Brendan Burgess
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Some commentators, especially Ross Maguire of New Beginning, have said that the new bankruptcy regime is a "game changer". Banks will be forced to write down debt. If they don't, the borrower will threaten to go bankrupt.
I am of the opinion that the new regime will make very little difference. Banks will only very rarely write down debt while leaving the borrower in the home. I hope that Ross is correct and I am wrong.
What was the position before the new legislation?
Lenders were often reluctant to allow people in negative equity to sell their homes.
There were very few repossessions - no more than 600 a year. This was due to the reluctance of the banks and some legal impediments.
Borrowers generally did not want to leave their family home, even if they were in deep arrears and deep negative equity.
Borrowers in deep negative equity were reluctant to agree to a voluntary sale of their home, as they would be liable for the shortfall for up to 18 years.
Although borrowers were liable for the shortfall for up to 18 years, in practice the lenders didn't pursue it very often.
Borrowers could go to the UK for a one year bankruptcy, but very few did.
What has changed?
The lenders have issued 15,000 letters to borrowers telling them that their mortgages are unsustainable.
The new bankruptcy law allows the borrower to write off the shortfall after 3 years.
Bankruptcy does not increase the lender's practical losses over straight repossession
In theory, the borrower is liable for the shortfall. In practice, the banks rarely got anything from the borrower.
If a borrower goes bankrupt, the lender will simply repossess the property and write off the shortfall in the bankruptcy.
So the threat of bankruptcy doesn't worry the bank in most cases.
Both members of a couple would have to go bankrupt
If the mortgage is in both their names, as it usually is, they are each fully responsible for the mortgage. If Jack goes bankrupt, Jill will still be fully liable for the mortgage. So both have to be insolvent and both their careers have to be unaffected by the bankruptcy.
In what situations could a threat of bankruptcy encourage the bank to do a write down?
Big negative equity and no unsecured debt
James has a mortgage of €600k on a house worth €200k and he has no unsecured creditors. He has the income to support a mortgage of €300k but not the income to support a mortgage of €600k
How should James approach this assuming that he wants to retain their home?
He could propose a deal to the lender where the the lender reduces the mortgage to €250k and writes off the shortfall of €350k. If the lender does not agree, James will hand back the keys and go bankrupt.
This proposed deal suits everyone. James gets to keep their house. He avoids the stigma of repossession and bankruptcy. The bank gets more than they would get from a repossession.
I suspect that the bank will reject this and offer a split mortgage instead. James should reject the split mortgage as he will be on the hook for the shortfall forever.
If the lender does not agree to writing down the mortgage, they should agree to the voluntary sale of the house for €200k.( If the lender doesn't agree to a voluntary sale, he can hand back the keys)
He will have enough income to rent a similar house.
He will still have a shortfall of €400k.
He can deal with this through a Debt Settlement Arrangement or bankruptcy.
If James goes bankrupt, the bankruptcy period of 3 years could be following by an Income Payments Order of 5 years. The lender might get more from a bankruptcy than from a debt write down.
I think a fair solution would be a split mortgage, but the warehoused part would be warehoused permanently and would be non recourse. In other words, if James decides to sell their home, the proceeds would be used to pay off the active mortgage and the remainder would go towards the warehouse. But James would not be responsible for any shortfall.
Big negative equity and big unsecured creditors
Mary has a mortgage of €600k on a property worth €200k and has unsecured creditors of €200k.
Mary would be better off selling the home and converting the negative equity into an unsecured creditor.
The lender might agree to writing down some of the negative equity in the context of a bankruptcy, because the writing off of the unsecured creditors makes the reduced mortgage more sustainable.
But it would be better all round to achieve this by a Personal Insolvency Arrangement which would impose the losses on the unsecured creditors.
What factors will deter mortgage lenders from doing write downs?
People just don't like going bankrupt. It still has a terrible stigma. And many professionals would have their career damaged by bankruptcy. So in most cases where people threaten bankruptcy, the bank will just say "fire ahead!" and the borrower will back down.
Banks just don't like writing down mortgage debt while leaving the borrower living in the home. They will give interest rate reductions and they will split mortgages, but they do not write down capital. I don't see the threat of bankruptcy changing this significantly.
In some cases, the lenders will just accept the bankruptcy because they are afraid that writing down debt would create a precedent for other borrowers.
It's true that banks don't like repossessing family homes, but they have issued 15,000 letters telling customers that their mortgages are unsustainable. A threat of bankruptcy from these borrowers will make no difference at all. The bank will just repossess the property.
In cases of jointly owned homes, both borrowers would have to go bankrupt. If only one borrower goes bankrupt, the other remains liable in full for the mortgage. The ISI published three case studies where the bankrupt borrower continued living in their family home. But in each case, the wife took over the mortgage. While unsecured lenders took write offs, the mortgage lender took no write off.
60% of mortgages are tracker mortgages. While the bank will take a capital loss if they have to repossess the house, at least it gets a tracker mortgage off their books.
I am of the opinion that the new regime will make very little difference. Banks will only very rarely write down debt while leaving the borrower in the home. I hope that Ross is correct and I am wrong.
What was the position before the new legislation?
Lenders were often reluctant to allow people in negative equity to sell their homes.
There were very few repossessions - no more than 600 a year. This was due to the reluctance of the banks and some legal impediments.
Borrowers generally did not want to leave their family home, even if they were in deep arrears and deep negative equity.
Borrowers in deep negative equity were reluctant to agree to a voluntary sale of their home, as they would be liable for the shortfall for up to 18 years.
Although borrowers were liable for the shortfall for up to 18 years, in practice the lenders didn't pursue it very often.
Borrowers could go to the UK for a one year bankruptcy, but very few did.
What has changed?
The lenders have issued 15,000 letters to borrowers telling them that their mortgages are unsustainable.
The new bankruptcy law allows the borrower to write off the shortfall after 3 years.
Bankruptcy does not increase the lender's practical losses over straight repossession
In theory, the borrower is liable for the shortfall. In practice, the banks rarely got anything from the borrower.
If a borrower goes bankrupt, the lender will simply repossess the property and write off the shortfall in the bankruptcy.
So the threat of bankruptcy doesn't worry the bank in most cases.
Both members of a couple would have to go bankrupt
If the mortgage is in both their names, as it usually is, they are each fully responsible for the mortgage. If Jack goes bankrupt, Jill will still be fully liable for the mortgage. So both have to be insolvent and both their careers have to be unaffected by the bankruptcy.
In what situations could a threat of bankruptcy encourage the bank to do a write down?
Big negative equity and no unsecured debt
James has a mortgage of €600k on a house worth €200k and he has no unsecured creditors. He has the income to support a mortgage of €300k but not the income to support a mortgage of €600k
How should James approach this assuming that he wants to retain their home?
He could propose a deal to the lender where the the lender reduces the mortgage to €250k and writes off the shortfall of €350k. If the lender does not agree, James will hand back the keys and go bankrupt.
This proposed deal suits everyone. James gets to keep their house. He avoids the stigma of repossession and bankruptcy. The bank gets more than they would get from a repossession.
I suspect that the bank will reject this and offer a split mortgage instead. James should reject the split mortgage as he will be on the hook for the shortfall forever.
If the lender does not agree to writing down the mortgage, they should agree to the voluntary sale of the house for €200k.( If the lender doesn't agree to a voluntary sale, he can hand back the keys)
He will have enough income to rent a similar house.
He will still have a shortfall of €400k.
He can deal with this through a Debt Settlement Arrangement or bankruptcy.
If James goes bankrupt, the bankruptcy period of 3 years could be following by an Income Payments Order of 5 years. The lender might get more from a bankruptcy than from a debt write down.
I think a fair solution would be a split mortgage, but the warehoused part would be warehoused permanently and would be non recourse. In other words, if James decides to sell their home, the proceeds would be used to pay off the active mortgage and the remainder would go towards the warehouse. But James would not be responsible for any shortfall.
Big negative equity and big unsecured creditors
Mary has a mortgage of €600k on a property worth €200k and has unsecured creditors of €200k.
Mary would be better off selling the home and converting the negative equity into an unsecured creditor.
The lender might agree to writing down some of the negative equity in the context of a bankruptcy, because the writing off of the unsecured creditors makes the reduced mortgage more sustainable.
But it would be better all round to achieve this by a Personal Insolvency Arrangement which would impose the losses on the unsecured creditors.
What factors will deter mortgage lenders from doing write downs?
People just don't like going bankrupt. It still has a terrible stigma. And many professionals would have their career damaged by bankruptcy. So in most cases where people threaten bankruptcy, the bank will just say "fire ahead!" and the borrower will back down.
Banks just don't like writing down mortgage debt while leaving the borrower living in the home. They will give interest rate reductions and they will split mortgages, but they do not write down capital. I don't see the threat of bankruptcy changing this significantly.
In some cases, the lenders will just accept the bankruptcy because they are afraid that writing down debt would create a precedent for other borrowers.
It's true that banks don't like repossessing family homes, but they have issued 15,000 letters telling customers that their mortgages are unsustainable. A threat of bankruptcy from these borrowers will make no difference at all. The bank will just repossess the property.
In cases of jointly owned homes, both borrowers would have to go bankrupt. If only one borrower goes bankrupt, the other remains liable in full for the mortgage. The ISI published three case studies where the bankrupt borrower continued living in their family home. But in each case, the wife took over the mortgage. While unsecured lenders took write offs, the mortgage lender took no write off.
60% of mortgages are tracker mortgages. While the bank will take a capital loss if they have to repossess the house, at least it gets a tracker mortgage off their books.
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