RIAD SC's correction of Norway example

[RIAD_BSC]

Hi RIAD

They are the figures which he gave. I know nothing abou the market. But it's the principle rather than the actual numbers which is important.

But just to be absolutely sure, I asked a question after his paper, and he confirmed my understanding that this guy would end up with a mortgage of €110k on a house worth €300k. Of course, most people did not have a 66% fall. To have that, they would have had to have a 100% mortgage at the peak of the market. And they would have had to do a debt settlement at the bottom of the market.

It sounds mad:

1987|300
1993|100
1998|300

The increase in 5 years was 200% cumulative from the bottom. I am sure that there is a Norwegian index somewhere. The bubble at €300k may not have been as bad as ours. The collapse probably overshot on the way down. So there could well have been a big spike when prices recovered. Even so, I agree that 200% is a lot.

I disagree with you that the principle is more important than the figures. The implication from those figures (i.e. that the guy had a 300k house and only a 110k mortgage) is the bedrock of the point you are trying to make (that the scheme was too generous to some people). The figures are absolutely central to what you are saying, and those figures are clearly wrong.

There is no way on earth that house prices rose by that much from 93-98..... Remember, these were the first five years after a total property collapse. The guy could not have had a house worth 300k at the end of the process, no way. For that to happen, the value of his house would have to have TRIPLED in the first five years after a property crash. It would be the most outrageously spectacular boom-bust-boom cycle in economic history. If that had happened, the whole world would routinely refer to the dynamics of the Norwegian crash, but they don't.

I think this needs to be cleared up for the sake of the point you are making. If those figures are so wrong, which they clearly are, your point is weakened considerably.

 

[RIAD_BSC]

 

[RIAD_BSC]

You can clearly see from the graph above that house prices in Norway from 93-98 rose by 50%. So the guy's house in the example was worth in the region of 150k at the end of the process. Not 300k.

With all due respect, I think this torpedoes the point you were making, Brendan.

Prices reached their peak again in 2008, judging by that graph, not 1998. So the guy's house wasn't worth 300k again until 2008.

 

[Brendan Burgess]

Hi Riad

The point I am making is that the system is way too generous, it that it unnecessarily allows the write off of debt.

The speaker gave those numbers.
I found them hard to believe, as you did.
So I asked the question and used his exact figures to illustrate my question.

Let's assume though that they are incorrect and that the figures are according to your graph. It's pretty much the same result.

By 1998, he had his mortgage reduced to €110k from €300k.
His next door neighbour still owed €300k (less any capital repayments)

If the property had increased by "only" 50% as your figures suggest, he still owed €110k while his next door neighbour owed €300k.

 

[RIAD_BSC]

Hi Brendan. Again with all due respect, I don't think it is intellectually fair of you to use distorted figures to make a disparaging point about writedown schemes (to which you are ideologically opposed in general), and to then turn around and say the figures don't matter when it is pointed out to you that they are way off. I think if someone else on the opposite side of a debate to you did that, you would pull them up on it much like I am now, and with some justification.

That there are winners and losers applies equally to all writedown schemes, no matter how they are constituted. The person who meets the criteria and avails of the scheme will always have a smaller mortgage than the person who doesn't meet the criteria and can't avail of the scheme. It's the nature of a writedown. Any example will prove that point, even one with distorted figures. It's obvious.

Usually, to meet the criteria of a scheme, you need a collapse in income. It is, in my opinion, unfair to then point how the scheme doesn't help someone who hasn't availed of it or doesn't qualify for it, and put that forward as some sort of bogus proof that the scheme is too generous.

The main point you seemed to be making was a kicker from the overall principle, that the guy who entered a writedown scheme emerged from it with a 110k mortgage on a 300k house. You were, incorrectly, insinuating that he got 190k of equity in his house for free, while the other guy gets nothing. Of course the other guy gets nothing, if he doesn't avail of the scheme. And the other guy gets nothing like 190k.

I think it is important to have these debates with you, because you get a lot of airtime to propogate your view (to which you are entitled). It is obvious that you are generally opposed to the principle of writedown schemes. You always cite fairness to people who don't avail of the schemes as your justification.

The point that people like me, who disagree with you on principle on this matter, would make by way of return is: I think your view is myopic. It isn't just a "fairness" problem. It is an economic problem, which is holding back the entire country. I don't support writedown schemes because I think we should be nice to struggling borrowers, and not nice to non-struggling borrowers. I support them because without them, the economy will not recover to any degree.

If you allow the whole debate to get sucked up into a faux argument about moral hazard, you lose sight of the overall goal: writedown schemes are primarily designed to help the overall economy, not individual borrowers.

That's just how they are politically portrayed.

 

[Brendan Burgess]

Riad

The issue is too important so I will ignore your personalised comments.

I suggest that you deal simply and solely with the issues involved.

Someone in serious mortgage arrears need one of two solutions. If the mortgage is completely unsustainable, they should surrender the house and have the shorftall written off over a short period of time. I have been actively pushing that everyone should recognize this. It is good for the borrowers; it is good for the lenders; It is good for the economy and it is good for Society. As was brought out by a few speakers at the conference, such a write down does not cost the banks. The insolvency of the borrower caused the write down.

An alternative to an agreed sale of their home, is to have their payments reduced. The underlying value of the property is of little importance to them. If someone has a house worth €100k and a mortgage of €300k, then it might make sense to reduce their repayments to the interest on the €100k.

There is absolutely no need whatsoever for debt write-down. As long as the bank is prepared to accept reduced payments, the unpaid interest can be deferred. When the house is sold subsequently - after 2 years, after 5 years or after 20 years, the proceeds can be used to repay the loan. If the house has increased to €200k, the bank will lose the difference. If the house has increased to more than €300k, the bank won't lose.

This is about fairness. It is extremely generous to the borrower. And it is fairer than the Norwegian system to the lender. There is no reason whatsoever to write off €190k at the expense of the lender or taxpayer for the benefit of the borrower.

As it happens, the proposed PIA in Ireland allows for this claw back of subsequent gains, as far as I recall. I am opposed to the PIA, but at least it recognises that any debt written down can be reclaimed against subsequent increases in value.

As I have already said, we looked at defining a mortgage as sustainable if the borrower could pay interest on the current value of the house. Initially we thought it was a good idea, but then we turned against it as it came up with so many anomalies. Someone with a house worth €100k would keep it, while someone with a house worth €200k would lose theirs. It just does not seem right. But as you point out, in any system, there will be unwanted side effects. We felt that the DIS would be far better where the sustainability was measured on the ability to pay at least 66% of the interest.

Brendan

 

[RIAD_BSC]

I'm bemused by references to personalised comments, as I was being fair and polite, in my opinion. I will continue to be fair and polite.

We'll just have to agree to disagree on this one, Brendan. I don't believe kicking the can down the road on mortgages is a good strategy for anyone.

In business, when it becomes obvious a loss is a big possibility, it is better to just recognise it upfront, write the asset down, and get on with things. The certainty this brings to the situation is the reward for paying the price of the write off.

Businesses, and economies generally, thrive on this certainty. Uncertainty, by hoping the mortgage might eventually be paid and kicking the can down the road to wait and see if that happens, is a bad strategy all round. The position that you favour tends more towards this, in my opinion.

It is also economically bad because the borrower effectively withdraws from consumer spending while this kick the can strategy is implemented. This is helping to destroy jobs in Ireland.

If the government is looking at another overall solution for this issue, it needs to look at it through economic spectacles, and not solely moral hazard spectacles.

With all due respect, once again, this is the problem I always had with the expert group of which you were a member - you guys never took a holistic economic view. The group never fully considered the economic merits for the country of a bold and radical plan to deal with mortgage debts. Look at Iceland, look at Norway, look at Sweden in the early 1990s..........look at the USA, where non-recourse mortgages are the order of the day and they don't even have to have this argument at all - their economy always recovers much more quickly after a housing bust because certainty (for borrower and bank) comes much earlier.

The approach taken to the problem so far in Ireland, to delay and pray, is slowly bleeding the domestic economy to death in a misguided search for fairness.

That's not personal, really it is not. It is a sincerely-held conviction.

 

[Brendan Burgess]

With all due respect, once again, this is the problem I always had with the expert group of which you were a member - you guys never took a holistic economic view.

Hi Riad

Would you,by any chance, remember the conversations and correspondence you and I had while the group was sitting?

You might like to inform the users here of what we discussed?

Brendan

 

[ballaboy]

I agree with RIAD BSC 100% the evil day is here and the time for confusing movement with action is long gone

 

[RIAD_BSC]

Darag, I'm not sure I'm strenuously opposed to anything here, except the accuracy of the figures used in the example. I think you are misreading me. I am in favour of bold schemes to tackle to mortgage debt crisis that is draining the life out of the economy. What is it that you think I object to?

 

[RIAD_BSC]

Hi Riad

Would you,by any chance, remember the conversations and correspondence you and I had while the group was sitting?

You might like to inform the users here of what we discussed?

Brendan

Brendan,

I'm not sure what the relevance of that is, but I do recall we had some correspondence at the time. Private correspondence if I am not mistaken.

It was on the single issue of negative equity mortgages, as I recall. I urged the group to come up with a workable option for people on good incomes who could afford to trade up to more suitable homes, but were trapped by negative equity. You disagreed with me, as I remember, subsequently and repeatedly. It transpired that the group came up with no recommendations in the manner I suggested. But thankfully, the financial regulator has since seen sense, and now allows all the banks to sell such mortgages, in much the same way that I was urging back in 2009.

My point that the group never took a holistic economic view (of the benefits of a far reaching scheme) stands. Of course, it was only possible to come to that conclusion after its final report had been published. Our correspondence was long before this point.

Again, I'm not sure of the relevance of you referencing it now. But whatever it is, Brendan, I'm sure it's not personal.

 

[44brendan]

I find myself somewaht confused as to whether there is a major difference in approach between both posters (RIAD & BB) on this issue.
Scenario as outlined by BB does incorporate an equitable solution to the primary problem. i.e. assists those with unsustainable mortgages & if they continue to own the property allows the bank to benefit (in terms of balance of loan owed) on any subsequent rise in property value. This appeasr to be fair to both parties.
I'm not sure whether RIAD has an objection to this proposal & if so what the basis of that objection could be.
The alternative (Norway) approach appears to give the property owners an immediate W/O of debt and allows them to benefit from any future increase in the value of the property. I don't see this as being an equitable solution.

 

[RIAD_BSC]

The point I was making was that the figures Brendan used were out by a huge factor.... of more than 100%. He was suggesting the guy in the example would get 190k in "free" equity, and hence the scheme was too generous. He gets nothing of the sort, and so the basis upon which Brendan suggested the scheme was too generous was incorrect. But I fear we have exhausted the argument at this stage, anyway.

 

[Brendan Burgess]

I'm not sure what the relevance of that is, but I do recall we had some correspondence at the time. Private correspondence if I am not mistaken.

It has two relevances.

You criticised the Expert Group on Mortgage Arrears

You accused me of "intellectual dishonesty"

You had made some excellent points about negative equity mortgages, which as you point out, I disagreed with.

Despite my disagreeing with you, I contacted you and asked you to make a submission to the Expert Group. Because it was important that the Group see all sides of the argument. Something which you did not do.

Not many people actively encourage the expression of a point of view, with which they disagree. So it's particularly offensive to be described as intellecutally dishonest.

I have been critical of some aspects of our report. But at least I actively participated in its preparation. You had an open door to make your submission but you chose not to.

 

[RIAD_BSC]

Now who's the one playing the man and not the ball? I think we've exhausted the good from this debate. I suspect you might agree. But I don't recall accusing you of "intellectual dishonesty". I don't recall it, because I didn't.

 

[Brendan Burgess]

But I don't recall accusing you of "intellectual dishonesty". I don't recall it, because I didn't.

You say it here

Hi Brendan. Again with all due respect, I don't think it is intellectually fair of you to use distorted figures to make a disparaging point about writedown schemes

Now who's the one playing the man and not the ball?

You accused me of dishonesty, which I resent. If you had made it about any other poster on askaboutmoney, it would have been removed as abuse.

You criticised the Expert Group - yet you had every opportunity to shape its views, but you declined to do so.

I think we've exhausted the good from this debate. I suspect you might agree

The reason why we don't allow abuse, is that they destroy threads. The Norwegian system is interesting and worth discussing. Your abuse has taken the thread off topic. I will remove it to a separate thread and you can continue it there, if you wish.

 

[RIAD_BSC]

You put "dishonest" in inverted commas. From what quote did you take it?

 

[Brendan Burgess]

Hi Riad

I have already pointed out what you said

I don't think it is intellectually fair of you to use distorted figures

I should not have put the word in inverted commas, but you clearly accused me of distorting figures and being unfair. That is accusing me of dishonesty.

 

[RIAD_BSC]

But you did use distorted figures. And I do consider that unfair.

 

[Brendan Burgess]

I have now received the notes from the speaker directly. And these are the relevant extracts

In the most exposed areas, houses and apartments lost 50 - 80 % of their value.
...
The price peak was in 1987/88, the bottom in 1993. But surprisingly, by 1997 the prices had caught up again.
...

As an example, if a property bought for €300 000 and fully financed by loan now is worth €100,000, the system would see agreed interest being paid on €110,000 for five years (which is 100% of the market value plus 10%), and the remaining €190,000 being treated as an unsecured debt.
...
[FONT=&quot]Due to the fluctuations on the housing market, it is obvious that the writing down of mortgages only went on for a limited period, most probably from the introduction of the Act and up to 1997, when the prices caught up the previous peak. [/FONT]

And, as I have already said a few times, I questioned these figures as they seemed odd to me. A 66% fall followed by a 200% rise.

He gave the figures.
I clarified them and the system from the floor immediately after the presentation.

If you consider that to be unfair of me, so be it.