# The implications of the LRC's recommendations for those in negative equity



## Brendan Burgess (1 Mar 2011)

The LRC has recommended that a person who is insolvent can enter a debt settlement agreement with the consent of 60% of his creditors by value. After 5 years of adherence to the debt settlement agreement, any remaining debts would be written off. 

Mortgage debt would be excluded. 

So, if today you are have a house worth €150k and a mortgage of €300k, it would be in your interest to sell the house and realise the shortfall as soon as possible. While mortgage debt is excluded, the mortgage shortfall is unsecured debt and ranks with equally with all other debt. 

In most cases, the former lender would control more than 40% of the creditors by value, so they would be able to veto any such settlement. 

But the borrower may apply for bankruptcy and have it written off anyway. 

This moves Irish mortgages in the direction of non-recourse mortgages and I am not sure that the knock-on effects have been fully considered. 

1) It will provide an incentive to borrowers just to hand back the keys and convert their debt into unsecured debt. 
2) Lenders will have to factor in the fact that they will face higher mortgage write-offs and so will lend lower Loan to Values.


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## JoeB (8 Apr 2011)

But the bank can veto any house sale if the mortgage hasn't been discharged, can't they? They hold the deeds after all.

So the bank may be able to prevent the convertion of excluded mortgage debt to included 'normal' debts.

Handing back the keys to the bank has no real effect does it? You still own the house and owe the mortgage. The bank could refuse to accept the keys,.. they are not contracted to accept them.


The only change that I can see here is that smaller lenders may have their right to full payment trampled upon, if big lenders agree to big loosses that the big lenders can absorb, or have paid by the taxpayer. The small lender may go under due to agreements made beyond his control.

Could small lenders challenge this change to contract law?, I'd expect so, .. if they can lose out due to other peoples actions and agreements.


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## JoeB (8 Apr 2011)

Brendan Burgess said:


> ...After 5 years of adherence to the debt settlement agreement, any remaining debts would be written off.
> ...



Surely this should read that the 40% forgiveness would be knocked off after 5 years,.. and the 60% still has to be paid in full.. (it's unlikely the 60% would have been paid in full within 5 years)

It seems quite arbitrary.. why 60% and 40%?

I don't fully agree with this policy.. if forces conditions on lenders who don't want them, and who entered into loan agreements in good faith, only to have the carpet pulled from underneath them. (This applies if Copmpany A agrees a debt forgiveness and Company B must also honour it, even though they don't want to.)


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## maryb (8 Apr 2011)

Well, I don't own the house. The bank does and I'm paying them for it over 30 odd years. If I am in a position that I can no longer pay for it and stop paying the mortgage then they are going to need to act - granted the debt is building up against me but that isn't in their favour if I can't ever repay. If I go to the bank and hand back the keys for the investment mortgage and tell them that I'm agreeing to the bank selling it, or my selling it on behalf of the bank, they need to act surely? The banks must be aware that the bankruptcy law is coming and there is no point in them having thousands of properties on their books whose loans are not being serviced.


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## JoeB (8 Apr 2011)

The problem with handing back the keys is that the bank may not want them.

This policy is unworkable, especially if the creditors include Revenue, or state agencies, like the ESB or other utilities. These companies could be forced to write off 40% of a debt, forcing them out of buisness while the big banks that agreed the debt forgiveness can ask the tax payer for endless amounts of money.

I cannot see this being workable, or legal.


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## maryb (8 Apr 2011)

It probably will bankrupt the country, again. But something has to be done so that there aren't thousands of people in limbo, as is currently the case.


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## jpd (8 Apr 2011)

What about all the people without a mortgage or not in negative equity?

How do you determine the point, if it exists, where it becomes in their interest to bale out those in negative equitY?


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## JoeB (8 Apr 2011)

How would it ever be in the interest of non-indebted people to see a program of debt forgiveness paid for by the taxpayer?, except for social or humanitarian reasons?

In order to prevent a massive country wide collapse?.. but a collapse of what?, of the banks? of social order?, of the governments ability to pay running expenses or borrow on international markets?

There is a huge moral hazard.. if the government introduces a system of debt forgiveness that's open to all I'd be sick, and wouldn't be happy paying taxes for that.  Such a system would be badly run, and open to abuse, and would be a disaster.

Any debt forgiveness for negative equity should be through the social welfare system.


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## BillyRay (8 Apr 2011)

*Its simple ...extend the load period ...*

50 / 100 years ...allow people space to get there finances up and running ...it would also kick start the domerstic economy with people free to spend safe in the knowledge that their home was safe.


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## dewdrop (8 Apr 2011)

How can you sell a house if the Mortgage lender has not agreed to release the Mortgage?


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## Brendan Burgess (16 Apr 2011)

dewdrop said:


> How can you sell a house if the Mortgage lender has not agreed to release the Mortgage?



Dewdrop

This is a very interesting point. 

1) You can ask the bank's permission to sell the house and agree to pay off the shortfall. The bank can refuse. 
2) You can voluntarily surrender it and I suppose that they can refuse this as well.
3) You can just abandon the house and post the keys to the bank. There isn't a huge amount that they can do. As I understand it, they have to go to the court to get a repossession order anyway. Then they sell it for whatever they can get. 

The problem with abandoning your house is that the proceeds will be a lot less and so the shortfall will be a lot higher. You are responsible for the shortfall as an unsecured debt, but...

If you choose to go bankrupt, you can get the debt written off. It would also be subject to any debt settlement arrangements which will be introduced in Ireland, although as the shortfall is likely to exceed 40% of your debts the lender could veto it.

Brendan


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## Brendan Burgess (16 Apr 2011)

JoeBallantin said:


> How would it ever be in the interest of non-indebted people to see a program of debt forgiveness paid for by the taxpayer?, except for social or humanitarian reasons?



Hi Joe

I don't think that there should be any debt forgiveness while the person continues to live in their home. 

However, most people would agree that bankruptcy and personal debt settlement are a part of any economy. If someone has sold their home at a shortfall and is insolvent, then they should get a fresh start. In the UK, bankruptcy gives a fresh start after one year. That is too short, in my view and the minimum period to be discharged from bankruptcy or a debt settlement should be 5 years. It should not be painless. It should remain on your credit record forever, so that you will find it very difficult to get credit again. Their pension fund should be made available as well. 

But it is not in the interest of the borrower, the lender or of society for someone who has insufficient income to pay off their debts to have those debts hang over them forever.


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## JoeB (16 Apr 2011)

Brendan Burgess said:


> Dewdrop
> 
> ...
> 3) You can just abandon the house and post the keys to the bank. There isn't a huge amount that they can do. As I understand it, they have to go to the court to get a repossession order anyway. Then they sell it for whatever they can get.
> ...



You'd have to be careful not to allow the house to become derelict, or de-valued in any way. You'd have to secure the home, and prevent squatters etc.. or else the bank may pursue you personally for not taking care of the home.. you are likely contracted to keep the home in a good state of repair, and to prevent dereliction or abandonment etc.

Does anyone know?, is that a common clause in mortgage agreements?



On the indebted issue,.. yes, of course, people should be allowed re-start, but not to keep expensive property, or to benefit unfairly.
Benefitting unfairly would be if you were allowed to stay in a biggfer home than you would be provided with on social welfare.. that should be completely outlawed, even if it's a private home, or a family home, and even if the poor people inside feel that they have an automatic right to such a high-class lifestyle. Clearly they don't if they're out with the begging bowl, and they should be reduced to near penary to be fair (Does penary mean poverty?). If you want the upside then be prepared for the downside. This should be taught in school, I was taught it at home.


The only way to prevent indebtedness would be to ban all lending, and that seems inpractical. If lending can happen then inability to pay will happen. But the lenders should take these hits.. no one else. If the lenders only want to lend 60% value that's fine with me. 

The problem is that property markets do crash, and 50% of the value of Irish property is gone, and so there simply isn't the money anymore to pay 100% of the debts. The banks should have considered this possibility, and I have no sympathy for professional bankers who didn't. I, as a cabinet maker, did know that Irish property shouldn't be the most expensive in the world (Ballsbridge), or that our rents should be the highest in the world. What possible justification could there be for that?


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## so-crates (16 Apr 2011)

JoeBallantin said:


> ... The banks should have considered this possibility, and I have no sympathy for professional bankers who didn't. I, as a cabinet maker, did know that Irish property shouldn't be the most expensive in the world (Ballsbridge), or that our rents should be the highest in the world. What possible justification could there be for that?


 
Had to smile at this Joe - perhaps you should be making a different type cabinet...


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