# why is there no onus on lenders to share loss



## bakerbhoy

As part of the bankruptcy legislation ,where a property is surrendered   why is there no onus on a lender to 

1. Share in any loss ie sale price not achieving outstanding mortgage value
    Homeowner still on the hook for balance
2. Lender not accepting low price ,as it achieves their aim of outstanding 
    mortgage ,  no consideration given to mortgage holder
   The lender accepted valuations at the outset , so shouldn't they now accept some share of the loss and not leave the weaker party carry all of the loss

My point is not about giving debt forgiveness but fairness . If a bank takes possession of property to realise a value there should be some pressure on them to achieve good value rather than dumping them ,a side effect would be to continue to drive property prices down rather than  normalise .


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## Gardener

There was a good article in yesterdays Independent entitled "Banks don't do charity - except for themselves".  The article was written by Brendan O' Connor, though not a fan of his chat show, I do agree with most of his articles!  The content of same is self explanatory.

As we regularly hear on our radio, one bank in particulars mantra, "your investments may go up as well as down", maybe this is a mantra the people of Ireland need to adapt whilst dealing with unsustainable mortgages!

The banks are still living on cloud cookoo.  The disaster the banks have inflicted on this nation has yet to be felt for generations to come.


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## 44brendan

But what is fairness in this context? If I borrow money to invest in a business opportunity and that opportunity fails, is it fair that the Bank or individual that I borrowed the money from should suffer part of the loss? 
Banks lent money at a relatively low margin (2/3%) to clients to assist them to purchase property. While the Bank took the properties as security, their primary recourse was to the individual/s who borrowed the money and not to the security. 
I accept the fact that during the property boom period, banks tended to look at the value of the asset rather than the repayment capacity of the borrower in a large number of lending decisions. I would also agree that where standard lending criteria was not applied, a Court could interpret this as culpability on behalf of the Bank and in such instances, perhaps the Bank should be made liable for part of the loss. 
It's a moral arguement at this stage as I'm sure a competent barrister would have taken a test case at this stage if he/she felt that the culpability issue would stand the test in Court.


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## Delboy

Gardener said:


> There was a good article in yesterdays Independent entitled "Banks don't do charity - except for themselves".  The article was written by Brendan O' Connor, though not a fan of his chat show, I do agree with most of his articles!  The content of same is self explanatory.
> 
> As we regularly hear on our radio, one bank in particulars mantra, "your investments may go up as well as down", maybe this is a mantra the people of Ireland need to adapt whilst dealing with unsustainable mortgages!
> 
> The banks are still living on cloud cookoo.  The disaster the banks have inflicted on this nation has yet to be felt for generations to come.



Thats the Brendan O'Connor who advised all in about 2010 in his Sindo column that all the 'ballsy' people he knew were getting into property again as the market was near the bottom!!!


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## Purple

Banks lent money based on them being able to recover the full amount of the loan. Their risk was seen as minimal and so they didn’t price in any risk.
If the value of the property was the only thing the loan was secured against then they would have priced in a greater risk and the interest rate would have been higher.
I agree that that’s the way it should be but that’s not what us borrowers paid for. It is a much better scenario though; interest rates would be higher so property prices would be lower (which is always a good thing) and people would not be saddles with negative equity in a down-turn.


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## Brendan Burgess

Hi baker

I don't agree with the Personal Insolvency legislation but the PIA does allow for insolvent borrowers to have their debts written off after the PIA period which cannot exceed 6 years. While the bank has a veto, in most cases, I would imagine that they won't exercise the veto.

I would much prefer to see a section in the legislation dealing specifically with unsustainable mortgages. Where the borrower has engaged meaningfully in the MARP and has sold their home, the shortfall should be written off within 3 years, the same period as the bankruptcy period. I would go further and say that the 3 years should start when the borrower first engaged in the MARP.

This would only be for totally insolvent borrowers who have engaged in MARP and not for people in negative equity who want to be rid of it.

Brendan


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## Jim2007

Purple said:


> I agree that that’s the way it should be but that’s not what us borrowers paid for. It is a much better scenario though; interest rates would be higher so property prices would be lower (which is always a good thing) and people would not be saddles with negative equity in a down-turn.



The idea that some people should be shielded from the consequences of their decisions, while others are not, is just not acceptable!

First we have the shareholders in BOI, AIB etc., many of these are people who were depending on the dividends from those shares to live on: old age pensioners, widows, people with disabilities who sunk their compensation into it etc... they have lost everything, so why should the tax payer not cover them?

And of course we have the builders, developers and other intermediaries who borrowed to put up the housing estates, offices and what not.  At least they gave us employment, so perhaps we should not cover their losses too?

And we have the home owners, who like everyone else in this saga invested in something that has lost value, but unlike the other expect they are special and the taxpayer should come up for their mistakes... seriously.

If what was been asked for were no recourse mortgages, where by you hand back the keys and walk away, I'd agree.  But the idea that someone should be allowed to continue living in nice four bedroom house, while some other poor sod who was careful with his money and is struggling to get by should carry the can is just not going to fly.


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## Purple

Jim2007 said:


> The idea that some people should be shielded from the consequences of their decisions, while others are not, is just not acceptable!
> 
> First we have the shareholders in BOI, AIB etc., many of these are people who were depending on the dividends from those shares to live on: old age pensioners, widows, people with disabilities who sunk their compensation into it etc... they have lost everything, so why should the tax payer not cover them?
> 
> And of course we have the builders, developers and other intermediaries who borrowed to put up the housing estates, offices and what not.  At least they gave us employment, so perhaps we should not cover their losses too?
> 
> And we have the home owners, who like everyone else in this saga invested in something that has lost value, but unlike the other expect they are special and the taxpayer should come up for their mistakes... seriously.
> 
> If what was been asked for were no recourse mortgages, where by you hand back the keys and walk away, I'd agree.  But the idea that someone should be allowed to continue living in nice four bedroom house, while some other poor sod who was careful with his money and is struggling to get by should carry the can is just not going to fly.


I agree completely. Welfare and charity that helps people stay out of poverty is one thing, their fellow citizens giving them an asset is quite another. 
I should have been clearer; I was talking about non-recourse mortgages. They would be more expensive because of the increased risk.


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## Bronte

bakerbhoy said:


> My point is not about giving debt forgiveness but fairness . .


 
This is nonsense, if a bank should share in a loss then presumably they should share in a gain by your thinking? So far on AAM I've never seen one poster ever come on here with a capital gain on selling who asked how to share this gain with the bank. 

Even if we go with the statement that banks should share in the loss. Well apparently in our capitalist system it doesn't work this way for banks. The only one who is going to pay for bank losses is ordinary people. So when people make suggestions that banks should share in losses, what they mean is that us taxpayers should pay for these losses.

And as for the banks forceing sales and allowing them at a very low price, it would behove all those in that situation to try and come to an arrangement with the bank to allow an orderly sale at the best price to mitigate the losses to us taxpayers.


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## burmo

44brendan said:


> But what is fairness in this context? If I borrow money to invest in a business opportunity and that opportunity fails, is it fair that the Bank or individual that I borrowed the money from should suffer part of the loss?
> Banks lent money at a relatively low margin (2/3%) to clients to assist them to purchase property. While the Bank took the properties as security, their primary recourse was to the individual/s who borrowed the money and not to the security.




 This is a very good analogy. I'm sick listening to people who want other people to share the blame for their decisions. If you drink and drive, if you abuse your health, if you make countless other decisions then you suffer the consequences (good and bad) but in this case people want to burden others with the consequences of their free choice. Yet, as it was pointed out above, if it had worked out in their favour they wouldn't have wanted to share the gains with the bank.

I haven't bought a house yet because I don't believe it is feasible at the current level of gearing that I am willing to accept. All these talks about socialising debt, because having to rent would tear the fabric of Irish family society... really annoys me. There are so many vested interests in the media that are trying to prop up house prices and promote debt forgiveness while still staying in their house! "It was our dream house..." I've only seen one article so far that talked about the positive attributes of a stable low priced property market, in particular to cost of doing business with respect to our external competition in the EU and further afield.  

Personally I also lost some money in a property investment fund over the last couple of years... I was told it was boring and a sure thing, property only goes up... can I have it back? Can I have my capital and some of the gains back as well? Pretty please?

Like a quote from Mrs. Cornflakes (the Garda's wife)... "How can I be expected to survive on €2,100 a month" and someone replied... no one expects you to, that's what you have.


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## bakerbhoy

And as for the banks forceing sales and allowing them at a very low price, it would behove all those in that situation to try and come to an arrangement with the bank to allow an orderly sale at the best price to mitigate the losses to us taxpayers.[/QUOTE]

This is the nonsense . 
The borrower is in unsustainable position due to any amount of reasons and you say come to an arrangement with the bank.
What leverage would they have in any negotiation , there is none in the legislation , there is no onus to achieve best value , borrower cannot veto a sale once repossesed regardless of sale price accepted by lender. Any equity they had in the property is gone and in the case of our upstanding 'pillar' banks at least it would seem the borrower carries ALL  losses .

The banks priced in the risk in the interest rate , the borrower presumably paid it until disaster struck .

I did not post here looking for bailouts , but to point out that the proposed legislation is a fudge and the status quo remains, the vested interests have won the day again.

Not all banks are state owned and just because tax euros are in some ,it is not a good enough reason to let them screw the nation all over again.

Thankfully i am not in the situation that many of our fellow taxpayers are in , but it is not ok to take the i'm alright jack attitude that some hold . The majority of the working population would soon be in similar territory if their employment was taken from them .


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## Bronte

You are incorrect that the borrower has no options. The banks don't want to repossess. It costs them more money. They don't want to manage and hold onto property. It is easier to sell a house that is well kept and maintained by the current owner, and if that owner cannot sustain the mortgage than the owner should come to an arrangment with the bank for an orderly sale.  They don't have to use the new insolvency legislation to come to an arrangement with the bank now.  

If the bank sells, they are in a hurry to offload, of course they'd like a good price, but 20K or 30K less than what would be achieve by the original borrower is not going to affect a bank, who have a duty to shareholders to get money back asap.  

I think what your actual argument is for is non recourse mortgages, as they are called in the USA. It means that a borrower who cannot pay the mortgage can literally walk away from a property. Another term for it is jingle mail. But they key point is that they walk away from the house and have to start again. They don't get to stay in the property. It also means that the costs of borrowing would be higher for everybody.


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## Purple

bakerbhoy said:


> The banks priced in the risk in the interest rate ,



The bank did not price that risk into the interest rate, that’s the point. The borrower was liable for the debt, above and beyond the price of the house. That's why lending rates were so low. Risk carries a premium so non recourse mortgages would be much more expensive.


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## bakerbhoy

http://www.google.ie/url?sa=t&rct=j...7oHYCg&usg=AFQjCNEGbUMWZzOpJ378Y3miEa-g86gB_w


Primary mortgage market survey in America Freddie Mac

30 year 3.39%  
15 year 2.27%

5% fixed seems to be the norm , risk priced in . 
We could do with a bit of that over here OR  ARE WE PAYING MORE FOR LESS


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## Bronte

I haven't followed your link, but you are not seriously bringing the dis credited lender FreddyMac into it. You realise the chaos they caused in the USA?

FreddyMac and FreddyMay (or is it Mae?) poster boys for what is the absolute worst in bank lending practices. And who had to pick up the pieces on that mess do you think


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## bakerbhoy

Bronte said:


> I haven't followed your link, but you are not seriously bringing the dis credited lender FreddyMac into it. You realise the chaos they caused in the USA?
> 
> FreddyMac and FreddyMay (or is it Mae?) poster boys for what is the absolute worst in bank lending practices. And who had to pick up the pieces on that mess do you think



And which institute in ireland has not been discredited or bailed out . I think we are down to a couple of local credit unions . Please enlighten us all.


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## Jim2007

bakerbhoy said:


> http://www.google.ie/url?sa=t&rct=j...7oHYCg&usg=AFQjCNEGbUMWZzOpJ378Y3miEa-g86gB_w
> 
> 
> Primary mortgage market survey in America Freddie Mac
> 
> 30 year 3.39%
> 15 year 2.27%
> 
> 5% fixed seems to be the norm , risk priced in .
> We could do with a bit of that over here OR  ARE WE PAYING MORE FOR LESS



Do you have any actual experience of building MBS models?  

And if so please explain why you are assuming the entire default rate is being built into the interest rate by Freddie and Fanny?


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## mercman

Purple said:


> The bank did not price that risk into the interest rate, that’s the point. The borrower was liable for the debt, above and beyond the price of the house.



The Banks in Ireland did exactly what can be classed as Bad business. The less asset profile a customer had, the more the interest rate was discounted.
And still they are at the same practice --- a borrower with a strong asset base and up to date repayment history are being forced to pay ridiculous interest rates on loans.

Very much a case of, we have 'em now so make 'em pay.


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## ciarank

It never ceases to amaze me how some people (maybe even the majority of people) are fixated on the whole 'moral hazard' issue with regards to debt forgiveness. They don't seem to think the whole thing through fully in my opinion.

If a very significant % me the population are strangled with debts they cannot pay (regardless of how they got there in the first place) then the whole economy is gonna stagnate for many years to come until these debt ridden individuals are a very insignificant % of the working population.

So that effects everyone and while Johnny with no negative equity is so busy worrying about his neighbour next door being forgiven some of his debt, he completely overlooks the fact that his own house and overall wealth will never rise much because his neighbour and many other entrepreneurs around the country have lost the will to live and make a positive contribution to the economy and society being saddled with so much debt!

It's a typical Irish begrudgery mentality, and one that you'll rarely (if ever) experience from an entrepreneur!

So let the banks take out the red pen and start forgiving debt to those that need it and get this country back in the saddle and on it's way to real economic growth that will benefit everyone.

Wake up and smell the coffee!


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## GDUFFY

ciarank said:


> So let the banks take out the red pen and start forgiving debt to those that need it and get this country back in the saddle and on it's way to real economic growth that will benefit everyone.
> 
> Wake up and smell the coffee!



The Banks are not forgiving anything, They have been given the money to write down unsustainable debts by the Irish people already, but have chosen not to fulfill the conditions of their bailout money, given their two fingers to the Irish Government,and the Irish people. Fool me once shame on you fool me twice shame on me. http://www.youtube.com/watch?v=eKgPY1adc0A


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## Kerrigan

We will look back at this blinkered charade in years to come and shudder at what we are doing to our fellow citizens.

Nobody is thinking straight.  Why are people not willing to grasp that we have all been stung by the banks?  We are in this together whether we borrowed money or not.

And for the record I am not in debt!  I do however have a social conscience.


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## ciarank

GDUFFY said:


> The Banks are not forgiving anything, They have been given the money to write down unsustainable debts by the Irish people already, but have chosen not to fulfill the conditions of their bailout money, given their two fingers to the Irish Government,and the Irish people. Fool me once shame on you fool me twice shame on me. http://www.youtube.com/watch?v=eKgPY1adc0A



It's incredible really how it's allowed to carry on like this. The guts of 5 years into this mess already and we're still no closer to solving this issue. I love the phrase 'extend and pretend' because that's exactly what's happening with everyone taking the ostrich approach!  

PS - That video is very funny!




Kerrigan said:


> We will look back at this blinkered charade in years to come and shudder at what we are doing to our fellow citizens.
> 
> Nobody is thinking straight.  Why are people not willing to grasp that we have all been stung by the banks?  We are in this together whether we borrowed money or not.
> 
> And for the record I am not in debt!  I do however have a social conscience.



Totally agree with your sentiments, very well put. I just wish more people would see things like you do........and start taking the brave and necessary decisions!


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## Artemis

*Reckless Lending*

Do the Banks or Government accept the reality of reckless lending?
Surely this factor must be part of the  settlement or solution. Remember you cannot have a reckless borrower without a reckless lender.
I have heard of a case where a bank loaned 16 times a PAYE salary to buy property.

Can we define reckless lending?


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## Brendan Burgess

Yield or Bust has written a good piece on this topic on Irish Economy.ie. It was in the context of Local Authority loans, so was a bit off-topic, and as I said, it deserved a thread of its own. 

http://www.irisheconomy.ie/index.php/2012/11/23/local-authority-mortgages/#comment-352621

Brendan Burgess said



> From the borrower’s point of view,  if they have a loan of €300k on a  house worth €200k, they are probably much better off servicing the  interest than surrendering the house and having to pay off a shortfall  of €200k. Of course, they would be much better off if the bank agrees to  split the mortgage into a €200k annuity mortgage and an interest-free  mortgage of €100k.  But if the borrower is able to pay the interest on  the €300k I don’t see why they should have their effective interest rate  reduced so that they can repay capital and eventually own their home  mortgage-free.


Yield or Bust said


> Your argument suggests that you have no difficulty in accepting the  basis of the house price and accompanying mortgage when the deal was  completed. I do. In fact, I, and many others have been making this  fundamental point over a long long time.
> 
> 
> 
> House prices since about late 2001 until now (well not in fact quite  yet in many parts of the country) were simply wrong. Prices were wrong  because they were not in fact determined, as you continually believe  they are, by the interaction of house buying consumers in the  marketplace, no far from it, house prices are simply a reflection of the  availability of credit and banks willingness to lend into that asset  class ahead of virtually any other for the period under review. In  simple language, banks determine house prices not the house buying  consumers.
> 
> 
> 
> Property, particularly residential houses as an asset type is unique  compared to virtually all other asset types insofar as its not in fact a  cash driven asset market it is a credit asset market. This matters  hugely and for my part this basic but hugely significantly difference  between property and all other asset market seems to have passed you and  your analysis by.
> You have assumed that the price of housing charged to consumers over  the past decade was somehow fair and reasonable and effectively the  ‘market price’ - based on all the available evidence this simplistic  analysis of events is clearly wrong. It begs to question your basic  understanding of the difference between value and price. They are not  the same thing - price is what you pay but value is what you get over  the longer term.
> We know from study after study that the ONLY sound long term metric  for determining fair value in any housing transaction is to use a  multiple of rent paid on similar proxy houses for the one being  purchased (the capitalisation of rent method). The long run average in  the RoI in housing from about the early seventies would suggest rental  yields should generally fall in the region of 7% to 8% depending on  location and the demand supply dynamic operating in the area. Banks know  these ratios and have known them for generations; novice first time  buyers who visit the property shop perhaps once or twice in the adult  lifetime generally don’t and are always price takers in the property  market. Consumers ability to bargain house prices down and yields up to  their long run levels during the period under discussion was virtually  nil. The reason being is that banks acting on the side of competing  consumers simply disregarded these known yield metrics and lent to  novice consumers, in the main, at yields as low as 2% gross (and in many  cases lower). Not only did this happen on the odd occasion but it went  on for years with billions lent and low and behold the banks are all  bust as a result. This represents a massive bank lending error (fraud  perhaps ?) plain and simple, there is no other alternate argument that  could, reasonably be voiced in opposition to this basic conclusion. The  banks simply mis-priced the residential property asset class and did so  for about a decade.
> 
> 
> 
> Your ongoing analysis of this mortgage disaster assumes a no lending  error default position on the banks behalf - based on what we know this  is a really silly position to adopt and you come across as simply a  mouth piece for the banks, a Pat Farrell in disguise if you like. Sorry  to say so, but its rather off putting when the overwhelming evidence  suggests a massive error on the banks behalf who were regulated to know  better.
> 
> 
> Take for instance the Irish Permanent RoI mortgage book – perhaps you  are not aware but 66% of its entire book was lent in the years 2005 to  2007. Now the average duration of a mortgage in the period under review  has increased beyond 25 years so on that basis a three-year lending  period should have represented c12% of the outstanding book. The actual  is over 5 times that rate. Not surprisingly, out of the mortgages lent  in that period by Irish Permanent c80% are now in some sort of default.  I’ll repeat that number, 80% of the mortgages lent by Irish Permanent in  that period are now in some sort of default or restructuring process.  Something has gone badly wrong.
> 
> 
> 
> Your analysis and understanding of events would seem to suggest that  the 100% of repayment duty still resides with the borrower – given the  numbers above anyone with even the most basic understanding of banking  couldn’t for a minute suggest that such a stance makes any sense. And it  goes without saying that all the banks operating in Ireland in the  mortgage space for the years in question are insolvent – and that  includes the branches of the foreign banks operating here. Had such  branches been stand-alone operations they too would be insolvent, given  their ongoing and prior reported losses, and yet you continually suggest  that the all the error and repayment obligation resides with the  borrower.


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## Brendan Burgess

There is a previous thread on this issue:


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## Dr.Debt

Guys

I'm no lover of the banks but I do think there needs to be a bit more balance in this debate.

CiaranK and GDuffy and many others besides them are complaining that the banks have been "recapitalised" so therefore its time for them to take out the red pen and start a mass debt forgiveness program. Quite simply, this cannot happen and the facts do not support it. The banks are no where strong enough to weather that type of storm

If you take Bank of Ireland for example and look at some extract figures from their most recent balance sheet.

Loan book of 98 billion (net of impairment charges)

Shareholders equity of 9 billion

Have been bailed out by the Irish tax payer to the tune of 4.8 billion so far
(but have since paid back 2.5 billion to the state in guarantee charges etc etc)

Now I don't know exactly how big the accumulated bad debt provision at Bank of Ireland is (ie Impairment charges reserved but not yet written off) but it is clear that the bank has very little room to manoevre

Quite simply if 50% of the loan book were to be written off they will need a further 50 billion in recapitalization
30% - 30 billion recapitalization
20% - 20 billion recapitalization

Its very clear to me at least that the banks are not able to open the flood gates on mass debt write off. Its just not going to happen except in the pure bankruptcy cases.

If the banks do end up writing off substantial amounts of debt then the taxpayer will end up paying for it.

Instead of hoping that the banks will start writing off debt soon, I think we should all be hoping that they do NOT !!

Yes, we are caught between a rock and a hard place and lets not imply that there are easy solutions. If we decide that we want to "free up the economy" by writing off debt, then in the same debate we must decide who is going to pay for it.
There are only a few possible avenues for mass write-off of bank loans (1) The government borrows even more money to re -finance the banks again OR 2) We find a listening ear in the Troika. I dont think either of these is remotely possible.


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## dodo

Simple reason this Country is run by self centered people who have all the power and are not willing to see outside their golden circle but hopefully things will change for the better and the people in the know will start doing what is best for the Country as a whole rathar than the select few,


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## Kerrigan

Dr.Debt said:


> Guys
> 
> I'm no lover of the banks but I do think there needs to be a bit more balance in this debate.
> 
> CiaranK and GDuffy and many others besides them are complaining that the banks have been "recapitalised" so therefore its time for them to take out the red pen and start a mass debt forgiveness program. Quite simply, this cannot happen and the facts do not support it. The banks are no where strong enough to weather that type of storm.



Hi Dr. Debt,

If people emigrate or simply hand back the keys surely the banks will need to be recapitalised anyway??


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## burmo

Kerrigan said:


> Hi Dr. Debt,
> 
> If people emigrate or simply hand back the keys surely the banks will need to be recapitalised anyway??



Yes but at the very least those people will not retain the asset having received a debt writedown.


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## dub_nerd

I love this idea of doling out money to get the economy back on the rails. My only question is why you would give it to people mired in debt, especially housing debt. They've already demonstrated that they'll only spend it on unproductive assets like property. We need to give it to people who will spend it on "proper" goods -- iPads, BMWs, booze and fags etc, etc. All the stuff needed to get our retail industry back on its feet. Why on earth would we give it to people who will only use it to repay the bank? Give it to the people who are already comfortable so that they can spend even more. Debt slaves are not going to get the economy back up and running. Surely any honest person who wants to give out "free" money can see that. The money has to come from somewhere, so if you're going to take it off those who can afford to pay, at least give it to those who can afford to spend. After all, it's all about boosting the economy, right?


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## Kerrigan

Where or how do we house 'em?  That's my question.


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## dub_nerd

Kerrigan said:


> Where or how do we house 'em? That's my question.


 
Why do "we" have to house them? Is there something wrong with renting?


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## Kerrigan

Hi, 

I agree there is absolutely nothing wrong with renting but how do you propose people are going to be able to afford the cost of renting?  

Surely if they have the money to rent they can well afford to pay the interest on their mortgage without a further burden on the tax payer.


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## dub_nerd

Bankruptcy isn't necessarily the right option for people who are temporarily struggling to keep up with full intrerest and capital repayments on their mortgage. For those people, it may well be in the lender's and the borrower's interest to keep things going until the situation improves.

For those people whose finances are irreparably holed below the waterline and have no hope of ever repaying their debts, bankruptcy could be an option. It doesn't mean they have no income. I presume a Personal Insolvency Arrangement would take into account their need for accommodation. 

There's been some pretty strange speculation about what a PIA would entail. Some people imagine the purpose is to leave the applicant destitute. And there's been speculation on other threads on here that the applicant can "pull a fast one" by giving away all their assets before walking away from their debts. I would imagine the first port of call in an insolvency is to examine a history of all transactions to check for just such a thing.


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