Allow people in negative equity swap with people with equity

[DerKaiser]

Listening to George Lee's 'million euro mortgage pauper' arguement this morning something sprang to mind.

For every person with a €1m mortgage on a house worth €600k who cannot pay the mortgage, there's probably someone else with a low mortgage on a €400k house who would gladly come up with €200k to trade up.

Should we somehow incentivise such switches? i.e. the person in the better financial position takes on €200k extra debt and gets the bigger house with the guy who's struggling switching to the smaller house and less debt.

Keeping people in homes is all very well but subsidising those in big houses rather than asking them to trade down to reduce their debt is lunacy from every perspective.

An initial thought on this is that the revenue could waive stamp duty on transactions where a person in difficulty is trading down and the banks could offer free solicitor fees for such transactions and an extended moratorium in view of the chunk of the mortgage paid down

 

[Brendan Burgess]

I don't follow this.

OK, so I have a €600k house with €1m debt.

What is in it for me to trade down? The ultimate trade down is to sell the house for €600k and be left with €400k of unsecured debt to repay to the bank.

The situation is so hopeless, that I am better off keeping my €600k stake in the property market and hoping that in time, it will come back again.

If I trade down and own no stake in the property market, I will have no chance of paying off the €400k loan.

Now let's look at the guy with a €400k house and €200k loan. Let's leave him alone and happy with his low loan to value. Let's not create more problems.

However, I do agree that stamp duty should be reduced to reduce the costs of moving. Some people are slow to take action due to the high costs involved. This makes the market inefficient. If I have a €600k house with a €500k mortage and I expect house prices to drop, there really is little point in me selling now with a view to buying again in a year's time due to the high stamp duty.

Brendan

 

[annR]

I don't follow this either.

>>Keeping people in homes is all very well but subsidising those in big houses rather than asking them to trade down to reduce their debt is lunacy from every perspective.<<

Even if he sold the house for 600k, there is still an outstanding debt to the bank of 400k - who is going to pay that?

 

[DerKaiser]

I don't follow this.

OK, so I have a €600k house with €1m debt.

What is in it for me to trade down? The ultimate trade down is to sell the house for €600k and be left with €400k of unsecured debt to repay to the bank.

The situation is so hopeless, that I am better off keeping my €600k stake in the property market and hoping that in time, it will come back again.

If I trade down and own no stake in the property market, I will have no chance of paying off the €400k loan.

Now let's look at the guy with a €400k house and €200k loan. Let's leave him alone and happy with his low loan to value. Let's not create more problems.

However, I do agree that stamp duty should be reduced to reduce the costs of moving. Some people are slow to take action due to the high costs involved. This makes the market inefficient. If I have a €600k house with a €500k mortage and I expect house prices to drop, there really is little point in me selling now with a view to buying again in a year's time due to the high stamp duty.

Brendan

I think looking at a more realistic example might help.

If I earn €50k p.a. and have a €300k mortgage on an apartment valued at €100k, I am probably able to survive day to day despite my negative equity of €200k.

If on the other hand I'd somehow managed to get a mortgage for €600k on a property worth €400k now, I'd be in quite a bit of difficulty.

In each scenario on paper I'm €200k into negative equity. This solution will not alter that. What it does do, however is reduce my total debt to a more manageable level.

The optimist inside many of us might rather keep the higher value house in the hope of making back our losses, but if you take an unbiased view (i.e. what you have lost in equity is gone), then trading down and reducing your mortgage is a more sustanable position to be in if your earnings cannot support the higher level of debt

 

[DerKaiser]

I don't follow this either.

>>Keeping people in homes is all very well but subsidising those in big houses rather than asking them to trade down to reduce their debt is lunacy from every perspective.<<

Even if he sold the house for 600k, there is still an outstanding debt to the bank of 400k - who is going to pay that?

I think people focus too much on the negative equity. you have to pay the entire debt and if you can give up €200k of the value of your home to reduce your debt by €200k this may help the very real problem of servicing your debts

 

[tiger]

You would need two people looking to sell at the same time, who were both interested in each other's property. A very illiquid situation. Instead, you would just have to allow people to sell when in -ve equity, and have the outstanding balance as an unsecured loan, but on the terms of the original secured loan/mortgage.

We could have a NAMA II to buy up these loans!

 

[Brendan Burgess]

The optimist inside many of us might rather keep the higher value house in the hope of making back our losses, but if you take an unbiased view (i.e. what you have lost in equity is gone), then trading down and reducing your mortgage is a more sustanable position to be in if your earnings cannot support the higher level of debt

Which position would you prefer to be in - a €100k home with €300k of debt or a €400k loan with €600k of debt?

In both cases, I am in serious trouble. In both cases, the bank is in serious trouble.

The only way out for me is if house prices rise. In the first case, they have to rise by 200%. In the second, they have to rise by "only" 50%.

The interest is twice as high in the second case, but I have 4 times more house.

While the risk is higher in the second case, in that I could lose a further €300k, I am bankrupt anyway, so I may as well be bankrupt for a bigger amount.

Brendan

 

[DerKaiser]

Which position would you prefer to be in - a €100k home with €300k of debt or a €400k loan with €600k of debt?

In both cases, I am in serious trouble. In both cases, the bank is in serious trouble.

The only way out for me is if house prices rise. In the first case, they have to rise by 200%. In the second, they have to rise by "only" 50%.

The interest is twice as high in the second case, but I have 4 times more house.

While the risk is higher in the second case, in that I could lose a further €300k, I am bankrupt anyway, so I may as well be bankrupt for a bigger amount.

Brendan

But my point is you would end up bankrupt with a large house or not bankrupt with a smaller house.

A €300k debt can be serviced a lot more readily on a €50k salary than a €600k one.

My suggestion, rather than looking at equity, is to look at income and the level of debt it can service.

I do believe there are people out there who'd like to trade up and who have the means to do so.

I also believe there are people in very large houses with very large mortgages who would jump at the chance to trade down and reduce their debts but cannot do so because they are effectively prevented from doing anaything as a result of the negative equity.

Finally I think the banks would be in a lot better position if those of lesser means reduced their debts.

The banks have people coming to them looking for loans to trade up and people with large mortgages who are in difficulty. They could improve everybody's lot with a bit of joined up thinking on this one.

 

[Pope John 11]

Which position would you prefer to be in - a €100k home with €300k of debt or a €400k loan with €600k of debt?

In both cases, I am in serious trouble. In both cases, the bank is in serious trouble.
Brendan

Not necessarily the case, assuming negativity equity DOES not come into the equation.

I think DerKaiser is saying if there was a complete reversal of fortune for two couples, lets simplify it, Couple 2 got lucky & Couple 1 got unlucky.

Heres the story:

Once upon a time, not so far gone in the Celtic Tiger Boom we had:

Couple 1 - Husband a Project Manager working with the same company with the last 5 years, salary €85,000. Wife a freelance interior decorator, own boss with the last 3 years, salary €65,000. Construction is booming.
They decide to purchase House A - €600,000, big enough for a future family. However not enough time in the day, not enough time to have kids,things are booming.

Couple 2 - Boyfriend working as Lab Technician, salary €35,000, although he has a degree in Biotechnology, he continues to do his masters part-time. He is renting. Girlfriend, a teacher in the local school with the last 6 years. She spends her summers completing a TEFL course & also corrects the junior & leaving cert papers, salary €45,000 approx.At the time her parents go guarantor on a house, House B - €300,000.

Then one day, dark clouds began to decend over head, along came NAMA & CREDIT CRUNCH:

Unlucky Couple 1 - Husband lost his job, a few odd jobs here & there, income €30,000, Wife salary also reduced to €35,000 this includes some parttime work too. Nevertheless both still getting the work. They are looking to downgrade to a house worth only €300,000.

Lucky Couple 2 - Boyfriend has just completed his masters & guess what, he has just been offered a role as an Analytical Lab Manager in the Biotechnology/Science sector, Salary €70,000, yes doing his degree/masters & previous work experience has paid off. This industry is really taking off now, he also plans to study further to gain further promotion later. His girlfriend has been extremely lucky too & has been offered the vice-principal following previous interviews etc. She now also spends her time teaching english in the summer months & still corrects exam papers, combined salary €58,000. They are planning to get married, have kids & are looking to upgrade. They have also factored in the upcoming budget cuts for the next few years. They are looking forward to the move. A house worth €600,000 max would suit them.

Any if the figures quoted above are purely for example purposes only, please do not be offended in anyway if the salaries are over-estimated & are far greater than yours!

Couple 1 would be comfortable with House B
Couple 2 would be comfortable with House A

Is it possible for them to swop? - Derkaisers Question, not mine......

I hope I have read this one right, Derkaiser?

Whatabout stampduty, Derkaiser?

 

[Brendan Burgess]

Which position would you prefer to be in - a €100k home with €300k of debt or a €400k loan with €600k of debt?

In both cases, I am in serious trouble. In both cases, the bank is in serious trouble.
Brendan


Not necessarily the case, assuming negativity equity DOES not come into the equation.

But this is all about negative equity. If I don't have a house and I earn €50k a year, of course I would be happier with a €300k mortgage than a €600k mortgage.

And if I live in a mortgage free house worth €600k and I have no kids and things are tight, I would consider trading down to a €300k house especially if the transaction cost of doing so was low.

 

[DerKaiser]

Is it possible for them to swop? - Derkaisers Question, not mine......

I hope I have read this one right, Derkaiser?

Whatabout stampduty, Derkaiser?

Perfect example.

My view is that society would be better off allowing the couple in trouble to trade down (rather than trapping them at a higher level of debt) and the couple with more secure means to trade up.

Because this will end up in a positive for society I believe stamp duty could be waived to encourage it.

Is the market too illiquid for them to swap?
I think it could happen. There will be a build up of people needing to trade up and if interest rates start to rise again there should be many people looking to trade down.

 

[DerKaiser]

And if I live in a mortgage free house worth €600k and I have no kids and things are tight, I would consider trading down to a €300k house especially if the transaction cost of doing so was low.

And if you live in a house worth €600k with a €700k mortgage you would benefit similary from moving to a house worth €300k with a €400k mortgage

 

[Pope John 11]

http://www.askaboutmoney.com/showthread.php?t=117814

Good example of a person who needs to downgrade, following recent change of circumstances. Have a look at the advice given in post 10.

 

[Brendan Burgess]

Folks

The ban on discussing house prices is still in force.

I have to delete posts and responses quoting those posts.

Please make your point without discussing house prices.

Brendan

 

[Pope John 11]

Folks

The ban on discussing house prices is still in force.

I have to delete posts and responses quoting those posts.

Please make your point without discussing house prices.

Brendan

Thats very well, Brendan, congrats on your 10,000 post

 

[Brendan Burgess]

http://www.askaboutmoney.com/showthread.php?t=117814

Good example of a person who needs to downgrade, following recent change of circumstances. Have a look at the advice given in post 10.

Again, that has nothing to do with the main topic of this post. People in negative equity.

The guy has a mortgage of 7,000 on a house worth €600,000.
He has two investment properties, so he may well be overexposed to property as an asset class and should sell the investment properties.
He might trade down or not as he sees fit ( I did not read the entire thread).

Brendan

 

[Brendan Burgess]

And if you live in a house worth €600k with a €700k mortgage you would benefit similary from moving to a house worth €300k with a €400k mortgage

This would not be clear at all.

If I was in this position, I would prefer to try to hold onto my bigger house and hope that the market rises instead of falls. But I would be aware of this risk.

If I was unable to make the repayments over a sustained period of time, then trading down would be appropriate.

The original post has a €400k negative equity which is much higher than a €100k negative equity.

 

[DerKaiser]

If I was in this position, I would prefer to try to hold onto my bigger house and hope that the market rises instead of falls. But I would be aware of this risk.

More and more people are going to end up with big houses and large debts with limited means of servicing these debts. Rising interest rates will compound the situation.

Do you think that there are not people out there who would gladly live in a house worth €300k less to knock €300k off their debts?

Reducing debts in such a way is a clear way for people to avoid becoming bankrupt. Hoping things bounce back should be seen for the gamble that it is

The original post has a €400k negative equity which is much higher than a €100k negative equity.

That's an extreme example but it's all relative when you look at incomes.

Someone on €150k p.a. might be able to afford an €800k mortgage but not a €1m mortgage

 

[DerKaiser]

Again, that has nothing to do with the main topic of this post. People in negative equity.Brendan

Well it was my post that initiated this and my main point is not negative equity.

My main point is that people on reduced incomes who are struggling with debt repaymants should be allowed trade down to reduce their total debts.

A combination of negative equity, stamp duty, fees and the belief that things will simply bounce back are stopping people in difficulty from trading down

 

[corkgal]

Those with more secure means generally have it because they stayed away from property speculation in the first place.