Brendan Burgess
Founder
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There have been many estimates
Professor [broken link removed]
“… if you … look at mortgages people have on their own houses, there are about €55 billion of these out there…“ I would reckon that the ultimate cost of this very useful social programme is something in the region of €5 billion to €6 billion.” (Actually there are €116 billion of home loans, so the cost, if his other assumptions are correct, would be around €11 billion). However, back in November he spooked us all with the following prominent forecast "If you thought that the bank bailout was bad, wait until mortgage defaults hit home" . Given that the bank bailout is costing around €55 billion, people assumed that mortgage defaults would be at least that again. In Kilkenny, Professor Kelly forecast that defaults on mortgages in excess of €1m given out to high rolling professionals, would cost in excess of €5 billion. It's hard to reconcile these wildly varying forecasts.
Brian Lucey and Constantin Gurdgiev and others came up with the following estimate in an Irish Times article on 11 November 2010.
“In the case of Ireland, such a formula would most likely lead to an implicit writedown of at least 30 per cent of the more recent mortgage amounts on average, yielding an expected total cost to the entire system of circa €37 billion to €49 billion.” However, in this Sunday Independent article, Gurdgiev says "I tend to think that around €5bn would do. It depends on how you do it and to what level you do it," he said.
So let's try to figure out what such a programme might cost...
The cost of a debt forgiveness programme would depend on the parameters of the programme.
The cost to the taxpayer would depend on what part of it the taxpayer has to pay - mainly the bit for AIB, EBS & PTSB.
And maybe the taxpayer has paid a deposit on this in the form of the bank recapitalisaitons?
The basic data
Total value of mortgages on owner occupied homes |€116 billion
Number of mortgages| 780,000
Average mortgage| €150,000
Of which, cheap trackers| €58 billion
Taxpayer owned mortgages – AIB, PTSB & EBS|€54 billion
Total value of mortgages in arrears at end March 2011| €9.5 billion
Total arrears |€826 million
Total value of rescheduled mortgages at end March 2011| €6 billion
Provisions already made by AIB, PTSB & EBS| €4.3 billion
Scenario 1 – wipe out all mortgage debt – cost €116 billion
This would leave us all mortgage free and owning our own homes. While no one is proposing this, it is useful to identify the absolute limit of such a scheme.
Scenario 2 - Reduce all mortgages to the current value of the property - €24 billion
These are only estimates.
Houses in negative equity| 300,000
Average mortgage in negative equity| €200,000
Average negative equity|€80,000
Total cost of write-off|€24 billion
Cost to state owned banks |€12 billion
While the state does not have to pay for the losses in banks it does not own, if it directed that negative equity be written off, it would have to compensate those banks to some extent.
Scenario 3 – Write off the negative equity of all first time buyers from 2005 to 2007 - €8 billion
Number of first time buyers| 105,000
Average negative equity| €80,000
Total cost of write-off|€ 8 billion
Cost to state owned banks|€4 billion
Scenario 4 – Write off the mortgage shortfall on 10,000 unsustainable mortgages - €1 billion
The average loss on an unsustainable mortgage is probably higher than the average negative equity of €80,000 estimated above – say it’s €100,000.
10,000 unsustainable mortgages x €100,000 = €1 billion
The banks have already lost this money. They are not going to get it back anyway. There is no need for the state to compensate Ulster Bank for agreeing to write off the mortgage shortfall.
Scenario 5 – write off the negative equity on all 50,000 mortgages in arrears - €5 billion
50,000 x €100,000 = €5 billion
But hasn’t the state already put €4.3 billion into the banks for these write-offs?
AIB, PTSB and EBS have made provisions of €4.3 billion against potential losses. Based on these and losses from other parts of the book, the taxpayer has had to recapitalise the banks.
This means that the taxpayer won’t have to put any more money into the banks unless the losses actually exceed €4.3 billion.
However, if the losses are a lot less than €4.3 billion, the banks would be able to return this to the taxpayer.
Some people argue “the taxpayer has put €55 billion into the banks – they should use this to write off mortgages”. This argument is invalid. The €55 billion was put in to the banks, in case of heavy losses. If these losses don’t amount to €55 billion, then the banks can refund some of this money.
The significance of cheap trackers
At least half the mortgages in negative equity are cheap trackers. This means that they are less likely to get into arrears.
It also means that the effective negative equity is much lower than the amount reported. If I have a mortgage of €300k on a house worth €200k, I have nominal negative equity of €100k. However, if I have a cheap tracker, my repayments are the same as they would be on a normal mortgage of €250k. So I have effective negative equity of €50k.
Look at it another way, the lender would lose very little by switching the borrower to a stanard variable rate mortgage of €250k.
Professor [broken link removed]
“… if you … look at mortgages people have on their own houses, there are about €55 billion of these out there…“ I would reckon that the ultimate cost of this very useful social programme is something in the region of €5 billion to €6 billion.” (Actually there are €116 billion of home loans, so the cost, if his other assumptions are correct, would be around €11 billion). However, back in November he spooked us all with the following prominent forecast "If you thought that the bank bailout was bad, wait until mortgage defaults hit home" . Given that the bank bailout is costing around €55 billion, people assumed that mortgage defaults would be at least that again. In Kilkenny, Professor Kelly forecast that defaults on mortgages in excess of €1m given out to high rolling professionals, would cost in excess of €5 billion. It's hard to reconcile these wildly varying forecasts.
Brian Lucey and Constantin Gurdgiev and others came up with the following estimate in an Irish Times article on 11 November 2010.
“In the case of Ireland, such a formula would most likely lead to an implicit writedown of at least 30 per cent of the more recent mortgage amounts on average, yielding an expected total cost to the entire system of circa €37 billion to €49 billion.” However, in this Sunday Independent article, Gurdgiev says "I tend to think that around €5bn would do. It depends on how you do it and to what level you do it," he said.
So let's try to figure out what such a programme might cost...
The cost of a debt forgiveness programme would depend on the parameters of the programme.
The cost to the taxpayer would depend on what part of it the taxpayer has to pay - mainly the bit for AIB, EBS & PTSB.
And maybe the taxpayer has paid a deposit on this in the form of the bank recapitalisaitons?
The basic data
Number of mortgages| 780,000
Average mortgage| €150,000
Of which, cheap trackers| €58 billion
Taxpayer owned mortgages – AIB, PTSB & EBS|€54 billion
Total value of mortgages in arrears at end March 2011| €9.5 billion
Total arrears |€826 million
Total value of rescheduled mortgages at end March 2011| €6 billion
Provisions already made by AIB, PTSB & EBS| €4.3 billion
Scenario 1 – wipe out all mortgage debt – cost €116 billion
This would leave us all mortgage free and owning our own homes. While no one is proposing this, it is useful to identify the absolute limit of such a scheme.
Scenario 2 - Reduce all mortgages to the current value of the property - €24 billion
These are only estimates.
Average mortgage in negative equity| €200,000
Average negative equity|€80,000
Total cost of write-off|€24 billion
Cost to state owned banks |€12 billion
Scenario 3 – Write off the negative equity of all first time buyers from 2005 to 2007 - €8 billion
Average negative equity| €80,000
Total cost of write-off|€ 8 billion
Cost to state owned banks|€4 billion
Scenario 4 – Write off the mortgage shortfall on 10,000 unsustainable mortgages - €1 billion
The average loss on an unsustainable mortgage is probably higher than the average negative equity of €80,000 estimated above – say it’s €100,000.
10,000 unsustainable mortgages x €100,000 = €1 billion
The banks have already lost this money. They are not going to get it back anyway. There is no need for the state to compensate Ulster Bank for agreeing to write off the mortgage shortfall.
Scenario 5 – write off the negative equity on all 50,000 mortgages in arrears - €5 billion
50,000 x €100,000 = €5 billion
But hasn’t the state already put €4.3 billion into the banks for these write-offs?
AIB, PTSB and EBS have made provisions of €4.3 billion against potential losses. Based on these and losses from other parts of the book, the taxpayer has had to recapitalise the banks.
This means that the taxpayer won’t have to put any more money into the banks unless the losses actually exceed €4.3 billion.
However, if the losses are a lot less than €4.3 billion, the banks would be able to return this to the taxpayer.
Some people argue “the taxpayer has put €55 billion into the banks – they should use this to write off mortgages”. This argument is invalid. The €55 billion was put in to the banks, in case of heavy losses. If these losses don’t amount to €55 billion, then the banks can refund some of this money.
The significance of cheap trackers
At least half the mortgages in negative equity are cheap trackers. This means that they are less likely to get into arrears.
It also means that the effective negative equity is much lower than the amount reported. If I have a mortgage of €300k on a house worth €200k, I have nominal negative equity of €100k. However, if I have a cheap tracker, my repayments are the same as they would be on a normal mortgage of €250k. So I have effective negative equity of €50k.
Look at it another way, the lender would lose very little by switching the borrower to a stanard variable rate mortgage of €250k.