# Restructuring of Bank Debt: Tracker Mortgages



## serotoninsid (11 Mar 2012)

I noticed the news item today related to attempts by the government to negotiate the restructuring of bank debt.  As part of that, the potential for transferring loss making tracker mortgages into IBRC/Anglo was mentioned.

If this was to happen, would this only involve the state-owned banks?


Would anyone care to speculate whether such an action would eventually lead to a deal being made with tracker mortgage holders for their redemption or for faster payback/partial lumpsum payback?


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## Commercial (16 Mar 2012)

I really think this is the only way forward for banks. I have a tracker with a rate of 1.65% at present on an original mortgage of €420,000. This is costing the bank circa. €10,000 per annum and I have 25 years left to run. 
If they were given a lump sum now in return for a full and final settlement they would take it. For example if I offered them €300k they might settle for it.
I would save €100k and they could save €150k in the life of the mortgage.
But who has €300k to offer banks now?
There maybe other options such as reducing your balance if you come off your tracker and onto a variable. 
But having said all of this, they might be just transferred to IBRC to make the state owned banks more attractive for somebody to purchase. 
Watch this space!


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## Kine (16 May 2012)

Commercial - how do you calculate what it is costing the bank for you to have your tracker mortgage?


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## Brendan Burgess (16 May 2012)

> There maybe other options such as reducing your balance if you come off your tracker and onto a variable.


I can't understand why the banks are not doing this. 



 Mortgage|420,000|335,000
Term|25 years|25 years
Rate|1.65%|3.65%
Monthly repayment|€1,709|€1704
Say the bank should offered Commercial a deal as follows: 

"We will reduce your balance by €85,000 in exchange for changing your mortgage to a tracker of ECB + 2.65% from the current rate of ECB + 0.65%"

Commercial should grab this deal with both hands as he could not lose on it. 

The bank would recognise the loss of €85,000 up front. This is just an accounting entry. 

Their LTV would improve, so they would need a lower provision against the loan. 

Their cash flow would remain the exact same. 

From now on, they have a profitable book and a customer with whom they can continue to do normal business. 

However, Commercial should be prepared to accept a lot less than 20%.

The 20% discount is only fair if he maintains the loan for the full 25 years and if interest rates don't change. 

If interest rates rise as they will in time, it will cost him 20% less as he owes less money. 

If he pays off the loan early in full or in part, he will get an even bigger payoff. 

So Commercial should take around 10% to 15% discount for this deal. 

The IBRC will not pay the nominal value for these loans if they take them from AIB, EBS and PTSB. So these banks should give these discounts to their customers now and keep the customers and be more profitable banks.

Brendan


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## Kine (16 May 2012)

Brendan,

I fully agree with your logic above, but after spending the past 9 months outlining this (and several other) reasons to my mortgage provider why they are losing money hand over fist on my mortgage, they are still prepared to do nothing and rack up the losses. Economically, all of it makes sense, but which Bank Manager will be willing to sign his name to numerous "debt write-offs" in the current cover your bum culture?

I know there has been several examples of people doing one on one deals, which is great, but there still seems to be little desire (or ability) to tackle this issue straight on.

Would you have the calculations you used to determine the difference between the two mortgage payments? I would like to check it against my own to ensure I am using the right logic and calculations!

One item not included above, and I mentioned it in my previous post, what impact should a bank's cost of funds also have on these negotiations / calculations? If you have an ECB+1%, I would imagine quite a few banks cost of funds are far greater than this - or are you assuming the COF is currently the variable on offer (i.e. Bank's are making a zero profit on mortgages in simple terms)?

Thanks,

Kine


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## Firefly (21 May 2012)

Brendan Burgess said:


> *The bank would recognise the loss of €85,000 up front. This is just an accounting entry. *
> 
> Brendan


 
Hi Brendan,

Edited...

The piece highlighed...is it just an accounting entry though? Would the bank need to be further capitailised for each mortgage it treats in this way as the bank's assets (mortgages lent out) have been reduced? 


Firefly.


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## Brendan Burgess (21 May 2012)

Firefly said:


> Hi Brendan,
> 
> Edited...
> 
> ...



I don't believe that the banks would need to be further capitalized. They were fully capitalized last year to cope for the losses on trackers. 

By the way, it's a lot better to delete the rest of the post and just leave the bit you want to quote. The thread is a lot more readable for others.


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## Jim2007 (21 May 2012)

Firefly said:


> Hi Brendan,
> 
> Edited...
> 
> ...



No it is not just an accounting entry!!!  It would have a direct impact on the calculation of the bank's T1 ratio and while the three main Irish banks can easily satisfy the min. T1 ratios of EU, they don't have a whole lot to spare when it comes to Basel III.

So yes if the banks took a heavy loss on the write offs, then further recapitalization would be required.   However assuming they were able to at least meet the min. EU T1s, then they might be able to sell the BIC on using coco bonds for the remainder....


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## Brendan Burgess (21 May 2012)

Hi Jim

That is interesting. So Basel III is tougher than the PCAR? 

If the state owned banks sell their trackers to the IBRC, presumably they will sell them at a discount to recognise their loss making status. So they will then have to be recapitalised further? 

In any event, they will have to recognise losses, so they may as well allow the customer to benefit from those losses.  

Brendan


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## mcaul (22 May 2012)

A more thought out variation of something I posted before - as I'm not on tracker and my mortage is from 1999, I would not gain from this, but a return of consumer confidence would see my business continue its growth.


First Time Buyers between 2004 and 2009.

Part 1 – Banks
In exchange for moving from tracker to current SVR or current fixed rate.

If you have a tracker mortgage of 1.25% or less over the ECB rate, you can exchange this for a 20% discount off the mortgage value at July 1st 2012.

If you have a tracker mortgage of 1.26% - 2%   over the ECB rate, you can exchange it for a 15% discount off the mortgage balance at July 1st 2012. 

In both above cases a 2% premium is added to the discount if the house was purchased between July 1st 2006 and June 30th 2007. 

For those without a tracker rate a special 7% (2% premium for 1st July 2006 to June 30th 2007) discount could be made available. 

Part 2 – Government
In exchange for no further tax relief on interest..

Homes purchased in 2004 – 10% of outstanding mortgage
Homes purchased in 2005 – 12% of outstanding mortgage
Homes purchased in 2006 & 2007 – 14% of outstanding mortgage
Homes purchased in 2008 – 12% of outstanding mortgage
Homes purchased in 2009 – 10% of outstanding mortgage 


Based on above and a first time buyer who purchased a house in 2006 for €350,000 with current outstanding mortgage of €300,000 and current house value of €180,000 would have new outstanding mortgage of €189,000.

Based on the Central Bank’s own statement that homes in Ireland are undervalued by as much as 26%, the negative equity for many if not all first time buyers in the 2004-2009 period would be either gone or extremely manageable and as such would allow for fluidity return to the market and allow for people to trade up/down/into different area without the legacy of huge debt.

Plan B – Non first time buyers 2004-2009 
A similar but less generous plan could be made for other home buyers in this period. Non first time buyers from that period probably had some equity and therefore outstanding mortgages would be lower. The move to svr and receiving a discount for doing so would allow then to sell and possibly still have some debt – but it would be manageable.
A government contribution of 5% - 7% would be proposed.

In all cases, any write down of mortgage would be applied in full to any arrears that are currently on the mortgage.

After the writedowns, a more aggressive repossession regime could be implemented as it would have been seen that both banks and government has helped substantially and the fact of a free market is that some homes get repossessed .


Advantages for the wider community / economy.

1 – Burden of excessive debt lifted from approx 120,000 families

2 – Growth returns to housing market and prices rise to long term sustainable levels

3 – Banks have substantially reduced arrears and a loan book that more reflects the value of the properties, thus confidence returns to the banks and they recommence lending.

4 – As there is now a shortage of housing in Dublin and some other areas, builders will recommence activity and thus new jobs are created.

5 – Consumers relieved of the burden of debt recommence spending. Those who did not have debt but were wary of spending also recommence spending, thus creating new jobs in the retail and service sector

6 – With the main gripe of unions gone, government could substantially drop the threshold that  workers commence paying tax, but at the same time substantially increase the paye allowance for children, thus not impacting on families, but ensuring that tens of thousands of people without huge outgoings pay a small amount of tax  - some of my staff earn 20k a year and pay a miniscule amount of tax, yet live at home and have very little outgoings.

7 – The Feel Good Feeling. Possibly the best part of a scheme like this. House prices will rise (possibly by 15% from current levels in a year to a sustainable growth level) and people will feel they have a bit of cash for a rainy day in their property value. This gives the feel good / confidence factor and will further enhance retail spending.

8 – Jobs. A re-start of discretionary spending will see an immediate pick-up in retail and service sector jobs. Thus a rolling affect of less social welfare payments, more tax receipts, less non payment of debt, more jobs from the spending of this group, better retail profits, stronger jobs, strong corporation tax returns, better vat returns. I’m sure someone can do the gain figures for the government on this and how that it exceeds the net contribution the government made to the original debt reduction plan.


This scheme could be put into effect very very quickly with mortgage holders themselves filling out most of the information, getting it cross checked by an accountant / bank official and signed off by their original solicitor with penalty of withdrawl of any offer and substantial fines for those making false claims.


At the end of the day SOMETHING has to be done and the easier the plan, the better for everyone.


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## Jim2007 (22 May 2012)

mcaul said:


> At the end of the day SOMETHING has to be done and the easier the plan, the better for everyone.



Everyone agrees that something needs to be done, the problem is that any proposal that sees one taxpayer get a discount on his mortgage while the other does not, is not going to fly!

My proposal would be to allow people to press the reset button, meaning hand back the keys and walk away.....with a moratorium on future mortgages for a period of say 10 years. 

The second step would be to reform Irish pension funds to bring them into line with the rest of mainland Europe thus requiring them to hold a high percentage of their investments in Irish property, which they pick up cheap from the banks. They can then use the rental income to pay pensions.

This would start to bring us into line with the models that seem to operated well in German, Austria and Switzerland!


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## mcaul (22 May 2012)

We really need to rid ourselves of this refusal to pay as a country for the excesses of the property market. E people who bought at that time could argue that they were duped by the newspapers, the bankers, the property developers, their family, their work colleagues or anyone else who said that buying property was the right thing to do. 

If their house is repossessed, the taxpayer pays on the double - we provide them with accomodation AND if its aib or ebs or ptsb, we take the hit on the mortgage.

If paying a little more tax can solve the problem, then I for one say yes.


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## MaxRuby (22 May 2012)

Fantastic post mcaul - you wouldn't consider getting into politics would you?  This Country could really do with somebody who wants to sort things out rather than kicking the can down the read.


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## bloodyhell (5 Jul 2012)

Brendan, this post my MCaul should be put in a prominent place on this website where people can vote for this solution and also sent to the independent or other corporation to gain more publicity. 

Here on this forum, we have intelligent people able to simplify things and come up with solutions rather than the pitiful solutions currently made by our government and high paid bankers.




mcaul said:


> At the end of the day SOMETHING has to be done and the easier the plan, the better for everyone.


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