# Morgan Kelly suggests that debt forgiveness will cost only €6 bilion



## Brendan Burgess (19 Aug 2011)

[broken link removed]



> “The good news is that if you leave investment  mortgages out [of total mortgages owed], which are largely the banks’  problem, and look at mortgages people have on their own houses, there  are about €55 billion of these out there,” he said.
> 
> 
> Prof  Kelly made his estimations based on 20 per cent of people having  difficulty paying their mortgages. This was the default figure in  Florida where there was a similar housing bubble, he said. He estimated  that mortgages would need to be halved on average.
> ...


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## callybags (19 Aug 2011)

A couple of things strike me about what he had to say.

*"We are talking sums in the region of €5 Billion to €6 Billion......, which by our standards are not very large"*

I don't understand what he means by "our standards". I think it is a very large amount.

He says it's ridiculous that banks *"have amounts set aside in their accounts for mortgage losses but are not forgiving mortgages".*

It is good accounting practice and one of the core accounting principles- prudence -that provisions be made in accounts for possible bad debts.

It does not mean that every effort should not be made to recover all debts.


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## Brendan Burgess (19 Aug 2011)

> look at mortgages people have on their own houses, there  are about €55 billion of these out there,” he said.


This is extraordinary stuff from a guy who is very influential. According to the Central Bank , the total loan accounts outstanding at the end of March 2011 was €116 billion. 

He may be excluding the securitised loans. 
He may be excluding the loans from non-covered banks.


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## Brendan Burgess (19 Aug 2011)

callybags said:


> He says it's ridiculous that banks *"have amounts set aside in their accounts for mortgage losses but are not forgiving mortgages".*
> 
> It is good accounting practice and one of the core accounting principles- prudence -that provisions be made in accounts for possible bad debts.
> 
> It does not mean that every effort should not be made to recover all debts.



I agree with you fully.  Many commentators don't understand this point. The Master of the High Court wanted the banks to swear that they had not wrtten off the mortgage when they were seeking repossession.


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## Brendan Burgess (19 Aug 2011)

Can you imagine the uproar if this principle was applied to property developers? 

If a bank has made a 70% provision against a loan, maybe then the borrower owes only 30% of the amount lent? 

And NAMA could only seek repayment of the amount it paid for the loan and not the full amount.


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## jhegarty (19 Aug 2011)

So 20% of people are let off , no problems.


I should pay my mortgage now because ?

I'll take forgiveness phase 2 please, get a nice new car instead of paying my mortgage.


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## Brendan Burgess (19 Aug 2011)

Sorry J





> Prof Kelly said any debt forgiveness scheme would have to take account of adverse selection and moral hazard.


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## onq (19 Aug 2011)

Brendan Burgess said:


> Can you imagine the uproar if this principle was applied to property developers?
> 
> If a bank has made a 70% provision against a loan, maybe then the borrower owes only 30% of the amount lent?
> 
> And NAMA could only seek repayment of the amount it paid for the loan and not the full amount.



I see potentially huge conflicts arising whatever happens, between 

(i) those who owe less and are managing their current financial difficulties prudently and competently and whose debts are in the tens of thousand range, and 

(ii) people whose debts are in the millions range, who have traded imprudently and/or lost money on a gamble on the market, or by taking a risk on what was an arguably unsustainable long term position - two incomes, 3% mortgage rates about to start a family.

Its a bit like the prodigal son returning and getting royally feted, while the loyal sons feel hard done by despite years of obedient service.

Equally, some people are genuinely suffering on a personal level because of the shame of not being able to pay their mortgage, their bills, socialize with friends - all the things they took for granted before this - there is no easy solution.

I know at least two property developers who will be actively looking for  debt forgiveness - albeit at the scale of millions and not billions -  because they simply cannot afford to repay their loans with the state of  the market in property the way it is.

Them's the breaks.

ONQ.


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## onq (19 Aug 2011)

Brendan Burgess said:


> This is extraordinary stuff from a guy who is very influential. According to the Central Bank , the total loan accounts outstanding at the end of March 2011 was €116 billion.
> 
> He may be excluding the securitised loans.
> He may be excluding the loans from non-covered banks.




We are a young, optimistic nation.

We need to trim our costs no doubt about it.
We need our banks to lend and jobs to work at.

We're doing the former, but the banks are lending half the mortgages this year they did last year and we continue to lose jobs.

Maybe somebody finally told Morgan to understand that economics is a  black art and consumer confidence didn't need to be driven any lower  than it currently is.


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## Duke of Marmalade (20 Aug 2011)

This is extraordinary stuff from MK and, sadly, more responsible academics such as Karl Whelan seem to be at least partly supportive.

I'm leaving aside the fact that he has his numbers all wrong. It is the ludicrous suggestion that provisions/projections for bad loans should be converted to immediate debt forgiveness which is entirely off the wall. 

Provisions/projections are an estimate, based on judgmental assesment of the probabilty and size of defaults across a mortgage book. Let's say the projections are that 10% will default for on average 50% of their mortgages. The problem is that we do not know which are the 10% and if we did we do not know which of these will be 25% defaulters and which will be 75% defaulters.

As Mathew Elderfield pointed out, there are no silver bullets. He also correctly warns that talk of such forgiveness is an incitement to bad behaviour. I could imagine that if I had a mortgage and there was a whiff of forgiveness in the air I would start pretending the mortgage was causing me great difficulty.


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## DerKaiser (21 Aug 2011)

I thought the banks were set to lose €5-6bn "high rollers" alone according to Kelly, so how does the total including everyone else still only amount to €5-6bn.


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## Brendan Burgess (21 Aug 2011)

DerKaiser said:


> I thought the banks were set to lose €5-6bn "high rollers" alone according to Kelly, so how does the total including everyone else still only amount to €5-6bn.



His figures often contradict themselves.

However, in his most recent defence of his High Rollers estimate, he claimed that he was referring to investment properties. 

Presumably the debt forgiveness is for home loans only? 

Brendan


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## goingforgold (21 Aug 2011)

hastalavista said:


> Debt forgiveness on a selective basis wont work because the non-recipients will stop paying their debts.


 
This is exactly what will happen. As I said previously, it is happening already in anticipation of such a move on debt forgiveness.


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## Slaphead (21 Aug 2011)

goingforgold said:


> This is exactly what will happen. As I said previously, it is happening already in anticipation of such a move on debt forgiveness.



Im seriusly wondering why do i bother paying mine, bought in 2009 and havnt missed a payment. No i hear i could have bought a bigger house, paid less, or nothing at all and have a big chunk taken off it! Crazy stuff.


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## Brendan Burgess (22 Aug 2011)

Excellent summary of the arguments against by Séamus Coffey here

Brendan


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## onq (22 Aug 2011)

The arguments against appear sound from the banks point of view, perhaps less so from the point of view of struggling debtors and again are based on estimates.
The article seems to put more realistic figures on the estimates by Morgan Kelly, which several AAM posters have commented on above in this thread.
This begs the question - if Kelly's figures are out on something that's quantifiable to this extent - how accurate are his other pronouncements?
Did the stress tests not yield hard data on all of this?


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## Brendan Burgess (22 Aug 2011)

Kelly's calculations are out because he said that there was €56m of mortgages, when there is actually €116 billion. 

This is what Gurd, Lucey, et al estimated in the Irish Times letter of 11 November 



> In the case of Ireland, such a formula would most likely lead to an implicit writedown of at least 30 per cent of the more recent mortgage amounts on average*, yielding an expected total cost to the entire system of circa €37 billion to €49 billion.*




The only hard data is that there is that there is €116 billion of owner occupier homes. 



The cost of any defaults can only be estimated at this stage.


The cost of debt forgiveness would depend on the criteria being used. 



It seems that Gurd and Lucey want to write off all negative equity, irrespective of the payment capacity of the borrowers.


Brendan


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## goingforgold (22 Aug 2011)

If Gurd and Lucey's policy is pursued then there is a huge portion of society that will feel very aggrieved. They will wonder why they didn't buy that 600K house now as they would be as well off as if they had bought a 300K house, and of course they'd have a much plusher property courtesy of the taxpayer. Can't see how this is equitable or fair. Surely this can't work?!

Also like many thousands of people I am in negative equity but also have substantial savings that I was going to use to reduce the mortgage. Not going to happen now! Let's all get a piece of this gravy train as best we can!


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## onq (22 Aug 2011)

The €49 Billion figure related back to the €116Bn of owner occupied homes seems too high.

I'm presuming 116 Bn is the book value - lets assume this is the max value - 2007.

Older properties will be less affected, but will also contribute less to the loan book.

From [broken link removed]


> _Since reaching their highest level, Residential Property Prices have fallen by almost 40% nationally, with Dublin               experiencing the largest decline (-47%), while in the rest of Ireland prices fell at a somewhat lower rate (-35%)._


Let's take a mean figure (47+35/2) = 41% and apply it to the entire €116Bn = €47.56Bn

This suggests that the €49 Billion figure may refer to the total fall in value, as opposed to the negative equity* (NE) involved.

*_NE may be higher for properties bought nearer the 2007 peak, but for houses bought in say 2001-2002 in sought-after locations, they may not be in negative equity yet._


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## Sunny (22 Aug 2011)

Let's add 6 billion, multiple it by two and add a further 6 billion for good measure. Let these economists publish their data and models. I have never seen such back of the envelope calculations being given such national coverage. Kelly has said he modelled the data so let's see it. Publish a paper instead of giving speeches and writing opinion pieces.


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## Brendan Burgess (22 Aug 2011)

> I'm presuming 116 Bn is the book value - lets assume this is the max value - 2007.



Not at all. This is the value of mortgages outstanding to owner occupied home owners at 31 March 2011.  It says nothing about the value of the homes. It is not a historic figure. It is today's figure.


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## onq (22 Aug 2011)

Thanks for clarifying.

Then I echo Sunny's comments.

We need to see where the figures come from


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## onq (23 Aug 2011)

Update:

The Government's position today, distancing itself from Willie Penrose position.

http://www.examiner.ie/breakingnews/ireland/govt-plays-down-debt-relief-speculation-517425.html


While Sean Gallagher supports it, saying it has been "repeatedly raised by voters"..

http://www.irishexaminer.com/breakingnews/ireland/gallagher-backs-debt-forgiveness-calls-517477.html


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## Brendan Burgess (24 Aug 2011)

Now Joan Burton seems to be supporting the idea, although it's not really clear what she is proposing.

[broken link removed]



> Minister for Social Protection Joan Burton has called for a debt  resolution scheme to allow struggling mortgage holders reach a deal with  banks and avoid going to court.
> Ms Burton said banks needed to  show that they were willing to settle in a realistic way with the  thousands of homeowners in distress.


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## Brendan Burgess (24 Aug 2011)

But Eamon Gilmore has ruled out widespread debt forgiveness on Drivetime.


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## Purple (24 Aug 2011)

I don't think Joan Burton's comments are at odds with Gilmore's or FG's. She is correct when she says that banks have to be realistic when dealing with people. It is no use pretending that a debt isn't a bad debt. If the banks were more rational and realistic on a case by case basis there would be less pressure for some grand scheme to forgive debt.


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## Brendan Burgess (24 Aug 2011)

Purple said:


> If the banks were more rational and realistic on a case by case basis there would be less pressure for some grand scheme to forgive debt.



Good point! They probably could defuse the calls for mass debt forgiveness by sorting out the people with unsustainable mortgages.

Brendan


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## onq (24 Aug 2011)

Given that we seem to be talking in big figures still, is there any indication that the banks have started to address the matter at this level of detail?


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## Wayne1966 (26 Oct 2011)

Quote:
Originally Posted by goingforgold  
This is exactly what will happen. As I said previously, it is happening already in anticipation of such a move on debt forgiveness.
Im seriusly wondering why do i bother paying mine, bought in 2009 and havnt missed a payment. No i hear i could have bought a bigger house, paid less, or nothing at all and have a big chunk taken off it! Crazy stuff.


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