Re: Some proposals for dealing with negative equity where the borrower can’t afford t
Options involving sale of the property
7)Reduce the debt in exchange for giving the lender part-ownership of the property.
Loan: €800k
House value : €500k
Borrower can afford interest only repayments on €500k mortgage.
Sell €300k worth of the house to the bank – i.e. 60%.
The borrower is left owning 40% of the home – i.e. €200k worth.
The borrower has a mortgage of €500k.
The negative equity is the same.
But the loan repayments will be reduced by 37.5%
If the house is sold, the bank gets 60% of the proceeds.
Disadvantage to the borrower
If I was a borrower, I would prefer to have €300k of negative equity on a €500k house as prices would have to rise by "only" 60% to solve the problem. Having €300k of negative equity on a €200k house means that prices would have to rise by 150%. The flip-side of this is that if house prices fall further, the negative equity rises more if I own 100% of the house.
8) The government should facilitate the sale and leaseback of the family home
At the end of the day, some borrowers will never be able to meet their loan commitments. But maybe if their home was sold to an investor, they could rent it back from them?
- A stamp duty exemption on the sale of the house in a sale and leaseback transaction.
- A stamp duty exemption on the repurchase of the home.
- Full interest relief for the purchaser on mortgage interest, rather than the 75% which applies to normal investments.
This still leaves the borrower with a debt owing to the lender. But this could be dealt with through help from the family and access to the pension scheme.
Disadvantage:
Tax incentives are part of the cause of the problem we find ourselves in. In general, tax incentives should be avoided.
Tilting the system towards particular buyers or sellers creates an unfair and artificial market.
However, the stamp duty is a huge interference with the smooth running of the market. Eliminating it or reducing it, might facilitate a more flexible market.
9) The government should allow qualifying homeowners access to a debt settlement scheme
Where the borrower’s problems stem primarily from having huge negative equity and repayments which they can’t afford, the borrower should have a right to sell the house at market value and participate in a debt settlement scheme as proposed by the Law Reform Commission.
In other words, the lender would not have the right to prevent the home being sold, as long as it was at market value. The borrower would have to pay a proportion of their income for the next 5 years to the lender. But after that, the borrower would have a fresh start.
Access to such a scheme would be limited to those
- Who have made every effort including accessing their pension fund to deal with the negative equity.
- Who have no realistic prospect of paying off the deficit on their mortgage.
People would be excluded from the system
- If they are able to pay but are just trying to escape their debts.
- If they had recently transferred assets to relations to create an artificial insolvency
- If they were turning down offers of work.
Disadvantage
Such a scheme might discourage people from asking their friends and family for hel. However, they would get a clean start quicker if they get help from friends and family.