# ESRI report on Negative Equity



## Brendan Burgess (12 Jan 2010)

Published back in October 2009

[broken link removed]

The first part of this article provides an overview of why negative equity matters. Section two briefly outlines some of the features of the Irish housing boom. Section three estimates the number in negative equity in Ireland, primarily based on published data from the Department of Environment. Estimates as to the numbers in negative equity are sensitive to the underlying assumptions. In the fourth section we explore the impact of a number of alternative assumptions. Following this, using unpublished data from the EU Survey of Income and Living Conditions, the fifth section attempts to provide some indication of those employment sectors where individuals are vulnerable to the impact of negative equity. In the sixth section some policies to overcome the problem are examined and finally section 7 concludes.

*Public Policy and Negative Equity*
Generally policies put in place by government or by lenders do not directly deal with negative equity but have had the goal of reducing the probability of default. These are usually either loan modification which puts in place a permanent change to the terms of the loan, possibly a lower interest rate or a reduction to the outstanding balance. Alternatively the lender may agree to lower payments without changing the loan terms and the reduction in payments is added to the outstanding balance, forbearance policies.

In the face of concerns about the rising number of households in negative equity the US government has launched the Making Home Affordable programme8 for borrowers through the Freddie Mac and Fannie Mae agencies. The Making Home Affordable Program offers two different potential solutions for borrowers: (1) refinancing mortgage loans, through the Home Affordable Refinance Program (HARP), and (2) modifying mortgage loans, through the Home Affordable Modification Program (HAMP).

Closer to home, during the trough of the UK housing market in early 1993, published estimates of households in negative equity were upwards of 1.5 million.

The more recent slump in UK house prices has resulted in an estimated 900,000 in negative equity (Tatch, 2009). Budget 2009 (HM Treasury) announced the extension of a number of supports to those experiencing negative equity. These include the Mortgage Rescue Scheme and Mortgage Support Scheme for those who are vulnerable to financial difficulties or who have suffered income or employment loss. The Mortgage Rescue Scheme has two strands – an equity loan enabling mortgage repayments to be reduced, or alternatively the debt is cleared completely and the applicant pays rent at a level they can afford. The Mortgage Support Scheme defers some of borrowers’ interest payments for up to two years, with the UK government guaranteeing a proportion of the deferred interest.

There has also been a private sector response to the difficulties negative equity creates for housing market mobility. The Nationwide Building Society in the UK launched a 125 per cent mortgage for existing customers who are experiencing negative equity and need to move house. Borrowers needing to move can replace their existing mortgage with a new loan of up to 95 per cent of the value of the property. An additional loan of 25 per cent of the loss incurred from the existing property could be added on.

Foote, Gerardi and Willen (2008) model the effectiveness of alternative strategies that lenders might pursue to address negative equity. They find that policies should focus on lowering repayments in order to make default less attractive. As these forbearance policies mean that borrowers do not avoid repaying the mortgage in full it means that lenders, and public money used to support any scheme, is not exposed to moral hazard problems associated with modification policies.


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