Why do the banks not do negative equity mortgages?

[RIAD_BSC]

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.

It doesn't make absolute sense. It makes no sense. If they can easily afford the repayments, and the loan is properly stress tested, then they are not over-borrowed.

If someone has NE of 200k on a 1-bed apt, then even if they could afford to increase their repayments by €1,500 a month, it would take well over a decade to clear the NE. "Over time" might be too late for some people to start a family.

 

[Brendan Burgess]

Update

I understand that the Central Bank has finished its review and has written to the lenders allowing negative equity mortgages but, only in exceptional circumstances.

If a lender wishes to do so, they must get the product approved by the Central Bank first.

But the capital requirements would be much hihger for such loans, so I don't think AIB, BoI, EBS or PTSB could consider doing them.

 

[Leaky1]

Brendan.
Sorry to ask what is probably a stupid question but what do you mean by the "capital requirements". I'm not familiar with the term.

 

[Bronte]

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.

Why are you saying that BB is doing all these things. It's the banks that won't allow it nor the regulator?

Can you give a concrete example in figures with salaries etc to show how it makes sense.

 

[Sunny]

Update

I understand that the Central Bank has finished its review and has written to the lenders allowing negative equity mortgages but, only in exceptional circumstances.

If a lender wishes to do so, they must get the product approved by the Central Bank first.

But the capital requirements would be much hihger for such loans, so I don't think AIB, BoI, EBS or PTSB could consider doing them.

Sensible approach. The capital requirements will stop the product becomig widepsread but the option will be there for banks to help certain people.

 

[Bronte]

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

Well that's to me a cop out on your initial argument. You mentioned that you know many couples what is wrong with giving us the figures and they should (the figures) in themselves prove your argument.

 

[Sunny]

Brendan.
Sorry to ask what is probably a stupid question but what do you mean by the "capital requirements". I'm not familiar with the term.

For every loan a bank gives out, they are required to hold capital against it to cover potential losses. This is expensive for banks. More risky loans should require more capital which is what the regulator is asking for. So they won't be rushing to issue billions of these loans but at least the option is there.

 

[Gekko]

Hi Brendan

You're assuming that the couple's borrowings increase.

Consider the following example, which is typical of the scenarios to which I believe negative equity portability/mortgages should be applied:

1 bedroom apartment purchased for €350,000 with a mortage of €280,000 outstanding. Current market value of €200,000.

Couple want to start a family and move to a 3 bed semi which is available for (say) €250,000. Couple have €50,000 saved. All of today's more stringent income requirements and ratios are comfortably satisfied.

The above couple's borrowings do not increase if they are allowed to shift their negative equity. They still owe €280,000. And their social problems have vanished as they can now start a family.

What is the downside of the above arrangement? The couple get what they want, the bank's position improves somewhat and the little guy isn't getting bailed out so the 'moral majority' should be happy.

EDIT: Bronte, see above...

 

[Brendan Burgess]

Hi Gekko

People tend to look at properites as being in negative equity, but it's better to look at the borrower's overall position.

In your example, the borrower's negative equity is:

House|200
Cash|50
Loan|(280)
Negative equity |(30)

Afterwards, the position is

House|250
Cash|0
Loan|(280)
Negative equity |(30)

The borrower is in a worse position in that he now has no safety net.
The lender is in a worse position, because the borrower no longer has the cash available.

This has nothing to do with bailing out anyone. It's financially bad for the borrower. It's financially bad for the lender. If it happens to be a state owned lender, then it could be the taxpayer who bails this person out if they get into difficulty.

The best solution here is for the person to continue saving and pay off the 30k negative equity.

Because of the excessive provisioning forced on the lenders by the Central Bank, they may well have had to make a provision against the existing loan. If that is the case, and/or if the borrower is on a cheap tracker, maybe the house can be sold and the negative equity might be settled.

The former borrower is now in a much better position. They are free of their loan and their unsuitable house. Now they can rent for a while until they can build back up a deposit.

Brendan

 

[Sunny]

The negative equity stays at 30k Brendan. (mortgage of 280k on a 250k house). Also assuming the borrorwer is able to meet the repayments, the bank is in a stronger position because it now has a lower LTV mortgage on its books albeit only slighter. Their security is also stronger (three bed house v one bed apartment) Ok, I take your point about the cash but surely whether they use that 50k to pay off negative equity on their exisiting property or use it to pay it off their new property is irrelevent.

 

[Gekko]

Hi Gekko

People tend to look at properites as being in negative equity, but it's better to look at the borrower's overall position.

In your example, the borrower's negative equity is:

House|200
Cash|50
Loan|(280)
Negative equity |(30)

Afterwards, the position is

House|250
Cash|0
Loan|(280)
Negative equity |(30)

The borrower is in a worse position.
The lender is in a worse position, because the borrower no longer has the cash available.

This has nothing to do with bailing out anyone. It's financially bad for the borrower. It's financially bad for the lender. If it happens to be a state owned lender, then it could be the taxpayer who bails this person out if they get into difficulty.

The best solution here is for the person to continue saving and pay off the 30k negative equity.

Because of the excessive provisioning forced on the lenders by the Central Bank, they may well have had to make a provision against the existing loan. If that is the case, and/or if the borrower is on a cheap tracker, maybe the house can be sold and the negative equity might be settled.

The former borrower is now in a much better position. They are free of their loan and their unsuitable house. Now they can rent for a while until they can build back up a deposit.

Brendan

I see your point Brendan, but you're advocating the paying down of the negative equity anyway. The couple want to move home now to start a family and don't want to be both landlords and tenants. They still end up in the same place as they have the €50K in cash right now to either pay down the existing negative equity or move home.

These people are generally at an age where delaying starting a family can cause all sorts of medical and social issues. Time is the most valuable commodity of all.

 

[Brendan Burgess]

Sunny

Thanks for that correction. I have edited the numbers.

The lender is in a far better position with the first case as the borrower has a cushion of €50k to keep up their loan repayments if the borrower loses their job, or takes time off work to raise a family.

It's very likely that in this case with €30k of negative equity, the lender would facilitate a sale and convert the shortfall into a personal loan.

If someone came to me saying that they owed €30k to the bank but had no asset to show for it and they wanted to take out a 102% mortgage to buy a house, I would advise against it. I would tell them to pay off the loan first and then save up for a deposit.

 

[Brendan Burgess]

I got this response from the Central Bank

The Central Bank wrote to all mortgage lenders last year seeking information and requesting them to stop writing negative equity mortgage products. We intervened because there were concerns about the negative effects of such products and we wanted to examine the impact of such products on borrowers regarding affordability and the risk lenders may be taking in offering such products.

We undertook an examination of the merits of these products with a view to consumer protection and concluded that such products should only be made available to consumers in very limited circumstances and in accordance with strict criteria and having appropriate controls in place. Any lender planning to provide such products must notify the Central Bank in advance to ensure that appropriate measures and controls are taken as such a product may lead to the potential of consumers being over exposed or facing future repayment difficulties.

 

[RIAD_BSC]

Can you give a concrete example in figures with salaries etc to show how it makes sense.

I already gave one on page 4 of this thread, post number 72.

Here it is again: "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 before they would be able to move, under your proposals.... Their kids would be grown up before they'd have a more suitable family home.

They could probably buy a three-bed home nowadays for 300k in most areas of Dublin, using a 250k mortgage and their savings of 50k. Carrying over their NE of 175k would give them an overall loan of 425k..... only a fraction above their original loan amount..... and their NE has been reduced to 125k... I cannot see why anybody in their right mind would be opposed to this...."

 

[Sunny]

Sunny

Thanks for that correction. I have edited the numbers.

The lender is in a far better position with the first case as the borrower has a cushion of €50k to keep up their loan repayments if the borrower loses their job, or takes time off work to raise a family.

It's very likely that in this case with €30k of negative equity, the lender would facilitate a sale and convert the shortfall into a personal loan.

If someone came to me saying that they owed €30k to the bank but had no asset to show for it and they wanted to take out a 102% mortgage to buy a house, I would advise against it. I would tell them to pay off the loan first and then save up for a deposit.

I agree in general Brendan. It is not something I would be rushing around telling people to do. As for the cash, they could as easily spend the money on the horses as keep it for a rainy day. It's not security to the bank. As a bank, I would prefer to have good security than poor security and a cash pile that I can't access and am unlikely to access anyway when push comes to shove. This all comes down to properly managing risk i.e. making sure that people can afford the new repayments.

I have more faith in this regulator to make sure they do their jobs properly than I did the last one.

 

[Brendan Burgess]

Riad,

If you are selling a house for €200k and buying a house for €300k, you are going to have additional net borrowings of €100k. You may be well off, but it is going to be a lot tighter than it is at present.

|Before|After
Property|200|300
Mortgage |(375)|(425)
Cash|50|0
Net mortgage| (325) |425)

an increase of €100k is not "only a fraction above their original loan amount"

and their NE has been reduced to 125k.

Their net equity as a whole, remains the same, although it will be increased by transaction costs.

They'd be decades trying to pay the NE off before they would be able to move, under your proposals.

They will be even longer paying off the additional €100k of net borrowing.

They have €125k of net negative equity now. They have saved €75k over the past 5 years. They would be able to pay off a loan for the shortfall in around 8 years. Not pretty. But better than been saddled with a huge mortgage for ever.

 

[oldnick]

Gekko - I think you are beating your head against a brick wall.

It seems that many posters don't understand the terrible cost to all of us if people wishing to start families delay or don't have kids. Some posters are dealing with purely with the arithmetic and ignoring the long term social costs/benefits issue.

At present, Ireland is in a far better position than most European countries re the issue of ever fewer young people to support the elderly. But this will change if banks and government don't see the absolute importance of more flexibility in this negative equity issue. (Actually it is already changing -Irish mums are getting older more quickly than EU counterparts)

Your excellent point re the social and medical consequences of banks reluctance to get involved except in "very limited circumstances" seems not to be understood - not only by some posters and banks, but also by most political parties.

Posters can produce as many arithmetical tables as they wish but they are ultimately meaningless unless accompanied by long-term macro-economic calculations of the cost resulting from the inflexibility of lenders in this matter.

 

[RIAD_BSC]

Riad,

If you are selling a house for €200k and buying a house for €300k, you are going to have additional net borrowings of €100k. You may be well off, but it is going to be a lot tighter than it is at present.

|Before|After
Property|200|300
Mortgage |(375)|(425)
Cash|50|0
Net mortgage| (325) |425)

an increase of €100k is not "only a fraction above their original loan amount"

Their net equity as a whole, remains the same, although it will be increased by transaction costs.


They will be even longer paying off the additional €100k of net borrowing.

They have €125k of net negative equity now. They have saved €75k over the past 5 years. They would be able to pay off a loan for the shortfall in around 8 years. Not pretty. But better than been saddled with a huge mortgage for ever.

Brendan, you are being very selective in your analysis. Also, just to be clear, this example does not represent my personal circumstances...

Yes, they would have additional net borrowings of 100k, but they'd have made an equity injection of 50k, so it would be down to an additional 50k net borrowings.....

Their total new loan amount would be 425k. Their original loan was 400k. That, in the context of their salaries, is quite clearly "a fraction above their original loan amount". In fact, it is one sixteenth above it, or a little over 6%.

They might be a few years paying off the additional 50k of borrowings (not the 100k you stated, which is incorrect). But at least they'd be settled in a good-sized family home while they do it.... And not trapped in a one-bed apartment.

They have only saved 50k in cash, not the 75k you refer to. So it would take them a further 12.5 years, not eight, to save up enough to plug the remaining NE. Then, they would have to save up a new deposit of, say, 20% (60k) to be able to move. That's another six years. So under your analysis, it would be a further 18.5 years before they could move.

Brendan, if you propose to tell a 30/31-year old couple with a high income that they will have to wait until they are almost 50 before they can move to a home that is suitable to start a family, they are well within their rights to say that an argument like yours is out of touch

 

[Brendan Burgess]

They might be a few years paying off the additional 50k of borrowings (not the 100k you stated, which is incorrect).

No.

They are paying an extra €100k for the house. Their net borrowings have increased by €100k

They have only saved 50k in cash, not the 75k you refer to.

No.

They have €50k in cash and they have paid €25k capital off the mortgage.

Brendan, if you propose to tell a 30/31-year old couple with a high income that they will have to wait until they are almost 50 before they can move to a home that is suitable to start a family, they are well within their rights to say that an argument like yours is out of touch

No.

I have not said that. I have said that a couple with excessive borrowings should not borrow more. I have made actual proposals to help improve their situation. I have suggested that they be facilitated to sell their unsuitable accommodation and I have suggested that if they can't sell it, that they get favourable treatment as "reluctant landlords".

I appreciate your frustration that there is not a financial engineering solution for your problem, but I would hate to see your or anyone else, being given false hope and ending up being trapped in an even worse financial situation.

 

[RIAD_BSC]

No.

They are paying an extra €100k for the house. Their net borrowings have increased by €100k



No.

They have €50k in cash and they have paid €25k capital off the mortgage.



No.

I have not said that. I have said that a couple with excessive borrowings should not borrow more. I have made actual proposals to help improve their situation. I have suggested that they be facilitated to sell their unsuitable accommodation and I have suggested that if they can't sell it, that they get favourable treatment as "reluctant landlords".

I appreciate your frustration that there is not a financial engineering solution for your problem, but I would hate to see your or anyone else, being given false hope and ending up being trapped in an even worse financial situation.

Not "no", Brendan. You're just plain wrong. Their borrowings increase by 50k, as they are also making a 50k equity injection.... The bank has no security over their existing 50k cash savings.... they could blow it on drink in the morning if they felt like it. It is better for the bank to have that 50k rolled into the security, rather than sitting in cash they can't get to....

By being allowed to buy the new house, their new borrowings are 425k, secured on a 300k asset (NE of 125k). Their current borrowings are 375k secured on a 200k asset (NE of 175k). The bank has absolutely no security over the 50k in cash, so that's a moot point.

They are on salaries of 150k. 425k in borrowings is not excessive in anybody's language. That's the nub of the issue.

It makes perfect sense for the people in this example to get a NE mortgage, no matter how much you try to deny it.