggesting anyone take out a mortgage "they can't afford". I am merely stating that there is little to incentive to a borrower restricting their borrowings themselves. It isn't rational, there is little to no risk to borrowing to the maximum you can service. Any future shocks will be borne mostly by the bank, by state decree. And if your earnings go down 15%, well there is a clear directive to the banks that they need to play ball with you to keep you in your home. No risk, so no deterrent.

You do realise that the Celtic Tiger is over don't you? Walk into a bank now looking for a mortgage and see how far they will let you stretch yourself no matter how much you want to borrow. The days of the borrower basically deciding for themselves how much they want are over. At least one hope they are until the banks then repeat their mistakes because they were bailed out and they know they will be bailed out again.....

 

[goingforgold]

going for gold;

You are correct ,negative equity can easily lead into an arrears mind-set .
I just cannot see that in the scheme of things it will be a major issue.
Anyone who uses negative equity as a ploy whilst having adequate funds to repay and keep a reasonable life style will be quickly found out.
I have sympathy for the person who can never see his/her way out of a lifetime of debt and who does not have enough income to maintain a reasonable life style, in that case unless he defaults Mr Bank will not come to a more socially acceptable arrangement.
It is a tough call.

I know Banks are not too bright but they are not that stupid {I hope}as to permit those who can afford play the poor me card.

Honestly @Gerry Canning I am not so sure that the banks aren't that stupid (I could be wrong)

If you look at the high profile debt writedowns that have made the news recently, there is a debt writeoff and a parked portion of the loan for a period of time. If that person/couple come into money (inheritance, Bord Gais windfall etc) there is no provision to use this money as part of the debt writedown arrangement. By not having a broad stroke arrangement whereby debt is written down in a fair and transparent manner we are wide open to an unfair method (moral hazard), and also one that can be abused more freely.

One final point re negative equity...you state correctly that the bank would not want to come to an arrangement if the person is capable of paying their loan, but my point is that the person can tell the bank they are going bankrupt in the UK unless the bank come to an arrangement, ie the customer should force the banks hand. This may not be palatable to all but if I were in serious negative equity I wouldn't feel like getting up for work for the next 20 years just to get back to a level playing field, especially as my next door neighbour gets a similar amount written off as their circumstances are slightly different!

 

[bugler]

You still don't seem to understand the point I'm trying to make. As I have said in this thread, I have been through the mortgage approval process. I know what the banks are willing to lend. For a single income family with a child, AIB will lend 4.3 times that single salary. The point isn't what are banks willing to lend, it's "are people being encouraged to borrow greater amounts due to a lack of significant consequences for doing so". Borrowers have huge incentives to "go big". They have no incentive to be cautious or prudent.

 

[goingforgold]

It's not moot at all, Brendan. I am speaking here from experience. I have been mortgage approved for 275k in the past, but my salary would actually make it possible to borrow 310k or so (maybe a bit more since I was approved originally).

The old me was prudent, I only wanted to borrow 275k at an absolute maximum. I am not looking to live in a grand house or the most salubrious area (just as well here in Dublin). I was risk averse.

The new me has realised that there's no need (or indeed advantage) to being risk averse, as it is actually others who carry the risk. In fact, being risk averse places me at a distinct disadvantage if buying a house, because I'll invariably be bidding against someone who isn't so risk averse and so who has more purchasing power compared to me.

So I might as well borrow the 310k. Everyone seems to be agreed that to be trying to put a family out of their home because they can't make their full mortgage repayment is abhorrent, to the point where it effectively is not allowed if some sort of reasonable offering by the borrower can be made (and whether repossession is possible or not, the banks don't seem interested in doing it).

Rationally, this opportunity to borrow more at reduced risk to myself is a no brainer. These are the market dynamics, and you get no thanks for acting prudently.

The interesting question on the banking side is why, given that Irish banks effectively operate a quasi-unsecured mortgage lending model (the process of repossession is both lengthy and costly, to the point where it seems better in many cases to actually write off debt) are Irish mortgage rates and Irish mortgage lending not as unusual as the wider mortgage environment?

Mortgage rates should be very high given the extreme difficulty in enforcing security. LTVs should be restricted. But there's AIB without a care in the world lending me over 4 times salary at 92% LTV on a 35 year term, as though they can actually repossess the property if I can only service 75% of the mortgage (they can't and/or won't) I'm not sure if changes in this regard will filter through as the reality dawns on lenders, or if I should expect some sort of plan to deal more stringently with arrears once the CB/Govt/Banks feel enough largesse has been shown, changes that will make mortgage lending secured again.

+1
And this effectively is the main moral hazard issue. Joe borrowed 600K in 2006 because he wanted a big house. Mike on same salary borrowed 250K as he wanted a mortgage he could afford. Mike has continued to pay his mortgage, despite c.100K negative equity. Joe has 300K written off because he can't affored his mortgage anymore, but he still retains his big house. Who is the loser in this situation? Joe has a big house with little/no negative equity and Mike has a modest house with 100K negative equity...my advice to Mike (depending on his circumstances) is to go bankrupt in UK if the bank won't do a deal.

 

[bugler]

None of this has been a secret. People have always known that banks are reluctant to repossess so the moral hazard as people call it has always been there

It's interesting that you say that. Do you not wonder if its existence was in some way related to our housing bubble? I mean if people are aware that repossession is an unlikely outcome, surely they will change their behaviour accordingly. Maybe this is an under appreciated contributory factor to the Irish housing bubble.

It hardly screams moral hazard to me. Bailing out the banks with taxpayers money screams moral hazard to me

It can't be both? Do we have to pick a side, banks vs people? That is an overly emotive attitude to take. This is not a football match, it is possible that both banks and borrowers have been incentivised to engage in risky behaviour, that both have been allowed to a degree to escape the consequences of their actions, in many cases because the state/taxpayer will pick up the tab.

But let's not cod ourselves. Some people are going to do quite well indeed out of this state sponsored largesse. I was incredulous to hear that borrowers who may be given a write down or a split mortgage will be further rewarded should they pay off a lump sum in the future (AIB-IMHO I believe) Or that those getting write downs may do so without any equity stake being taken in the property by the bank. What about a reward for the people actually meeting their obligations?
No chance of that I suppose. Get into arrears and then come back to us.

 

[ashambles]

How are they the riskiest loans that banks can give?

They're the riskiest loans because they're large, they're given out at only a couple percent above their borrowing rates and they're unable to enforce their power to take the assets they're secured against. They're supposed to be the first bill you ensure is paid, but it's not unknown for people to make sure their credit card bill is paid first.
If you'd a couple hundred thousand to lend how happy would you be to hand it out as a mortgage under those conditions. You might consider it risky perhaps?

None of this has been a secret. People have always known that banks are reluctant to repossess so the moral hazard as people call it has always been there.

That's simply not true, when I first took out a mortgage (c 2000) people borrowing were under the impression that a bank could and would very quickly move against you. In fact it used to be recommended to head to the building societies if they'd have you as they had a more tolerant approach if things went pear shaped.

Mortgages don't even have a long history in Ireland, the banks wouldn't give them outside of "professionals" for a long time, which is why the EBS, ICS came into being. For averagely paid private sector workers to get them came later again when the building societies expanded to lend to the general public.

All the main lenders were set up for high interest rates and extremely conservative lending until the euro started to come into being. Despite the seemingly non-stop recession until the late 90s there was no opportunity for people to test the willingness of banks to repossess.

 

[Delboy]

Sindo have a nice article on debt forgiveness at work, Irish style
http://www.independent.ie/opinion/a...ng-yourself-a-big-fat-writedown-30117091.html

 

[goingforgold]

Sindo have a nice article on debt forgiveness at work, Irish style
http://www.independent.ie/opinion/a...ng-yourself-a-big-fat-writedown-30117091.html

This sums up exactly what some of us have been saying...jump on bandwagon and get yourself a strategic default before you are left behind.

I also believe this example answers those who believe the banks are properly vetting people and their financial situation...they are just not capable I'm afraid.