# Housing Agency Head: Writing off negative equity 'would ease crisis'



## Brendan Burgess (25 Apr 2017)

*Writing off negative equity 'would ease crisis'*

Homeowners and landlords unable to pay their mortgages could see the negative equity portion of their loans written off to help restore the property market to normality, under proposals outlined by the head of the Government's Housing Agency.


John O'Connor said banks needed to "get real" and write off billions of euro of debt for homeowners and buy-to-let landlords, instead of waiting for prices to rise or selling non-performing loans to vulture funds.

...
http://www.independent.ie/business/...gative-equity-would-ease-crisis-35647443.html
In an interview with the Irish Independent, Mr O'Connor said the priority had to be dealing with loan arrears to help tackle the housing crisis. Only in cases where it was proved debtors could not pay should any write-down be considered.

He said for homeowners struggling to repay their mortgages, the debt should be written down to a sustainable level. This would avoid families being evicted.

For landlords in arrears, the loan should also be written down but instead of the properties being sold to private investors, they should instead be sold on the open market, boosting supply to first-time buyers and others hoping to trade up.

"We can't have a situation where people (banks) are waiting for land prices or house prices to go up before moving," he said.

"We need to address the mortgage arrears. In a lot of cases, people can afford to repay a mortgage based on the current value of the house. Leaving aside the moral hazard, banks just have to write off the residual debt.

"Why sell a loan to an investor when the family in the house can afford to repay the value of the mortgage you're selling?


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## AlbacoreA (25 Apr 2017)

Why would anyone pay a mortgage or loan if they thought it would be wiped off. 

Those that scrimped and saved, and worked their butts off to pay of their mortgages. What lesson for them.


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## Brendan Burgess (25 Apr 2017)

Exactly.

The Head of the Housing Agency has just contributed to making the arrears problem worse. He has told borrowers that they are better off stopping their mortgage payments as they are more likely to get a deal that way.

Brendan


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## Sarenco (25 Apr 2017)

Brendan Burgess said:


> "We need to address the mortgage arrears. In a lot of cases, people can afford to repay a mortgage based on the current value of the house. Leaving aside the moral hazard, banks just have to write off the residual debt.



Whoppee!  

I assume this excellent deal be made available to everybody.  Right?  Seeing as we're, you know, "leaving aside the moral hazard".

I would suggest that Mr O'Connor needs to "get real".


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## Brendan Burgess (25 Apr 2017)

OK.There is another article on the same day coming at it from a different angle. 

*'House prices and rents won't stabilise for up to three years'*

It seems that the Housing Agency is buying houses from the banks.  So they might be trying to tell the banks to write off loans with a view to selling the houses more cheaply. 

"
Established in May 2010 to help local authorities, approved housing bodies and the State to deliver housing, the Housing Agency is actively buying units through a €70m capital fund.

So far in 2017, it has bought 400 at a cost of around €160,000 each. It plans to buy 1,600 over the coming years. It has also secured another 2,000 from Nama, and will end up with around 2,500.

The agency deals directly with banks, and Mr O'Connor is critical at the lack of progress, saying it's time for them to deal with non-performing loans and write-down debt. He also says units shouldn't be sold to vulture funds, but instead placed on the open market.

He believes banks may hold up to 10,000 vacant units, adding it is a speculative figure, and they should not be held back from the market.

"Prices are back up and we don't want them to increase more," he says. "Holding back on selling a property in the hope prices will go up shouldn't be encouraged by the Government or banks."


He makes some good points in that article, but he is misguided on the write-off of debt issue.

Brendan


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## odyssey06 (25 Apr 2017)

Should they (as one State Agency) not have asked NAMA (as another State Agency) for these haircuts?


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## AlbacoreA (25 Apr 2017)

Nama should have given the banks a haircut when it bought the properties then used them for social housing. Instead of selling them back to Vulture funds for a song. Which the Govt then has to rent at top dollar for social housing.


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## Tebbit (25 Apr 2017)

And what about the rest of us?????    This is a crazy suggestion - those who struggled and kept paying would be penalised for having paid.    If that happens this country is well and truly finished.


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## newtothis (25 Apr 2017)

Tebbit said:


> And what about the rest of us?????    This is a crazy suggestion - those who struggled and kept paying would be penalised for having paid.    If that happens this country is well and truly finished.



As crazy as billions of taxpayer's funds being used to write off bank debts?


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## PMU (25 Apr 2017)

newtothis said:


> As crazy as billions of taxpayer's funds being used to write off bank debts?


This is not correct. The Irish Government did not user taxpayers money to write-off bank debts. The then Government guaranteed bank liabilities for a two year period. Subsequent to the ECB issuing recommendations on guaranteeing solvent but liquidity restrained banks, the IE Government recapitalized AIB and BoI and nationalized Anglo-Irish. The point here, and it is important, is that bank debts, i.e. primarily the bonds they issued, were not written-off. The taxpayer paid off these bonds; the banks remained solvent.

The proposal by the Housing Agency that negative equity amounts be 'written-off' by the banks will do nothing but destroy the banks' balance sheets by lowering their book value (and, am I right on this, allow the banks to claim a tax deduction on the written-off values?) So, the taxpayer pays again.


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## newtothis (25 Apr 2017)

PMU said:


> This is not correct. The Irish Government did not user taxpayers money to write-off bank debts. The then Government guaranteed bank liabilities for a two year period. Subsequent to the ECB issuing recommendations on guaranteeing solvent but liquidity restrained banks, the IE Government recapitalized AIB and BoI and nationalized Anglo-Irish. The point here, and it is important, is that bank debts, i.e. primarily the bonds they issued, were not written-off. The taxpayer paid off these bonds; the banks remained solvent.



OK, so it was poorly phrased and a simplification. Follow the money, though: who paid (taxpayers, who else) ? who benefited (banks, who else)? The mechanisms are obviously different, but my point was the craziness is not just a current suggestion of something that might happen, it's being rampant for almost a decade now.


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## Jim2007 (27 Apr 2017)

PMU said:


> The proposal by the Housing Agency that negative equity amounts be 'written-off' by the banks will do nothing but destroy the banks' balance sheets by lowering their book value (and, am I right on this, allow the banks to claim a tax deduction on the written-off values?) So, the taxpayer pays again.



It is a bit more than that actually.  The balance sheet reduction would have a negative impact on the bank's T1 ratio and as the banks are already struggling to comply with Basel III, there would be an immediate requirement to recapitalise the banks yet again.  Furthermore it would almost certainly reduce the banks lending capacity making it more difficult for buyers to obtain a mortgage.  Which may or may not be a good thing.

Nothing happens in a vacuum.  The point of pushing this off the vulture funds it try and make sure non of this comes back on us.  If it works out bully them, if not too bad, so sad.  Experience shows someone will get caught holding the package when the music stops, that is why the rewards are so high - to tempt them to play the game.


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## Jim2007 (27 Apr 2017)

newtothis said:


> OK, so it was poorly phrased and a simplification. Follow the money, though: who paid (taxpayers, who else) ? who benefited (banks, who else)?



Except that is now what happened!  The state recapitalised the banks, meaning that the state now has a stake in the banks, which it will in time dispose.  And no the banks did not benefit, because the shareholders were wiped out - ask anyone how had been hold banks shares as pension investment for starters.

There are no winners, but one thing is certain, had the banks failed, household wealth would have been wiped out completely as bank debt crystallised.


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## AlbacoreA (27 Apr 2017)

Who did the banks borrow from.


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## Sarenco (27 Apr 2017)

AlbacoreA said:


> Who did the banks borrow from.



Mainly Irish depositors.


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## AlbacoreA (27 Apr 2017)

What was all that bondholders about then.


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## Sarenco (27 Apr 2017)

AlbacoreA said:


> What was all that bondholders about then.



Banks also borrow money by issuing bonds on the capital markets which are bought by pension funds, etc. 

However, customer deposits are the main source of bank funding.  From memory, over 95% of BOI's customer loans are funded by customer deposits.


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## Sophrosyne (27 Apr 2017)

PMU said:


> This is not correct. The Irish Government did not user taxpayers money to write-off bank debts.



What about the National Pension Reserve Fund?


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## Sarenco (27 Apr 2017)

Sophrosyne said:


> What about the National Pension Reserve Fund?



Funds from the NPRF were used to recapitalize the relevant banks in 2009 - not to write-off their debts. 

The equity stakes in the banks held by the NPRF (now called ISIF) have been valued at €12.6 billion.  When combined with its discretionary portfolio, the Fund now has a total value of €20.7 billion, which is materially higher than the Fund's value at year-end 2008 (€16.1 billion).


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## jjm (27 Apr 2017)

Sarenco are you saying  the part sale of AIB this year should go back into the National Pension Reserve fund.


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## Sarenco (27 Apr 2017)

No but there is certainly an argument for doing just that.


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## Jim2007 (28 Apr 2017)

jjm2016 said:


> Sarenco are you saying  the part sale of AIB this year should go back into the National Pension Reserve fund.



It is not a question of it going back, they own the position and when they sell it, it's their cash!


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## Jim2007 (28 Apr 2017)

AlbacoreA said:


> Who did the banks borrow from.



In a simple model, when banks write loans they have three sources of finance:
- deposits (this is how the get the cash to pay deposit interest)
- borrowings through issuing bonds and similar instruments (on which they pay interest)
- lenders of last resort such as the ECB in cases of an immediate liquidity need

Apart from fees, one of the ways banks make money is to lend it at a higher interest rate than what they borrowed it at.

The other side is that without lending banks would not be able to pay deposit interest and without the bonds pension funds, charities, local government etc would struggle to find save investments for the money they hold in trust.  Indeed at one point during the Clinton presidency the federal government had to start issuing bonds not because they needed the money, but because of a shortage of safe investments for these organizations.

That is why in modern times letting a major bank go is not an option as it would hammer every household:
- devaluation of their major asset, the house
- savings on deposit wiped out 
- pension savings wiped out
- loans, mortgages and overdrafts crystalised

Continuing the simple model, the basic problem with Irish trackers is that there is no direct relationship between the interest rate charged and the interest rate paid on the borrowings.  The ECB is called a lender of last resort for a reason!  And using it as the base rate was a really dump idea, even at the time.  But the bankers did pay, the real bankers - the shareholders!  They were responsible for the appointment of the board of management and they saw their holdings wiped out.

The only winners, if their were winners were the salaried employees at the banks, commission agents etc.


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## newtothis (28 Apr 2017)

Jim2007 said:


> And no the banks did not benefit, because the shareholders were wiped out - ask anyone how had been hold banks shares as pension investment for starters.



I wasn't referring to the local banks, but the foreign banks (and others) who provided the cash that was lost. As I said, follow the cash: who paid it and who got it. And your point about shareholders is interesting: shareholders get wiped out, bondholders don't. I wonder why?


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