Why do the banks not do negative equity mortgages?

[so-crates]

RIAD BSC I do understand exactly where you are coming from - I can do the mathematics. What I don't like is the presumption of value that you are using to base the calculation on. I do not see the banks that you and I now own knowingly handing out 100+% mortgages as a solution, by virtue of this thread existing at all it has proven bad enough that they handed out 90% of the then value of the property.

As to my being disparaging? I chose that phrase quite carefully. How are we to start differentiating for these new "humane" mortgages? How are we to discriminate? What is to be the selection criteria? Who is to be the arbitrar of these new "humane" considerations? Bank managers? If we consider these mortgages, we must consider them for all.

 

[RIAD_BSC]

So-crates... I'll say it again. These people already have NE mortgages with the banks... all they want is to be allowed transfer the NE to a different address. That is a whole different ball game to giving out a freshly-minted 125% mortgage to someone who doesn't yet own a home, which is what you seem to object to....

What "presumption of value" are you referring to? I don't understand what you are saying there. The NE would be defined by the sale price they receive for their house before moving. There is no assumptions at all.

You say you object to banks giving 100+% mortgages to these people..... You forget that these people already have 100+% mortgages.... It has already happened! They just want to change address!

 

[pjuegos]

How can this be so difficult to understand?

Example:
A home owner in Dublin has an outstanding mortgage balance of 300K. The current house value is 200K, which means 100K NE.

If that home owner is offered a better job in Cork, it is currently not possible to sell the house in Dublin and buy a new house in Cork.
However, if NE transfers were allowed, that house owner could sell the Dublin house for 200K, and buy another house in Cork for the same 200K.

Result of the operation:

• No extra financial risk: the house owner is in the same situation as before, a house in 100K NE. Just a different address as RIAD BSC pointed out
• No extra risk to the banks: home owner keeps borrowing the same amount of money from the bank
• No extra risk to the state: no debt forgiveness or anything like that
• The operation creates a new buyer, who acquires the house in Dublin
• The operation creates a new seller, who sells a house in Cork
• Allows job mobility, which is good for the economy

 

[JoeB]

Brendan, your views on this matter....

I feel that Brendan does display sympathy to those involved. The problem is such that there is no easy solution.

Explain to me how NE portability is a bad idea for someone who is properly stress-tested on a mortgage that is within their affordability limits? Explain how this is bad for society? The bank is already on the hook for the NE anyway (the existing mortgage is already one of the "negative equity mortgages" you are so opposed to.... something that gets lost in this argument).

You are also assuming that their total indebtedness will always rise.

Transaction costs, of perhaps 15,000. That's a significant amount of extra debt.

Take a couple on combined salaries of 150k. Bought a 100% mortgaged apartment at the top of market for 400k, now worth 200k, have paid 25k off the mortgage.... that's NE of 175k.... they have savings of 50k (I'd surmise there are lots of couples like this in modern Ireland)

They'd be decades trying to pay the NE off ....

Clearly they're not trying hard enough. It'd take decades to pay 175K, on an income of 150K a year? I think it could be paid off in two to three years. What else would they be spending their money on?

It's people who earn 35,000 a year that are the problem, not those earning 150K.

 

[Gekko]

Isn't it interesting that you characterise as "greedy" and "self-centred" the unpalatable? How exactly is it greedy and self-centred to consider society as a whole as opposed to the wishes of a small number of individuals who are not actually in constrained financial circumstances? And how is it fumbling in the greasy till to disagree with your stated position? I am at a loss as to how disagreeing with you on the subject of negative equity mortgages equates to greed on the part of myself or others. My reasons for seeing negative equity mortgages as dangerous, short-term thinking have not changed since I first heard them mooted back at the height of the boom - though no-one labelled them "negative equity" mortgages then - they called them 125% mortgages. Oh the recipients had good jobs and were able to afford the higher repayments but as with all short-term thinking the bite was only down the line. Remember I too would have to fund a shortfall if I were to sell. I too bought in the boomtimes. So I am also a candidate for your fantasy mortgage. I didn't, however, buy a place I wanted to move out of in a hurry (I never did understand the lure of the term "starter home" - a marketing ploy if I ever heard one). I didn't borrow to the extent of my capacity or even close to it. I didn't fund the deposit with borrowings. I didn't furnish the place with borrowings. I didn't, in short, view it as a five-year purchase and expect my debts to be cleared by an appreciation in prices within a short period. I was prudent but still find myself with a mortgage for more than my property is worth - yet I don't clamour for others to bear my burden or my risk since I knowingly and willingly engaged in chancing my arm on the property market.

It is neither greedy nor self-centred nor grasping to view with some distaste and indeed alarm a battle-cry for the continuation or even extension of the dangerous and foolish practices that got us into this mess in the first place.

It is also not addressing the valid concerns of others as to the advisability of extending short term "solutions" when your only response is name-calling.

I'm not sure what to say in response to your post.

I'm not branding anyone "greedy" or "self centred" for disagreeing with me.

I'm referring to those whose arguments are "I wasn't greedy...let them eat cake" and "if they get bailed out, I won't pay my mortgage". I'm also referring to those who make flippant comments about holidays, cars, trips to New York etc. There are people in this country who are on their knees because of the greed and avarice of bankers and builders and because of the absolute incompetence of government, regulators and bankers. As I've said before, we're primarily a society rather than an economy. Something has to be done to help these people. I want to see my taxes used to help these people. I don't care if I don't get a portion of my debt forgiven or if the fact that I'm repaying my debts somehow excludes me from any wider restructuring. That's what it means to be part of a society. But I'm not entirely social minded. The only way this country will bounce back is for the overburdended middle class to emerge from beneath the debt mountain and get the economy going. And when that happens, we'll all be in a better place.

 

[Leaky1]

I said it looks do able not that it made sense. Your bank doesn't think it makes sense. Can we run through why that is? And also why do you think they said no. It's good to have a real situation with real figures.

Also can you afford interest rate hikes? Why do you want to move. What size and approximate location are you living in.

My questions are not directly at you, but it's very hard to deal with this in an abstract way so if we could discuss a real sitation, yours, it's easier to deal with the concept.

I posted a reply to you earlier but it was very brief, so I'm editing it here. You said it was good to have a real example. All helpful suggestions are welcome.

Reasons why the bank think it doesn't make sense?:
I asked my bank several times if I could carry the negative equity but they said no straight away. They said the Financial Regulator will not allow them to create a negative equity mortgage. I emailed the CEO of EBS and provided figures, much as I did here earlier, and he said that negative equity mortgages were something they didn't do and would not be looking at just yet. The only option they will entertain will be for me to pay them the shortfall of a sale upfront.

Can I afford interest rate hikes?:
I can afford the 4.6% I'm currently paying. I was previously on a fixed rate of 5.8% and that was okay too. I could afford another percent or so. Genuine question - how much extra percent should I stress-test for?

Why do I want to move?
I currently live in a 1-bed apartment in a city centre location, I think it is approx 40msq. The idea would be to move to a more suitable size home to start a family. Honestly, our neighbourhood is not a nice place to bring up kids even if there was enough living space. Yes I was short-sighted to not plan ahead for kids when I purchased but that is the shortsightedness of being in your mid-20's.

We don't have any debts other than the mortgage. I have a credit card for occassional online purchases - if I order something I immediately transfer payment from the current a/c. We own a 2nd hand car that we bought outright. In previous years when I got a payrise I instanly increased the amount of my savings. I guess what I'm trying to make a point of here is that we don't live on credit and try to make decent financial decisions. Unfortunately the apartment mortgage was a bad mistake. I want to pay for this mistake (I don't want debt forgiveness) but would rather pay for it while living in a more suitable home. If I had to live here for another 10years I would go mad - and children would be an IVF option only (I'm not trying to curry sympathy, but there is an age where this becomes a fact).

Current situation:
Joint incomes of 60k, stable jobs.

Current mortgage is 179k with 24yrs remaining. The monthly repayment is eur970 (standard variable 4.6%). Neg equity could be estimated at 50k.

If I were allowed I would buy a new home valued at approx 200k.
I have deposit of 20k.
I would require a mortgage of 180k, plus to be allowed to carry forward 50k negative equity.
Total new mortgage of 230k, hopefully to extend the term to 30years. At the current variable rate of 4.6% it would be monthly payments of eur1,100.

Even if I were allowed to get a negative equity mortgage tomorrow I wouldnt do it instantly. I would prefer to save for another 12months and increase my deposit, knowing there was light at the end of the tunnel. But waiting another 5years would be quite dispiriting - this doesn't mean I want instant gratification on this subject, in reality I have been saving for some time to get my deposit together.

 

[Gekko]

I can see no reason why Leaky1 shouldn't be allowed to do this.

 

[Brendan Burgess]

Folks

This is a very long thread, which I split from another thread yesterday.

Can you stay on topic. This is about negative equity mortgages. It is not about debt forgiveness.

Can you also stick to the issues. If the abusive comments about me were made about anyone else, they would have been removed.

This is an interesting and important topic. Argue the points and not the person.

From now on, any personalised attack will be removed.

Brendan

 

[Brendan Burgess]

As I am being abused on this topic, let's just look at what I said

http://www.askaboutmoney.com/showpost.php?p=1158567&postcount=33

The only negative equity mortgages which lenders should allow would be where borrowers are trading down, as this improves the situation for both lender and borrowers. Giving someone in negative equity more money is just not a good idea.

In this Key Post on the topic under the heading "Ideas which might work"

Should borrowers be allowed to transfer their negative equity to a new home?
I don't think that this should be allowed, but I am including it in this thread for completeness. It's discussed at length here.

I don't try to shut people up by abusing them and belittling the work that they have done. I provide a forum for people to exchange ideas. I discuss those ideas and even if I don't agree with them, I will often promote those ideas for consideration.


and

“Reluctant landlords” should be facilitated by changes to the tax regime for renting a new property
Where someone is in negative equity and needs to move for job reasons or for family reasons, but can’t sell their house, the state should facilitate this. They should be treated differently from professional investor landlords.

and

Struggling borrowers should be allowed to sell their homes if they want to
This is a serious problem. Where a borrower wants to sell a home in negative equity, the lender is often refusing unless the borrower is able to clear the shortfall. Up to now the rationale for this has been that the loss would be recognized in the accounts. Now that the banks have been forced to make provisions against such loans in the stress tests, this rationale is no longer valid.

So, I am very aware of the problem. I know some people personally in this difficulty and I have read enough reports on Askaboutmoney to be very much aware of it.

I have sought solutions and documented them in a systematic manner.
I spoke about the topic on DriveTime yesterday
and
I will circulate that thread to the relevant politicians, civil servants and Financial Regulator today.

For the official record, this is what the Expert Group said on the topic

Trade Down

The Group notes that, for some mortgage holders who are in negative equity, trading down would produce a reduction in mortgage debt and more affordable monthly payments. The Group recommends that further consideration should be given by lenders to facilitating trading down by borrowers in this situation. Such options would have to meet relevant prudential standards, with appropriate controls in place, and be in the customers’ best interest.

I have also sought to establish the factual position which, I understand, from speaking to lenders, is as follows. Two banks, probably Ulster and Bank of Ireland, told the Financial Regulator around 6 months ago that they were proposing to do trade-up negative equity mortgages. The FR was uneasy about them, and asked/told them to hold off while they reviewed the issue. As far as I know, the FR has not made a decision on the issue.

 

[Bronte]

Reasons why the bank think it doesn't make sense?:
I asked my bank several times if I could carry the negative equity but they said no straight away. They said the Financial Regulator will not allow them to create a negative equity mortgage. I emailed the CEO of EBS and provided figures, much as I did here earlier, and he said that negative equity mortgages were something they didn't do and would not be looking at just yet. The only option they will entertain will be for me to pay them the shortfall of a sale upfront.

Thanks for the comprehensive reply.

Did the CEO write back to you himself? Did you argue the same case you outlined here. Banks are trying to sort out the mess but you must think of it from their point of view. You can afford your mortgage, they are making money off you so why should they budge. That's your problem. You can appeal to their better nature. Maybe they will accomodate you. Things seem to be changing all the time in the banking world. How about trying to negotiate selling your house and taking the negative equity with you as a loan at maybe mortgage rates, and go and rent for some time in a more suitable place?

In relation to children which is off topic but relevant because the main reason people want to move is to get a place more suitable. Do not let where you live now put you off. I have one bed apartments only suitable for couples but during the boom we had many couples (Poles/Latvians etc ) who got pregnant and had babies and stayed for quite some time, even though we didn't thing the place was suitable for them size wise, we also had couples with older kids. Personally don't know how they did it but they weren't waiting to have kids, liked the rent and the flat and did whatever in order to have a family. It can be done.

 

[Bronte]

.

I know quite a few young couples who are stuck in apartments and are desperate to buy houses with a view to starting a family. They're postponing this because their in negative equity. Most would have combined income of €100,000 - €120,000. They could easily afford a mortgage on a larger property and the absorption of the apartment's negative equity into that apartment. They just can't bridge the €50,000 - €80,000 to get them out of the negative equity problem.

In light of Leaky1's honest assessment of his situation on his modest salary could you Gekko give us a full account along the same lines of the people with the 100K to 120K salaries.

 

[Guest105]

I certainly have sympathy for anyone caught in this trap at a personal level.



The logical arguement against this is that it is creating an artificial floor to support property prices at unrealistic levels. This in turn is keeping many other people out of the property market, and indeed stopping those people from moving on with having kids etc.

You have explained the argument against negative equity mortgages very well there Complainer. I fear if negative equity mortgages became a reality, it will lead to more problems down the line and we need to learn the lessons from the past. The market should be allowed to dictate what happens to house prices and they should be no more interventions from governments or banks.

I read here about couples who are delaying having families because they are only living in nice modern one or two bedroom apartments.

I think people seem to forget that it wasn's that long ago when 14 or 15 children were brought up in one room shacks. We have come a long way.

 

[Sunny]

Personally I don't see why Negative Equity mortgages should be automatically banned but having said that, people are right to be sceptical about them. They are not going to be a solution by itself and given the banks history, the regulator is perfectly right to tread very cafefully. The same thing happened with 100% mortgages. The banks swore they would only be offered to a tiny fraction of qualified people but within days, there were adverts on the back of buses for them.

As long as the banks and the borrowers are responsible, it is an option that has to be examined. There are of course risks but no matter what we do, there will be risks. We are in a hole here and ranting about the past or people's mistakes isn't going to help anyone.

 

[Brendan Burgess]

So, having read this discussion, here is a summary of my views.

I have huge sympathy for people who are in negative equity and who need to move.

I don't think that they should be allowed to increase their borrowing as that only increases their risk. If they have a large income which would justify a higher mortgage on an affordability basis, they should apply that higher income to reducing their negative equity.

They do have a problem in that need a larger house. A larger mortgage makes the problem worse for them, not better. There is no need for them to own that larger house, they can rent it.

So, they should be facilitated in selling their home in negative equity. If they have a cheap tracker, they should be given a discount for paying off the cheap tracker early.

If they can't sell their home, they should be allowed set the rent paid on their new home against the rent received on the old home.

I am not opposed to transferring a negative equity mortgage to a house of the same value
There is a sort of "logic" about moving from a house worth €200k in Cork to a house worth €200k in Dublin and simply transferring your mortgage of €300k. I was opposed to this when the transaction costs were much higher mainly due to stamp duty as it would increase borrowing.

While I am not opposed to it, I would recommend to people considering it, that they should just sell and rent instead.

Trade-down negative equity mortgages should be allowed, but...
they might not be of great value to the borrower. At the time of the Expert Group report, my concern was that the stamp duty and transaction costs would wipe out most of the money saved and the borrower might end up with less house but with the same amount of borrowing.

Say, I have a mortgage of €300k on a house worth €200k. I need an increase in property prices of 50% for my negative equity to evaporate.

If I trade down to a house worth €100k, I will have a mortgage of around €210k on a house worth €100k. So I will need house prices to increase by 110% to evaporate my negative equity. (Of course, if you sell the original house and don't buy another one, you will be stuck with a €100k shortfall and you won't benefit from any increase in house prices.)

My interest costs will be a lot less on €110k, but is it worth the trading down? My advice to someone in this situation would be to consider staying put but taking advantage of the Deferred Interest Scheme - as suggested by the Expert Group.

Trading down because you have to move location, is probably ok. Trading down because you can't afford the repayments, is probably not a good idea, but worth considering.

 

[Brendan Burgess]

The same thing happened with 100% mortgages. The banks swore they would only be offered to a tiny fraction of qualified people but within days, there were adverts on the back of buses for them.

Well said.

 

[Guest105]

I certainly have sympathy for anyone caught in this trap at a personal level.



The logical arguement against this is that it is creating an artificial floor to support property prices at unrealistic levels. This in turn is keeping many other people out of the property market, and indeed stopping those people from moving on with having kids etc.

You have explained the argument against negative equity mortgages very well there Complainer. I fear if negative equity mortgages became a reality, it will lead to more problems down the line and we need to learn the lessons from the past. The market should be allowed to dictate what happens to house prices and they should be no more interventions from governments or banks.

I read here about couples who are delaying having families because they are only living in nice modern one or two bedroom apartments.

I think people seem to forget that it wasn's that long ago when 14 or 15 children were brought up in one room shacks. We have come a long way.

 

[RIAD_BSC]

Again, a quote from Brendan that I take serious issue with: "They do have a problem in that [they] need a larger house. A larger mortgage makes the problem worse for them, not better. There is no need for them to own that larger house, they can rent it. So, they should be facilitated in selling their home in negative equity."

So, even if they can easily afford the repayments on the larger home and mortgage, they should be prevented from buying it? That makes no sense. It should not be up to you to decide if there is "no need" for them to own it or not.

You are also denying those people the opportunity to transfer their NE over to a new property and allow future house prices rises to help inflate the NE away. You are forcing them to crystalise their loss at the bottom of the market. That's just plain bad financial advice.

I'm sorry if you think this is all too strong, Brendan, but the expert group made such a mess of this issue, I think you guys should be fair game for very heavy public criticism on it....

That is, unless the expert group issues a recommendation that might help fix its previous mistake, by agreeing that NE mortgages are suitable for some people who can afford them..... If the expert group doesn't say something, then nothing will ever be done to help these people

 

[Gekko]

In light of Leaky1's honest assessment of his situation on his modest salary could you Gekko give us a full account along the same lines of the people with the 100K to 120K salaries.

It's not my situation so it wouldn't be right for me to discuss it in greater detail.

 

[Brendan Burgess]

So, even if they can easily afford the repayments on the larger home and mortgage, they should be prevented from buying it? That makes no sense.

Riad, It makes absolute sense.

Being overborrowed is a problem for the borrower and a problem for the lender. Increasing the borrowing makes the problem worse.

If the person can "eaily afford the repayments on the larger home", then they can easily afford to increase their repayments on their current home and, over time, eliminate the negative equity.

It might well be a bit academic at this stage, as I believe that the Central Bank forced the lenders to make provisions for performing loans which were in negative equity. This suggests that the Central Bank won't allow banks to increase the lending to people who are already in negative equity.

You might want to make a submission to the Central Bank on the topic.

 

[Brendan Burgess]

You are also denying those people the opportunity to transfer their NE over to a new property and allow future house prices rises to help inflate the NE away. You are forcing them to crystalise their loss at the bottom of the market. That's just plain bad financial advice.

Hi Riad

We don't allow speculation about house prices on Askaboutmoney. But I will leave your comment there as it shows the flaw in your argument. You are assuming that we are at the bottom of the market. I don't think that this is a valid assumption.

If someone is on a low salary and is in such deep negative equity that the only way of recovering is to wait for house prices to increase, then they should hold onto their home as long as possible. If house prices fall, they will be just a bit more insolvent.

If someone is in the situation you describe and they have a high income, they have to make a judgment. If house prices continue to fall, their negative equity and problem will get worse. They may well be better off selling now and paying off the shortfall. If they wait and house prices fall further, their options may be further restricted.

It's important for people in negative equity to understand that there is no magic wand. It is going to take time to resolve their problem.