Morgan Kelly suggests that debt forgiveness will cost only €6 bilion

Brendan Burgess

Brendan Burgess

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“The good news is that if you leave investment mortgages out [of total mortgages owed], which are largely the banks’ problem, and look at mortgages people have on their own houses, there are about €55 billion of these out there,” he said.


Prof Kelly made his estimations based on 20 per cent of people having difficulty paying their mortgages. This was the default figure in Florida where there was a similar housing bubble, he said. He estimated that mortgages would need to be halved on average.
“ I would reckon that the ultimate cost of this very useful social programme is something in the region of €5 billion to €6 billion.”

In such a scheme mortgages would be reduced to a level “deemed affordable” while others would be allowed to leave their properties “without being pursued for outstanding debts”, he said.

He described as “ridiculous” the situation in which banks “have amounts set aside in their accounts for their mortgage losses but are not forgiving mortgages”. This was “something that needs to change”.
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A couple of things strike me about what he had to say.

"We are talking sums in the region of €5 Billion to €6 Billion......, which by our standards are not very large"

I don't understand what he means by "our standards". I think it is a very large amount.

He says it's ridiculous that banks "have amounts set aside in their accounts for mortgage losses but are not forgiving mortgages".

It is good accounting practice and one of the core accounting principles- prudence -that provisions be made in accounts for possible bad debts.

It does not mean that every effort should not be made to recover all debts.
 
look at mortgages people have on their own houses, there are about €55 billion of these out there,” he said.
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This is extraordinary stuff from a guy who is very influential. According to the Central Bank , the total loan accounts outstanding at the end of March 2011 was €116 billion.

He may be excluding the securitised loans.
He may be excluding the loans from non-covered banks.
 
callybags said:
He says it's ridiculous that banks "have amounts set aside in their accounts for mortgage losses but are not forgiving mortgages".

It is good accounting practice and one of the core accounting principles- prudence -that provisions be made in accounts for possible bad debts.

It does not mean that every effort should not be made to recover all debts.
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I agree with you fully. Many commentators don't understand this point. The Master of the High Court wanted the banks to swear that they had not wrtten off the mortgage when they were seeking repossession.
 
Can you imagine the uproar if this principle was applied to property developers?

If a bank has made a 70% provision against a loan, maybe then the borrower owes only 30% of the amount lent?

And NAMA could only seek repayment of the amount it paid for the loan and not the full amount.
 
So 20% of people are let off , no problems.


I should pay my mortgage now because ?

I'll take forgiveness phase 2 please, get a nice new car instead of paying my mortgage.
 
Brendan Burgess said:
Can you imagine the uproar if this principle was applied to property developers?

If a bank has made a 70% provision against a loan, maybe then the borrower owes only 30% of the amount lent?

And NAMA could only seek repayment of the amount it paid for the loan and not the full amount.
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I see potentially huge conflicts arising whatever happens, between

(i) those who owe less and are managing their current financial difficulties prudently and competently and whose debts are in the tens of thousand range, and

(ii) people whose debts are in the millions range, who have traded imprudently and/or lost money on a gamble on the market, or by taking a risk on what was an arguably unsustainable long term position - two incomes, 3% mortgage rates about to start a family.

Its a bit like the prodigal son returning and getting royally feted, while the loyal sons feel hard done by despite years of obedient service.

Equally, some people are genuinely suffering on a personal level because of the shame of not being able to pay their mortgage, their bills, socialize with friends - all the things they took for granted before this - there is no easy solution.

I know at least two property developers who will be actively looking for debt forgiveness - albeit at the scale of millions and not billions - because they simply cannot afford to repay their loans with the state of the market in property the way it is.

Them's the breaks.

ONQ.
 
Brendan Burgess said:
This is extraordinary stuff from a guy who is very influential. According to the Central Bank , the total loan accounts outstanding at the end of March 2011 was €116 billion.

He may be excluding the securitised loans.
He may be excluding the loans from non-covered banks.
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We are a young, optimistic nation.

We need to trim our costs no doubt about it.
We need our banks to lend and jobs to work at.

We're doing the former, but the banks are lending half the mortgages this year they did last year and we continue to lose jobs.

Maybe somebody finally told Morgan to understand that economics is a black art and consumer confidence didn't need to be driven any lower than it currently is.
 
This is extraordinary stuff from MK and, sadly, more responsible academics such as Karl Whelan seem to be at least partly supportive.

I'm leaving aside the fact that he has his numbers all wrong. It is the ludicrous suggestion that provisions/projections for bad loans should be converted to immediate debt forgiveness which is entirely off the wall.

Provisions/projections are an estimate, based on judgmental assesment of the probabilty and size of defaults across a mortgage book. Let's say the projections are that 10% will default for on average 50% of their mortgages. The problem is that we do not know which are the 10% and if we did we do not know which of these will be 25% defaulters and which will be 75% defaulters.

As Mathew Elderfield pointed out, there are no silver bullets. He also correctly warns that talk of such forgiveness is an incitement to bad behaviour. I could imagine that if I had a mortgage and there was a whiff of forgiveness in the air I would start pretending the mortgage was causing me great difficulty.
 
I thought the banks were set to lose €5-6bn "high rollers" alone according to Kelly, so how does the total including everyone else still only amount to €5-6bn.
 
DerKaiser said:
I thought the banks were set to lose €5-6bn "high rollers" alone according to Kelly, so how does the total including everyone else still only amount to €5-6bn.
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His figures often contradict themselves.

However, in his most recent defence of his High Rollers estimate, he claimed that he was referring to investment properties.

Presumably the debt forgiveness is for home loans only?

Brendan
 
goingforgold said:
This is exactly what will happen. As I said previously, it is happening already in anticipation of such a move on debt forgiveness.
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Im seriusly wondering why do i bother paying mine, bought in 2009 and havnt missed a payment. No i hear i could have bought a bigger house, paid less, or nothing at all and have a big chunk taken off it! Crazy stuff.
 
The arguments against appear sound from the banks point of view, perhaps less so from the point of view of struggling debtors and again are based on estimates.
The article seems to put more realistic figures on the estimates by Morgan Kelly, which several AAM posters have commented on above in this thread.
This begs the question - if Kelly's figures are out on something that's quantifiable to this extent - how accurate are his other pronouncements?
Did the stress tests not yield hard data on all of this?
 
Kelly's calculations are out because he said that there was €56m of mortgages, when there is actually €116 billion.

This is what Gurd, Lucey, et al estimated in the Irish Times letter of 11 November

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.
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The only hard data is that there is that there is €116 billion of owner occupier homes.



The cost of any defaults can only be estimated at this stage.


The cost of debt forgiveness would depend on the criteria being used.



It seems that Gurd and Lucey want to write off all negative equity, irrespective of the payment capacity of the borrowers.


Brendan
 
If Gurd and Lucey's policy is pursued then there is a huge portion of society that will feel very aggrieved. They will wonder why they didn't buy that 600K house now as they would be as well off as if they had bought a 300K house, and of course they'd have a much plusher property courtesy of the taxpayer. Can't see how this is equitable or fair. Surely this can't work?!

Also like many thousands of people I am in negative equity but also have substantial savings that I was going to use to reduce the mortgage. Not going to happen now! Let's all get a piece of this gravy train as best we can!
 
The €49 Billion figure related back to the €116Bn of owner occupied homes seems too high.

I'm presuming 116 Bn is the book value - lets assume this is the max value - 2007.

Older properties will be less affected, but will also contribute less to the loan book.

From [broken link removed]
Since reaching their highest level, Residential Property Prices have fallen by almost 40% nationally, with Dublin experiencing the largest decline (-47%), while in the rest of Ireland prices fell at a somewhat lower rate (-35%).
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Let's take a mean figure (47+35/2) = 41% and apply it to the entire €116Bn = €47.56Bn

This suggests that the €49 Billion figure may refer to the total fall in value, as opposed to the negative equity* (NE) involved.

*NE may be higher for properties bought nearer the 2007 peak, but for houses bought in say 2001-2002 in sought-after locations, they may not be in negative equity yet.
 
Let's add 6 billion, multiple it by two and add a further 6 billion for good measure. Let these economists publish their data and models. I have never seen such back of the envelope calculations being given such national coverage. Kelly has said he modelled the data so let's see it. Publish a paper instead of giving speeches and writing opinion pieces.
 
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