# Will the threat of bankruptcy force mortgage lenders to do deals?



## Brendan Burgess (16 Dec 2013)

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.


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## Kaymin22 (16 Dec 2013)

Your analysis doesn't take account of homeowners future earnings and the  wish of banks to get their hands on such earnings. In many cases that  will be sufficiently worthwhile for lenders to want to keep mortgagees  out of bankruptcy.


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## Brendan Burgess (16 Dec 2013)

Hi Kaymin

I have restructured the original thread, so I hope I have not lost the context of your post. 

I am not sure what you mean.

Are you saying that the mortgage lender who expects their borrower's  earnings to increase will write down their mortgage to make it  sustainable and so keep them out of bankruptcy? 

I think that would make sense but I don't expect the banks to do it. I  have suggested elsewhere that borrowers who are offered split mortgages  should  probably go bankrupt instead. However, if the lender makes the  mortgage non-recourse, then they could accept the split mortgage.


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## Cantalia (17 Dec 2013)

I think Ross Maguire is correct. People will go bankrupt and stay in their houses. Whether or not it is by way of an arrangement that they ultimately take it out of the estate of the last deceased owner remains to be seen. That would be an Irish answer to an Irish problem.
Do you really think the government I'd going to allow state owned banks to put a hundred thousand people on the housing register or rent allowance. No I don't think so either!!!!
Ross Maguire and his team have done a huge service to this country.


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## Matthew Moore (17 Dec 2013)

I have told the bank that I would be applying for bankruptcy, and then sent them the receipt from OA's office. We were on reduced payments covering all interest and some capital. I offered that we would continue this payment for the lifetime of the mortgage and allow a claw back facility for the lifetime of the mortgage also. The remaining term is 31 years. I wanted a portion of the debt dealt with as unsecured in the bankruptcy. If this was applied the bank would of gotten €152,000 over the lifetime of the mortgage versus the €70,000 that they have valued the house at. The €70,000 of course does not include repossesion costs, auctioneers, court fees, BER certs etc. I have it in writing that they expect my mortgage debt to be reduced by only €40,000 once they have repossesed and sold.
Maybe I'm doing something wrong but they seem dead against allowing somebody to stay in their home and writing down the mortgage. I understand and accept that the house is security on the loan and they are entitled to access their security but surely the deal I offered is better for all concerned.


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## Dermot (17 Dec 2013)

What concerns me about certain aspects of write offs/write downs is that there will be quite a proportion of people who will play the system.
Take an example of couple A and couple B both with the same income and same circumstances who  buy a house each in two different estates in the same year. Couple A paid 200k for their house with a mortgage of 150k and Couple B paid 400k with a mortgage of 300k in a so called classier estate a mile away. Couple A are continuing to pay their mortgage in full even though it is not easy for them.  Couple B have stopped paying their mortgage for the past 18 months because they have decided that if they cannot pay in full they have nothing really to loose. Couple B now feel that they should get a mortgage writedown to a least half of what the borrowed and remain in their house. They do not want to contemplate moving to the estate of Couple A.  How do you think Couple A would think about this. Couple A's house is still about half the value of Couple B's house. 
If there is going to be a hundred thousand people getting large mortgage writedown's the taxpayer is in for more fleecing. There is a danger that if this mortgage problem is not managed well we could see this become a tornado with devastating consequences for the whole country. Yes there will have to be write downs but there has to be consequences otherwise it will become the norm with some people taking advantage of it.  We have to look out for unintended consequences in the solutions that are agreed.  
I also fear for the next generation of mortgage applicants where banks will be putting them through the hoops in order to protect or over protect their security.


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## Matthew Moore (17 Dec 2013)

Dermot said:


> What concerns me about certain aspects of write offs/write downs is that there will be quite a proportion of people who will play the system.
> Take an example of couple A and couple B



If that was to happen the following would be factors:

Couple A: will have a superior credit rating, access to future credit and possibly an opportunity to buy a house in couple B's estate at reduced prices. They will also have their pride intact.

Couple B: will surely have to enter some publicly advertised form of insolvency, live within pretty tight means, have their excess income ditributed by the PIP/OA, have no chance of accessing credit for quite some time as their credit rating would be destroyed and of course they would have to live with the moral consequences of what they are doing and perceived to be doing.

I don't think it's as easy to get a write down as you may worry.


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## Dermot (17 Dec 2013)

pat2. I have total sympathy with people who are in very difficult situations but what concerns me is that there are quite a lot of people who are financially savvy or have access to advisers who will make their case for them.
I never trusted the banks but all I see is an industry of so called experts looking to make a very good living out of the misery of others.


My viewpoint just comes from that where at all possible you pay what you owe.  I just work reasonably hard and have a very modest lifestyle.


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## Brendan Burgess (17 Dec 2013)

Folks

This is an important serious thread. 

I have deleted some off topic rants and responses to them.

Brendan


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## Brendan Burgess (17 Dec 2013)

pat2 said:


> I have told the bank that I would be applying for bankruptcy, and then sent them the receipt from OA's office. We were on reduced payments covering all interest and some capital. I offered that we would continue this payment for the lifetime of the mortgage and allow a claw back facility for the lifetime of the mortgage also. The remaining term is 31 years. I wanted a portion of the debt dealt with as unsecured in the bankruptcy. If this was applied the bank would of gotten €152,000 over the lifetime of the mortgage versus the €70,000 that they have valued the house at. The €70,000 of course does not include repossesion costs, auctioneers, court fees, BER certs etc. I have it in writing that they expect my mortgage debt to be reduced by only €40,000 once they have repossesed and sold.
> Maybe I'm doing something wrong but they seem dead against allowing somebody to stay in their home and writing down the mortgage. I understand and accept that the house is security on the loan and they are entitled to access their security but surely the deal I offered is better for all concerned.



Hi pat2

Your story backs up what I have been saying. That banks will not cut deals just because someone threatens bankruptcy. They might be better off doing a deal, but they don't want to set a precedent. 

When you go bankrupt, the Official Assignee will take over your house and mortgage. I don't think that the bank has the option of allowing you to keep the house and mortgage. However, the ISI case studies have mentioned "The banks stayed out of the bankruptcy" which I don't really understand.  In your case, I would expect that the OA will just surrender the house to the bank. 


I have commented more fully on your case study here


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## Kaymin22 (21 Dec 2013)

Brendan Burgess said:


> Hi Kaymin
> 
> I have restructured the original thread, so I hope I have not lost the context of your post.
> 
> ...



Hi Brendan,
I was re-reading your OP and I'm trying to recollect what point I was trying to make! 

I think that it's not appropriate to just look at the bare numbers as, in many circumstances, there are other aspects that are of relevance - stigma, career limitations (gardai, accountants etc), inability to obtain credit for 3 years / set up a business etc are all soft reasons that might outweigh the benefits of becoming debt-free for a mortgagee.

Banks I expect will wish to take advantage of this if it means they can extract more from the mortgagee and so will not push the borrower into bankruptcy - they will likely need to accept some writedown to make it worthwhile to the mortgagee though.

I think your updated post reflects some of these complexities.


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## Bronte (3 Jan 2014)

http://www.irishexaminer.com/busine...-to-gain-from-bankruptcy-shake-up-254064.html

Article about bankruptcy, they've obviously been reading AAM, and it does get a mention.


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