Loans should be made non-recourse

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Purple

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Why bother with these changes?
What’s needed is a structure where banks have to carry the can for mortgage defaults. The mortgage should be secured against the value of the house. If the house is repossessed and sold the bank and not the customer should be liable for any outstanding loan balance. If that was the case then banks would be far more cautious about how they lend. It will make borrowing more expensive but it will not give one cohort of borrowers an advantage over any other (outside of what sensible lending practices should dictate anyway).
 
I agree completely... we should have the US hand back the keys and walkway option for any new mortgages.
 
Loans are made to people not to properties. The people to whom the loans are made should repay them. The security is there, just in case.

Such a proposal would be open to all sorts of fraud. Overvaluation of properties, sales between connected parties, etc.

It is so expensive and time consuming to get repossession, that people would just stop paying their mortgage if there was any hint of negative equity.

In effect, this would close down the mortgage market or limit the loans to 60% LTV.
 
That didnt work out very well for a lot of US banks.

Unfortunately given how small Ireland is, how little care is given to risking shareholder money and that downside risk has been abolished for bank management this wont work to avoid the situation which the CBI is trying to protect against.

Non recourse plus the LTV limits I would be all for but we need to protect us and the banks against our respective stupidity. We can't inflate our way of the resulting debt trap now we are in Euro/German framework and we need to adapt to this - the past inflation of wages ain't happening again
 
Brendan Burgess said:
Loans are made to people not to properties. The people to whom the loans are made should repay them. The security is there, just in case.

Such a proposal would be open to all sorts of fraud. Overvaluation of properties, sales between connected parties, etc.

It is so expensive and time consuming to get repossession, that people would just stop paying their mortgage if there was any hint of negative equity.

In effect, this would close down the mortgage market or limit the loans to 60% LTV.
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I'm not saying it's a solution, I'm asking why not.

I accept that loans are made to people currently but they could be made to people with the property as the limit of the liability. Of course repossession would have to be much faster and cheaper but that should be the case now anyway.
I don't accept that properties could be overvalued in that way. There's a property price register and it can't be beyond the ability of a bank to know what a property is worth. Who the sale is between doesn't matter.

AT the moment the banks know that they will be bailed out if they collapse and, in many ways more pertinently, they never have to crystalize their loss as in theory they can go after the borrower forever unless they file for bankruptcy.

Where did the 60% LTV come from?
 
cormacol said:
That didnt work out very well for a lot of US banks.

Unfortunately given how small Ireland is, how little care is given to risking shareholder money and that downside risk has been abolished for bank management this wont work to avoid the situation which the CBI is trying to protect against.

Non recourse plus the LTV limits I would be all for but we need to protect us and the banks against our respective stupidity. We can't inflate our way of the resulting debt trap now we are in Euro/German framework and we need to adapt to this - the past inflation of wages ain't happening again
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Mortgages in the US are not really non-recourse; the borrower didn't have to pay the difference but the federal government did.
 
Your dead right - sorry should have made the distinction
I wonder if banks faired any different where the mortgages were not recourse.

I guess my concern was that non recourse potentially encourages even poorer decisions by borrowers I.e. I'm not on the hook so ill borrow x million. When this coincides with weakening lending standards as is inevitable the next time it's different (if left unchecked) then you threaten the entire financial system.

Ireland is too small for that scenario and inevitably tax payer money would be involved - we need to be saved from ourselves unfortunately
 
Be careful what you wish for. If we introduced non-recourse mortgages, you could expect mortgage rates and rents to increase substantially.

Non-recourse States are very much in the minority in the US but they include California and Arizona, which both experienced pretty dramatic post-2006 crashes in property values.
 
odyssey06 said:
I agree completely... we should have the US hand back the keys and walkway option for any new mortgages.
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Really! So you'd like to have another government bail out would you? Clearly you have not got the foggiest idea how those loans were financed and how it all went horribly wrong. Even today we still do not know much it will end up costing the U.S. tax payer.
 
OK, so how do we ensure that banks are more on the hook, more frightened of the consequences of bad lending?
How do we ensure that the person who signs off on the loan has skin in the game if the result does pear-shaped. They want bonuses for success so why not have penalties if things go badly?
 
It's a really important question - it all comes down to incentives.

Death penalty for the senior management maybe? In reality, what I have reasoned from recent events is that there are no real consequences for anyone. So I'm all for steps being taken to prevent it happening.

Maybe things would work better if the bust wasn't do extreme but unfortunately we Irish, on average, are gombeens with no understanding of what is going on.
 
Jim2007 said:
Really! So you'd like to have another government bail out would you? Clearly you have not got the foggiest idea how those loans were financed and how it all went horribly wrong. Even today we still do not know much it will end up costing the U.S. tax payer.
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I don't think the poster was suggesting that the state underwrite the loans. At the moment the Irish state has underwritten the banks.
 
Purple said:
OK, so how do we ensure that banks are more on the hook, more frightened of the consequences of bad lending?
How do we ensure that the person who signs off on the loan has skin in the game if the result does pear-shaped. They want bonuses for success so why not have penalties if things go badly?
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Well I think we need to start by clearing up one popular misconception - bankers are people who are either a partner in a private bank or a shareholder in a bank, all others are just employees! The bankers, the real bankers, were responsible for the appointment of the management, they got it wrong and were wiped out - so the bankers were held responsible, despite the popular press. So both sides were held responsible as they should have been and should continue to be going forward.

The important thing is to ensure that the banks are well enough capitalised to withstand such a blow in the future, so I would suggest:
- Up the T1 ratios to around 21%
- Restrict the banks from using MBC products
- Restrict executive bonuses to long term share option, vesting should be at least 5 years out or so
- Restrict the mortgage business to about 25% to 30% of the loan book

For the mortgage itself:
- Require a minimum deposit of 20% achieved via documented savings, not a gift from granny!
- Max mortgage period is 25 years
- Load must be paid back by the time the borrower reaches 60 years of age
 
Jim2007 said:
Well I think we need to start by clearing up one popular misconception - bankers are people who are either a partner in a private bank or a shareholder in a bank, all others are just employees! The bankers, the real bankers, were responsible for the appointment of the management, they got it wrong and were wiped out - so the bankers were held responsible, despite the popular press. So both sides were held responsible as they should have been and should continue to be going forward.
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The senior management of any business are the people who really run it. Who the shareholders are is largely irrelevant.
It’s a real stretch to suggest that the upper echelons of management are not “Bankers”. If someone is placed in a senior management position charged with making strategic decisions which can and will have a major impact on a bank it is bizarre to say that they are not a banker and should not to culpable for the decisions they make.
Anyone who gets a bonus for positive results should be penalised for negative results. Carrot and stick.


Jim2007 said:
The important thing is to ensure that the banks are well enough capitalised to withstand such a blow in the future, so I would suggest:
- Up the T1 ratios to around 21%
- Restrict the banks from using MBC products
- Restrict executive bonuses to long term share option, vesting should be at least 5 years out or so
- Restrict the mortgage business to about 25% to 30% of the loan book
Click to expand...
From my limited knowledge of the subject I agree though restricting the proportion of the loan book that mortgages constitute to 30% seems severe.

Jim2007 said:
For the mortgage itself:
- Require a minimum deposit of 20% achieved via documented savings, not a gift from granny!
- Max mortgage period is 25 years
- Load must be paid back by the time the borrower reaches 60 years of age
Click to expand...
Limiting the term to 25 years is a good idea. Maybe even a shorter term would be good.
With a retirement age of 68 why should mortgages have to be cleared by 60?
 
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