# The reality of 10,000 unsustainable mortgages must be recognised



## Brendan Burgess (17 Feb 2012)

_This is an excerpt from my submission on the Personal Insolvency Bill  to the Oireachtas Joint Committee on Justice _
*
6. Someone with an unsustainable mortgage must have the right to sell their home and settle the shortfall over a short period 
*
 Around 10,000 borrowers have mortgages which are unsustainable. No amount of forbearance or restructuring will solve their problems. They will never be able to pay, even the mortgage interest, let alone the full repayments. 

 

 Strangely enough, the lenders do not allow these borrowers to surrender their home or sell it unless they can discharge the shortfall. They would prefer to keep the borrowers tied in to these mortgages forever. The lenders are scared that if they allow some people to do this, those in negative equity, who could otherwise repay their mortgage, will want out of their mortgages as well. 

 

 The only solution for borrowers with genuinely unsustainable mortgages is to sell their home and settle the shortfall. The Bill must be changed to facilitate this.
 

*7. An independent arbitration service should be set up to determine when a mortgage is unsustainable.  
*

 If the lender and the borrower cannot agree that a mortgage is unsustainable, then the borrower should be able to refer it to an independent arbitrator whose decision would be binding. 

 

 For a mortgage to qualify as unsustainable, the bar would have to be set very high. The test would contain  the following criteria :
 

 ·        The borrower is unlikely to be able to service the interest for the foreseeable future 
 ·        The borrower will have fully cooperated  in the Mortgage Arrears Resolution Process
 ·        The borrower will have acted honestly and in good faith at all times.
 ·        The borrower will have taken every opportunity to maximise their income and will not have taken any steps to reduce their income
 ·        The borrower will have cut back their discretionary expenditure.
 

*8. The arbitration service would also determine how the shortfall should be dealt with*
 ·        The standard period for discharge for a home loan should be three years – the same as bankruptcy. 
 ·        The standard period for discharge where there are loans on investment properties could be extended to 6 years.
 ·        This should be reduced by any time spent by the borrower engaging in the MARP. So if a borrower has been engaging in good faith for 2 years prior to the mortgage being judged unsustainable, then they should be discharged after 1 year. 
 ·        The discharge period could be reduced further if it is judged that the bank had not engaged fairly with the borrower at any stage.
 ·        If the borrower has not been acting in good faith, they don’t qualify. For example, if they lied about their income or have hidden assets or engineered a lower income.
 ·        If the borrower has a cheap tracker mortgage, the bank benefits from the early repayment and the arbitrator can decide to reduce the shortfall to reflect the bank’s gain.


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## Purple (22 Feb 2012)

Excellent submission Brendan.


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## elcato (23 Feb 2012)

Good stuff and the nub of the arguement will hinge on "The lenders are scared that if they  allow some people to do this, those in negative equity, who could  otherwise repay their mortgage, will want out of their mortgages as  well". The Oirish begrudgery psych is certain to want to get something purely if someone else gets it ...



> ·        The standard period for discharge for a home loan should be three years – the same as bankruptcy.


Could you elaborate here. If the borrower decides to stop paying or decides they have no money to pay then they simpkly walk away in 3 years ? What if he wins the lotto ? Will the lender have to bring him all the way to court to get a settlement ? I would suggest here that a token payment should be made based on income (% maybe?) regardless of whether they are on benifit or not.


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## ashambles (23 Feb 2012)

Do you’ve a rough breakdown of what these 10,000 mortgages look like?

  Are you implicitly talking about debt forgiveness? In my view the shortfall for many people after a sale will be as much of a problem as the mortgage itself, and an even worse problem for the dumb old bank that lent the loan in the first place.

  Take an example of someone with a 600k mortgage, with a house that might sell for 300k. Let’s say they’re in a position where that mortgage is genuinely unsustainable.

  The shortfall of 300k is not something that can be solved in a short period of time – it’s higher than the value of most newly issued mortgages. 

  Also the 300k will now not be securitized by the property and so unless the banks are charitable they’d also have to charge an interest rate at much higher than mortgage rates, possibly pushing the ex-mortgage holder back into the same interest repayment position as they were on a mortgage.


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## Brendan Burgess (23 Feb 2012)

> Could you elaborate here. If the borrower decides to stop paying or  decides they have no money to pay then they simpkly walk away in 3 years  ? What if he wins the lotto ? Will the lender have to bring him all the  way to court to get a settlement ? I would suggest here that a token  payment should be made based on income (% maybe?) regardless of whether  they are on benifit or not.



Hi Elcato

"If the borrower decides to stop paying"

I am very clear that an independent arbitrator makes the decision as to whether a person has properly engaged with the process. If they hand back the keys or quit their job, they don't benefit from this at all. 

Should someone get a completely clean break after three years? There are pros and cons. On balance, I would favour the clean break. If there is no clean break, then the bankruptcy is pointless. 

I have not read the bankruptcy bit in detail, but I understand that there is a process in place to extend the period beyond three years.


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## Brendan Burgess (23 Feb 2012)

ashambles said:


> Do you’ve a rough breakdown of what these 10,000 mortgages look like?
> 
> Are you implicitly talking about debt forgiveness? In my view the shortfall for many people after a sale will be as much of a problem as the mortgage itself, and an even worse problem for the dumb old bank that lent the loan in the first place.
> 
> ...



Hi Ashambles

·        The standard period for discharge for a home loan should be three years – the same as bankruptcy. 

In other words, I am suggesting that after three years, the borrower gets a fresh start. 





> Are you implicitly talking about debt forgiveness?



The expression debt forgiveness is vague. I am opposed to people having their mortgage written down while retaining their home. However, if a mortgage is unsustainable, they should lose their home and they should become debt free after three years.


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## 44brendan (23 Feb 2012)

ashambles said:


> Are you implicitly talking about debt forgiveness? .


 
In the context of Bad Debt management where does "Debt Forgiveness" come in? In running a business if a creditor doesn't pay me I initiate collection proceedings against him/her. Depending on his financial circumstances and my willingness to pursue through the Courts I may get back some/all/none of what is owed. At the end of the process I will write off the amount not collected. I am not "forgiving" the unpaid balance, I am merely taking a commercial and pragmatic approach to the prospects of recovering the balance. I.e. If I'm owed 10K and I receive an offer of 5K I may well decide to take the 5K, on the basis that it's the best deal available. While I may have to write off the 5K balance I'm not forgiving the debt. I'm just being realistic.
There is a perception amongst a lot of borrowers that "Debt Forgiveness" will be introduced as some kind of compensation for those who bought at the peak of the market. This is unrealistic and won't happen. Irrecoverable debt should be written off after a realistic appraisal and this is what Banks and businesses do on a regular basis. Why do we persist in calling this "Debt Forgiveness??


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## ashambles (23 Feb 2012)

I was misreading “Someone with an unsustainable mortgage must have the right to sell their home and settle the shortfall over a short period” 

I was taking “settle” in the sense of everything’s paid off, as in settling up with a tradesman.  

So in reality it’ll be to sell the properties, and write off the majority of the shortfall. 

Also this might just be a wording thing I’d question if the mortgage owner has the right to “sell their home”. It has to be the lender doing the selling or otherwise you’d have a seller who knows the shortfall is likely to be huge and eventually written off  - what’s it now matter to them if it’s 200k, 300k, 400k short.  That's open to cuteness and someone might sell a house the market suggests is 300k for 200k in return for a kickback of 50k.

Perhaps the proposal is deliberately euphemistic?


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## elcato (23 Feb 2012)

> It has to be the lender doing the selling or otherwise you’d have a  seller who knows the shortfall is likely to be huge and eventually  written off  - what’s it now matter to them if it’s 200k, 300k, 400k  short.  That's open to cuteness and someone might sell a house the  market suggests is 300k for 200k in return for a kickback of 50k.


Pretty much what sums up what I stated all right but I think Brendan is stating an independant arbitrator will decide whether the person does not have the means and did their best to engage. Thing is, will they have the power to check work details and bank accounts similar to revenue audits I guess.


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## Brendan Burgess (23 Feb 2012)

> It has to be the lender doing the selling



Sometimes what happens is that the lender repossesses the property, evicts the former owner and sells the property in a fire sale. That is in no one's interest. 

It is better that the owner and the lender reaches an agreement. The owner puts the house on the market through an estate agent appointed by the lender. This ensures that the maximum price is obtained.



> That's open to cuteness



The business is messy. There will be abuse. But we still have to address the issue as best we can.


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## jpd (23 Feb 2012)

I have a few questions on the proposal :-
Do we have an estimate of the total shortfall on these 10,000 mortgages?
Has any provision for the losses been made in the banks accounts?
If so, how much?
If there is a shortfall in the current provisions, how will it be funded ie will we have to put more capital (that is, taxpayers' money) into the banks?

Looking at the figures published by Ulster Bank this week, it would seem that there is a huge hole to fill :-(


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## Brendan Burgess (23 Feb 2012)

> Do we have an estimate of the total shortfall on these 10,000 mortgages?



We don't have an estimate. The figure of 10,000 is itself a guess. But let me guess that it is €80,000 of a shorfall. So that is €800m



> Has any provision for the losses been made in the banks accounts?
> If so, how much?


Yes. The really important thing to remember here is that this is not debt forgiveness or debt reduction. This money is gone. Whether we like it or not, the banks are not getting it back. All I am saying is that they must recognize this as soon as possible and move on.



> If there is a shortfall in the current provisions, how will it be funded ie will we have to put more capital (that is, taxpayers' money) into the banks?Looking at the figures published by Ulster Bank this week, it would seem that there is a huge hole to fill


There is no shortfall

Don't forget, the taxpayer is on the hook only for AIB, EBS and PTSB. They have made combined provisions of €7 billion on owner occupied home loans and further significant provisions against losses on tracker mortgages.


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## jpd (24 Feb 2012)

If this is so, then, much as it annoys me as a non-borrower, the banks should call in the mortgages, repossess the houses, write off the debts and sell the houses (back to original owners if possible) or equivalently, write down the mortgage to a the value of the house (the upcoming Allsop auctions and house price database will help here)

This won't solve the problem of the State spending more than it receives but it will get rid of debt overhang.


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## Roamer808 (9 Apr 2012)

What is the general guide to an 'unsustainable mortgage'?

OK I know if you have not job and your are in arrears that can be looked upon as a non runner, but work will come back some day.

Is there a kind of formula? Or is it when you pass a percentage of the loan value in arrears you are then looked at.


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## Alwyn (9 Apr 2012)

Roamer808 said:


> OK I know if you have not job and your are in arrears that can be looked upon as a non runner, but work will come back some day.



The banks don't seem interested in whether you are going to earn money down the line or not.

I've heard of a case were a struggeling mortgage holder, cash strapped, was to receive an inheritence.  The bank put pressure on, and the house was sold.  There was an outstanding balance of 150k negative equity.

This person is now living in Australia with their inheritence and the TAX payer is now picking up their 150k bill. 

Had the bank waited and gave this person time, they would have received the outstanding amount owed.

Common sense and rational thinking seems to be gone out the window.


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## Roamer808 (9 Apr 2012)

Thanks boomtobust, just the news none of us want to hear!
Bless those rational thinking bank folks.


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## Brendan Burgess (10 Apr 2012)

Boomtobust said:


> I've heard of a case were a struggeling mortgage holder, cash strapped, was to receive an inheritence.  The bank put pressure on, and the house was sold.  There was an outstanding balance of 150k negative equity.



Hi boomtobust

Are you the borrower in this case? 
Do you know the borrower directly in this case? 
Do you know all the facts? 

It seems like a taxi-driver story to me. The problem most people have with unsustainable mortgages is that the banks won't allow them to sell their home.  We have very few repossessions although we don't know how many agreed sales we have. 

I agree that in many cases the banks behaviour is difficult to explain, but one would need to know the facts of this case a lot better.

Brendan


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## elcato (10 Apr 2012)

> It seems like a taxi-driver story to me.


Disgraceful generalisation about the ordinary, hard workin, droivers ...


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## miriammary (13 Apr 2012)

I am curious as to how they decide that a person can have this write down / debt forgiveness on their mortgage? Say if you were struggling to pay your mortgage, were in arrears, in huge negative equity but had another property abroad would you still get it? Are all your assets looked into before you get it?


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## Brendan Burgess (22 May 2012)

At long last, the Central Bank is waking up to the issue of unsustainable mortgages according to their [broken link removed]



> LENDERS ARE being pressed to identify borrowers who are unlikely to  be able to repay mortgages and to push for agreed sales of properties  and the repayment of any shortfall under plans being devised for the  Central Bank.
> ...
> The banks must decide by the end of the month which  loans can be modified for borrowers who can afford them but require  short-term forbearance, and which loans struggling borrowers will never  be able to repay.
> 
> ...


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## itsallwrong (11 Aug 2012)

What is the definition of 'deeply in arrears'?
I touched on this in another post.
Apart from being on interest only, is there a value ratio to what is deemed
'deeply'?


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