ONQ's proposal for Universal Debt Forgiveness

[onq]

I reckon these are the three that Mpsox refers to:
(Bulletpoints are my own)

1. Firstly, there are those who have lost their jobs and are struggling to pay things back, and ....
2. secondly, those who got completely carried away and borrowed left right and centre and even if they are working, can't carry the debt burden they've loaded on themselves.
3. In addition, we're losing flexibility in the workforce due to the inability of people to move for work due to negative equity.

(nods)

One and two are fine - those points I got.

3 refers to a consequence, as opposed to a category of person.

As far a it goes, it appears to be incorrect, since mobility for work doesn't always require a family to relocate within the jurisdiction.

Its a small island, and the additional cost of travel and temporary lodging would be far less than the loss that would be incurred by negative equity.

If Mpsox means "relocate outside the jusridiction" then that doesn't relate to mobility within OUR workforce.

 

[Gekko]

Why not do the following?

Write people's mortgage debts in relation to their principal private residences back to (say) 80% of the value of the home. Only write off loans for the purchase, improvement or repair of the property. This is easy enough to calculate as it was the criteria used for mortgage interest relief (where "top ups" for other items were excluded) and standard rental income calculations.

That way you don't reward those who've taken out equity for ridiculous reasons. The moral hazard is doing nothing to help people.

Gekko,

The LTV is not directly correlated to people being in difficulty. There are many people in properties that have LTVs higher than 80% who can afford their mortgage payments and whose property suits their needs.

Having an LTV above 80% does not mean that you did not remortgage to buy a fast car, a big extension or nice holidays.

1) There are degrees of being in difficulty. Someone in negative equity with a decent job may not be in difficulty in relation to their mortgage repayments but they may be stuck in an unsuitable property. Plus writing down everyone's mortgage to (say) 80% might help silence the "moral hazard merchants".

2) Which is why I suggested that any write down should only be in relation to loans for the purchase, improvement or repair of the person's PPR.

 

[ontour]

1) ...... may not be in difficulty in relation to their mortgage repayments but they may be stuck in an unsuitable property. Plus writing down everyone's mortgage to (say) 80% might help silence the "moral hazard merchants".

Unemployed people who live in properties that they can not sell or rent but could find employment if they could move are in 'unsuitable property' Apart from that who would qualify for the universal mortgage bailout?

Many 'moral hazard merchants' or smart investors/ prudent borrowers etc. do not have a negative equity mortgage because they did not trade up in the boom or waited to buy because prices were to high. What will you do for those people? We are back to writing everyone a big check and tell the children that the retirement age is now 90 !

 

[onq]

Unemployed people who live in properties that they can not sell or rent but could find employment if they could move are in 'unsuitable property' Apart from that who would qualify for the universal mortgage bailout?

I think you're trying to limit the word "universal", ontour.

Many 'moral hazard merchants' or smart investors/ prudent borrowers etc. do not have a negative equity mortgage because they did not trade up in the boom or waited to buy because prices were to high. What will you do for those people? We are back to writing everyone a big check and tell the children that the retirement age is now 90 !

Yes, that could work, plus it'll reduce the pensions bill.

 

[Chris]

Hi Chris, in the absence of proper rental laws here as per the likes of France/Germany I don't think that renting can offer the same form of stability for a family with children (assuming that people can afford what they buy and don't have to sell and put strain on the family). If the children are moving around frequently it would be unsettling as they would be constantly making new and leaving old friends. Also, there is the "time limit" for mortgages....unless someone has significant deposits then they could quite quickly run out of time by being too old for a 20 year mortgage. Again, proper rental laws would help here. If the accomodation was good and rents were cheap then people would have so much more disposable income that they could spend/save/invest etc, never mind the anxiety of hearing about interest rate rises.

Some valid points, but I don't think you don't need some government regulations to make long term renting work. Germany is often held up as a model for rental laws, but there are loads of pitfalls there. Because of the added cost to landlords, accommodation is pretty much always empty, no light fittings, no sockets, not even a kitchen. Fully furnished accommodation is is extremely rare. Once you are renting a certain place for more than 5 years (I think this is the right number) then the renter has to give 12 months notice to vacate the property. I know many people in Germany that have ended up paying 6 months rent for two apartments because they had to move. Maintenance like painting walls falls to the renter, regardless of the state of carpets, the landlord is only obliged to replace them every 15 years, which means that renters essentially pay for these.
I think that people are perfectly capable of negotiating contracts or getting advice on doing so. With my current landlord I have a written agreement that the notice period we have to give is not one month but 3 and we have agreed a rental price for a three year period which includes a split of maintenance responsibilities between the two parties. If I had wanted longer term certainty the landlord would have been willing to increase the notice period. He was even willing to fix the rent for a 5 year period.
These are flexibilities you do not have in Germany. Because landlords are only able to increase rent by I think 2% per year, what happens is that rent only ever goes up, even if it is only a small amount.

I think you're trying to limit the word "universal", ontour.

I think ontour was referring more to the fact that if all mortgage holders have their mortgage reduced this would still leave a moral hazard. Those that did not buy and kept saving will not get any benefit. In addition a universal bailout will put an artificial floor under house prices so potential buyers would be hit negatively.

There are 3 kinds of people; those who can count and those that can't.

Actually there are 10 types of people in the world, those that understand binary and those that don't.

 

[Firefly]

Some valid points, but I don't think you don't need some government regulations to make long term renting work. Germany is often held up as a model for rental laws, but there are loads of pitfalls there. Because of the added cost to landlords, accommodation is pretty much always empty, no light fittings, no sockets, not even a kitchen. Fully furnished accommodation is is extremely rare. Once you are renting a certain place for more than 5 years (I think this is the right number) then the renter has to give 12 months notice to vacate the property. I know many people in Germany that have ended up paying 6 months rent for two apartments because they had to move. Maintenance like painting walls falls to the renter, regardless of the state of carpets, the landlord is only obliged to replace them every 15 years, which means that renters essentially pay for these.
I think that people are perfectly capable of negotiating contracts or getting advice on doing so. With my current landlord I have a written agreement that the notice period we have to give is not one month but 3 and we have agreed a rental price for a three year period which includes a split of maintenance responsibilities between the two parties. If I had wanted longer term certainty the landlord would have been willing to increase the notice period. He was even willing to fix the rent for a 5 year period.
These are flexibilities you do not have in Germany. Because landlords are only able to increase rent by I think 2% per year, what happens is that rent only ever goes up, even if it is only a small amount.

Hi Chris. I think the current market favours the renter and any landlord looking to keep their investment property for the long run would be delighted with a 3 year term. However, if you were to go back to 2002-2005 with a family and kids you would have had a hard time finding any landlord looking to be locked into such a lease unless the rent was very high...there were queues of people outside the door for viewings (I was there myself) and the landlord had the pick.

 

[Gekko]

Unemployed people who live in properties that they can not sell or rent but could find employment if they could move are in 'unsuitable property' Apart from that who would qualify for the universal mortgage bailout?

Many 'moral hazard merchants' or smart investors/ prudent borrowers etc. do not have a negative equity mortgage because they did not trade up in the boom or waited to buy because prices were to high. What will you do for those people? We are back to writing everyone a big check and tell the children that the retirement age is now 90 !

People in totally unsuitable apartments who want to start a family for example.

The smugness of your post and those by others astonishes me.

Those who haven't been stung by the property collapse were in the main just lucky. For either chronological reasons or in fact because of incompetence they didn't invest in the property market. Sages slowly rubbing their beards during the period 2001 - 2007 were thin on the ground but the way people carry on now you'd swear that they were everywhere.

EVERYONE encouraged and cajoled people to buy property. The government did so with its policies. Ergo the government and the State MUST bail people out.

A UNIVERSAL write down of ALL mortgages on people's principal private residences to (say) 80% or 90% of their market value is the way to go. Build in safeguards to prevent the writing off of non principal private residence purchase/improvement related debt but that's the bones of the way we should go.

 

[monagt]

"Nama have their own debt forgiveness program http://wp.me/pNlCf-1K0 /bet there aren't many nama developers living on cornflakes... " ref Brian Lucey

 

[IsleOfMan]

Those who haven't been stung by the property collapse were in the main just lucky. For either chronological reasons or in fact because of incompetence they didn't invest in the property market. Sages slowly rubbing their beards during the period 2001 - 2007 were thin on the ground but the way people carry on now you'd swear that they were everywhere.

EVERYONE encouraged and cajoled people to buy property. of the way we should go.

I have three sons who fitted the profile of those people who might have been looking for a property a few years back. None of them purchased despite being offered loan approval letters from their banks and the fact that I was also offering them a gift toward the deposit. It had nothing to do with age or incompetance.

 

[BOXtheFOX]

1)

2) Which is why I suggested that any write down should only be in relation to loans for the purchase, improvement or repair of the person's PPR.

I think that you would have to break this down even further. I didn't take out my existing kitchen and replace it with a newer one. I still have my old kitchen. I didn't re-tyle my bathrooms, the old tyles are still there. I didn't bother with decking, electric gates etc. Some people "improved" their homes just like they updated their wardrobe. What exactly is home improvement?

 

[Chris]

Those who haven't been stung by the property collapse were in the main just lucky. For either chronological reasons or in fact because of incompetence they didn't invest in the property market.

How on earth was staying out of the property market an act of incompetence? If anything it was an extremely competent action to take. I have posted about my own actions before, and absolutely nothing in it was luck. To say that people who consciously didn't buy or sold were simply lucky is very insulting to their intelligence.

EVERYONE encouraged and cajoled people to buy property. The government did so with its policies. Ergo the government and the State MUST bail people out.

A UNIVERSAL write down of ALL mortgages on people's principal private residences to (say) 80% or 90% of their market value is the way to go. Build in safeguards to prevent the writing off of non principal private residence purchase/improvement related debt but that's the bones of the way we should go.

So the answer to a problem caused by government intervention is more government intervention. You cannot be serious!

 

[ontour]

Gekko,

Look at it from a different perspective, There are people who decided not to buy and have been renting and have not been able to 'settle down'. They have not been able to make a house in to a home, I am not saying that everyone needs to own a property but there is an Irish mindset that we need to own the house and personalise it for it to change from a house to a home.

There are people living in small apartments that would like to have children but have deferred it as they are not in a position to provide a home that they deem suitable. There are people in financial difficulty that have deferred having children because they do not feel that they have the financial security for any / more children.

The case is strongly put for people who were unlucky/ imprudent with little consideration for those people who make sacrifices as they have no expectation of a 'bail out'. People have made life altering decisions without due planning and consideration, the morale hazard argument is that based on experience we need people to think more carefully about the implications for themselves and others. The overly simplistic rationale is that a bail out would reduce people's adversity to risk.

You are absolutely correct that now many people will say that they saw it coming and that the majority of people, media & professionals promoted the unsustainable growth. Given that the state is the people, I am still at a loss as to where the money will come from for the bail out, unless we burn bondholders it is going to be paid for by us the people.

There was a significant shift of wealth/ debt between generations over the last decade. We only ever hear about the pensioners who can not pay the fuel bills, this stereotype masks the many retired people who greatly benefited from the boom. Part of the cost of a bail out should be funded by redressing the generational disparity that occurred.

Having a non-principal private residence is excluded in your plan. There are many couple who married in the last 5 years who had to keep their their pre-marital homes due to negative equity or inability to sell, these accidental landlords have been 'unlucky'.

First solution for a bail out should be restructuring of debt, second should be a fast-track facility for bankruptcy and the last resort should be a universal bailout (debt forgiveness).

 

[Purple]

First solution for a bail out should be restructuring of debt, second should be a fast-track facility for bankruptcy and the last resort should be a universal bailout.

I agree.

 

[DerKaiser]

So we need to get real here and put a sensible argument together. For what it's worth I feel the only way any debt forgiveness scheme could work would be for it to happen through the courts and where people's incomes and savings would be scrutinised as they would be in a bankruptcy case.

Also obviously somebody who can't afford to pay for a big fancy house can't have their mortgages wiped out and be left to live there.

We were closer to a real solution 12 posts in.

How about our NAMA for the people? Except it works as follows (rather than the ill thought through soundbite most people would like it to be):

• The state pays discounted amounts to the banks to purchase mortgage debt where it's obvious restructuring alone will not work.

• The state then acts as both the state and a debt collection agency on a case by case basis. They take over all the income and assets of the household concerned leaving them possession of their PPR (provided it's not luxury - say over €400k in value at current prices) but not owning it .

• In order to incentivise the household to not just decide to live off social welfare, they get to keep all their income up to €20k and 30% of any excess they take in above that amount.

• This situation continues for 5 years, after which point the household can start fresh, keeping all their net of tax income and can continue to rent their home from the state at market rates.

 

[monagt]

40,040 Irish homes are in arrears of greater than 180 days. 10k homes now going through the courts. Running out of cans and roads here folks

The number of homeowners falling behind in their repayments has jumped from 49,609 at the end of March to 55,763 at the end of June.

 

[BOXtheFOX]

Those in the 1980's and 1990's who fell in to arrears on their mortgages weren't given or expected a bailout.

 

[monagt]

Those in the 1980's and 1990's who fell in to arrears on their mortgages weren't given or expected a bailout.

TRUE and I lived thro' it but the circumstances differ radically.

The country is being taken back 5/6 years in terms of incomes, allowances, pensions, standard of living, cost of homes, etc,

For the first time we have sudden mass unemployment, public service employees and pensioners pay and pensions being systematically reduced.

But should mortgages on overpriced house also be taken back??

This would reduce burden on state services and increase consumer spending so it would not all be taxes lost.

 

[Purple]

But should mortgages on overpriced house also be taken back??

Taken back by whom?

 

[monagt]

Taken back by whom?

Taken back to an appropriate level in relation to the current value of the house (within + - parameters)

I don't pretend to have an answer to this problem and do see both sides of the argument, but the answer is not throwing young couples on the street or making them lead an impoverished life for the next 20 years.

Does the lender take the house and then sell it at 50% of the original value to someone else while the owners could have stayed in their home if their equity and mortgage had been adjusted to the new circumstances?
Something for nothing is not the answer either but perhaps shared risk with the lender.

 

[Purple]

Taken back to an appropriate level in relation to the current value of the house (within + - parameters)

I don't pretend to have an answer to this problem and do see both sides of the argument, but the answer is not throwing young couples on the street or making them lead an impoverished life for the next 20 years.

Does the lender take the house and then sell it at 50% of the original value to someone else while the owners could have stayed in their home if their equity and mortgage had been adjusted to the new circumstances?
Something for nothing is not the answer either but perhaps shared risk with the lender.

My question is who takes back the loan; who takes the hit?

If you lend me €20 and I can’t pay you then you lose €20. It doesn't just disappear. Given that the banks are nationalised it means that tax payer owns the debt. If my bank reduces my mortgage by €100’000 then the tax payer is down by that amount.

If there’s to be a debt for equity swap, a “NAMA for the people” then the state (or state owned banks) need to make sure they are covered so the banks should be looking for at least a 50% margin on the debt, i.e. if a mortgage is reduced by €100’000 then they should take €150’000 of equity in the property. After all they have to cover their costs, their risks and the fact that they are reducing their cash-flow.