Paying a mortgage on the current value of a person's home

Brendan Burgess

Brendan Burgess

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I think that this particular issue raised in Karl Whelan's paper to the Central Bank Mortgage Conference deserves special attention

Consider a family that cannot come close to paying a mortgage equal to the current market value of their home.

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I think it is also clear that the size of the Irish mortgage problem is such that even when mortgage debts are currently unsustainable, repossessions should not necessarily be the first choice.

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For this reason, options discussed in the Keane report (such as mortgage-to-rent schemes or split mortgages) that allow for debt write-downs while families remain in their homes need to be considered by all banks involved. Go back again to the example of a family who are in negative equity and cannot pay the current value of their loan. If the family can service a mortgage equivalent to the current market value of the home, then a bank will likely be better off writing the loan down to the current market value of the home and “parking” the remainder of the loan until maturity, than removing such a family from their home.
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I'm a bit confused ... does "writing down" not mean simply knocking a chunk off the loan balance (as a bad debt or whatever)? But "parking" means deferring it (with or without interest in the meantime)? In the latter case isn't part of the problem still just being kicked to touch to be considered in a few decades?
 
Leave aside the complication of cheap trackers for the moment. Assume that a borrower has 5% standard variable rate loan.

House value|€200k
Mortgage|€300k
interest charged on mortgage|€15k
interest applicable to the house value |€10k
Borrower can afford repayments of| €12k
which represents the interest on a mortgage of|€240k
It is argued that the bank would be better off reducing the mortgage to €240k either by writing off €60k or warehousing it interest-free.

If they repossess the house, they will sell it for €200k and only get the interest on €200k, whereas at the moment, they are getting the interest on €240k.

While debt forgiveness is better for the borrower, there is no need for it in this case. The Deferred Interest Scheme can cope with this very well.

€3k of interest is deferred each year, until the borrower is in position to repay it.

Let's say we go for the Debt Forgiveness solution.

The bank writes down the mortgage to €200k - potential cost to taxpayer :€100k
The borrower pays the interest and some capital off their mortgage.
Over time, the house will probably increase in value.
The mortgage outstanding will be reduced as the borrower is paying off the capital.

The end result is that the taxpayer will have paid €100k on behalf of the borrower, so tha t they can buy their own home.
 
One of the most sensible posts that I have read. There is abosolutely no doubt that this needs to happen.
 
All these schemes have merit and I am all for anything that can keep people in their houses and save the taxpayer from having to put more money into a banking system. One of the big problems that I see banks facing with schemes like this is that are restricted by accounting regulations. If they start deferring interest or "parking" part of the loan, then they could be forced to classify the loan as non-performing/restructured in their accounts. Once this happens, they have to take provisions which will impact their ability to generate profit and therefore capital and could up requiring a bailout anyway.

If banks are going to do this on a large scale, I think they will have to figure a way to get the loans off balance sheet.
 
I suspect that many of these negative equity loans will already have been provided for. The issue of concern re such a straightforward proposal is that does it apply to all in negative equity. I.e. If I am on a reasonable salary and can easily meet my mortgage can I avail of this scheme? This is where Sunny's fear may come into play as currently despite negative equity I would be viewed as a satisfactory credit risk!
 
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