Brendan and David McWilliams on LateLateShow 26/Oct/12

[Duke of Marmalade]

newborn I don't really know what McW means by debt for equity swap.

Let's say a punter has a mortgage of 300k on a property worth 200k.

Let's say bank takes 50% ownership, does it write down mortgage by 150K or 100K? If the former, then that is 50K debt forgiveness. If the latter then no debt forgiveness yet, but if the bank foregoes rent for the next 20 years on its 100k share of the property that equates roughly to a gift of 50K (indeed it should be taxed as a gift).

It is negative equity which is making this debt crisis potentially much worse than in previous recessions. Not because this time round there are more people who can't afford to keep up the payments but because of the strong temptation for strategic default, which was not present in times past.

 

[newborn]

newborn I don't really know what McW means by debt for equity swap.

Let's say a punter has a mortgage of 300k on a property worth 200k.

Let's say bank takes 50% ownership, does it write down mortgage by 150K or 100K? If the former, then that is 50K debt forgiveness. If the latter then no debt forgiveness yet, but if the bank foregoes rent for the next 20 years on its 100k share of the property that equates roughly to a gift of 50K (indeed it should be taxed as a gift).

It is negative equity which is making this debt crisis potentially much worse than in previous recessions. Not because this time round there are more people who can't afford to keep up the payments but because of the strong temptation for strategic default, which was not present in times past.

I would envisage it going to whatever leval was sustainable and the split of ownership reflecting this. i.e in your example if 100k was the only mortgage they could afford the Bank would own 66.66% and the borrower 33.33%. which is zero forgiveness now keeps people in their homes with some equity interest

Re your other point the absence of rent on the banks 66% is a drawback but the trade off is as I pointed out the writeback of a provision / non crystallisation of a loss and the fact interest will now be earned on the 100k that to date has not been income for the bank (or ought not to have been treated as such).

 

[Duke of Marmalade]

I would envisage it going to whatever leval was sustainable and the split of ownership reflecting this. i.e in your example if 100k was the only mortgage they could afford the Bank would own 66.66% and the borrower 33.33%. which is zero forgiveness now keeps people in their homes with some equity interest

newborn I think there is an element of forgiveness there. The bank has acquired an asset currently worth 133K (2/3rds of 200K) but has forgiven 200K of mortgage, that looks like a gift or forgiveness, call it what you will, of 67K. Now for the transaction of itself to have no forgiveness aspect would mean the bank owning the full property.

 

[ontour]

So yes homes are not assets in my view.

Homes are essential to life on the coldest weekend of the winter so far its horrible to sit on your couch in front of your fire thinking about all the people who should be thrown out on street.

You are confusing a home with ownership of property. You do not need to own a property to have a healthy and happy home. It is important for people to have a home but it is not essential to own property.

Ownership of something can create an asset or a liability. For many people in trouble their property is a liability as it is incurring costs and they are unable to dispose of that property.

The world is not black and white. Everyone in arrears should not have their property reposessed and everybody in a position of unrepayable debt should not be given that property because it is 'not their fault'.

One step should be for the banks to buy people out of tracker mortgages. This would reduce the loan amount and may enable the person to get out of negative equity so that they have more options. People may not be happy with what the banks offer and that is fine, they can keep their tracker rate. This doesn't solve many of the circumstances but there is no single silver bullet to the mess.

 

[newborn]

newborn I think there is an element of forgiveness there. The bank has acquired an asset currently worth 133K (2/3rds of 200K) but has forgiven 200K of mortgage, that looks like a gift or forgiveness, call it what you will, of 67K. Now for the transaction of itself to have no forgiveness aspect would mean the bank owning the full property.

Yes on reflection you're correct in that there is an element of forgiveness there but by the same token you ignore the other positives for the Bank I outlined which make it a better option than enforcement and sale crystallising a loss............

Were it the case that the sustainable level is equal to or above the current value of the property less disposal costs then the argument that a Bank should restructure by way of debt / equity swap is even stronger.........

The really interesting part of the current debate is around what represents sustainability.......the prejudices of various bank policymakers and their own upbringing will determine what represents a 'realistic lifestyle'......

 

[Duke of Marmalade]

newborn I just read Matthew Elderfield's speech where he talks about split mortgages. He explains one version of this as follows, taking our example.

Split the mortgage into the 100K that can be afforded and "warehouse" the other 200K which rolls up with interest. This seems interesting and has the potential in some cases to square the circle. The customer has not given up any ownership. She can afford to service the new mortgage and on the face of it the bank still has a fully performing loan.

Of course a lot depends on what happens to house prices but it is not unreasonable that over the next 20 years, house prices will rise significantly thus covering the rolled up warehouse mortgage and there is also a good possibility that the person will once again be able to service a mortgage similar to the original, after all she used to be able to afford it and at much higher interest rates, in which case she can "buy back" the warehoused mortgage.

I presume Fiona Muldoon was lambasting the banks for not being more innovative like that rather than for not engaging in wholesale debt forgiveness.

 

[newborn]

newborn I just read Matthew Elderfield's speech where he talks about split mortgages. He explains one version of this as follows, taking our example.

Split the mortgage into the 100K that can be afforded and "warehouse" the other 200K which rolls up with interest. This seems interesting and has the potential in some cases to square the circle. The customer has not given up any ownership. She can afford to service the new mortgage and on the face of it the bank still has a fully performing loan.

Of course a lot depends on what happens to house prices but it is not unreasonable that over the next 20 years, house prices will rise significantly thus covering the rolled up warehouse mortgage and there is also a good possibility that the person will once again be able to service a mortgage similar to the original, after all she used to be able to afford it and at much higher interest rates, in which case she can "buy back" the warehoused mortgage.

I presume Fiona Muldoon was lambasting the banks for not being more innovative like that rather than for not engaging in wholesale debt forgiveness.

My sense is that none of the warehoused loan interest could be taken to profit and in fact each amount of interest capitalised would hit the bank p and l as an additional impairment every quarter as the potential loss increases...........

To my mind that proposal compels a bank to impair each interest installment on the 200k over a long period which may or may not be written back and eliminates the bank having any possible long term upside through a share of the property...........

 

[Delboy]

......There is no proof or statistics showing that some people are defaulting on purpose. Its quite possibly made up by those who want the status quo to remain as it is.

Thats a very innocent comment you've made there. I can only assume you don't follow the news or read the papers too much. And that you speak with passion on this more from personal experiences, than common sense.
There are cases before the courts which show clearly that people, especially those with BTL's in NE, are pocketing the rent and have stopped paying mortgages.
There's even a case study on 1 of the forums here where someone discusses this about their brother I think it is.

I listened to the LLS show last night and I saw BB up against it, 2 possibly 4 against 1. I can see some of DMcW's point about maybe the banks taking partial ownership of houses in trouble...and I can definitely see BB's point about people being adults and no 1 forced them to buy the houses in the first place.

If you bought a house that was way beyond your reach at the height of the boom, and perhaps still is even after the falls we've had, why should you be allowed to keep it. Why should those that sat out the madness or had the sense to buy smaller more affordable houses, now have to pay for this....and possibly have their chances of trading up seriously hindered by what in effect are 'bed blockers'.
Sell the house for whatever it can achieve on the open market, reach an agreement with the bank on how much debt both parties will share following an open and transparent review of the case....and move to a home that is simply more affordable, or God forbid, rent!

 

[PiedPiper]

There are cases before the courts which show clearly that people, especially those with BTL's in NE, are pocketing the rent and have stopped paying mortgages.
There's even a case study on 1 of the forums here where someone discusses this about their brother I think it is.

What cases what statistics thats all hearsay and simply an assumption maybe its you who is a little innocent. The person here was suggesting suspending payments and saving the cash to buy another house and balance it out which was an economic decision.

why should you be allowed to keep it

What are you do you really want to play god? Get a grip how and I keep asking this how are all these homeless people going to make your life better or the economy better or society better, it won't. A couple of thousand damanged kids will make society a much more dangerous and ugly place than it already is.

Why should those that sat out the madness or had the sense to buy smaller more affordable houses, now have to pay for this....
Hello you are paying for russian bond holders whose names you dont even know you are paying county managers more than the salary of Obama and Kenny combined, the dude running the FAI is getting more than a couple of european leaders together. None of this bothers you, you are doing nothing about it but you want ordinary hardworking Irish people to be made homeless?? And you think I am a little soft and innocent come on now!!

Your asking me do I read the papers did you read that PTSB, Ulster Bank and so on are buying back their bonds, ie buying back the loans. Why would they be doing that ask yourself some more difficult questions than is that fecker up the road got away lightly, and you might find the answers a lot more enlightling and less harmfull than running around with the paint can to thow out the unworthy.

 

[Delboy]

at Pied Piper....

sure, we'll just keep paying for everyone...line them up, who's next to get paid off. Eventually the whole thing will collapse and what then

You mention the case I referred to as being an 'economic decision'....there'll be lots of them

No one will be homeless, no need for the massive hysterics....if you can't afford a 2k mortgage in a NE house, then perhaps you can afford a 1.2k rental. Examine each case on its merits.
There's no shame in renting or perhaps even buying a smaller house, or God forbid moving into 1 of the BTL's a lot of those in trouble have in a less desirable location

But there simply cant be massive debt forgiveness, not while the asset is retained. No way

 

[newborn]

at Pied Piper....

sure, we'll just keep paying for everyone...line them up, who's next to get paid off. Eventually the whole thing will collapse and what then

You mention the case I referred to as being an 'economic decision'....there'll be lots of them

No one will be homeless, no need for the massive hysterics....if you can't afford a 2k mortgage in a NE house, then perhaps you can afford a 1.2k rental. Examine each case on its merits.
There's no shame in renting or perhaps even buying a smaller house, or God forbid moving into 1 of the BTL's a lot of those in trouble have in a less desirable location

But there simply cant be massive debt forgiveness, not while the asset is retained. No way

I beg to differ, forced sale of PPRs should be a last resort..
.......none of what our Dear Leader or his acolytes propose recognises the economic virtues of or social cost of ignoring reasonable debt for equity swap arrangements.....constant reference to economic irresponsibility poses the question as to whether this forum simply pits one unfortunately timed house house buying generation against their predecessors.......

 

[RMCF]

Why do people continue to mention negative equity mortgages in this debate?

NE is only important if you plan to sell. If you can afford to pay the repayment on your mortgage every month then you should not be classed as a 'problem' mortgage just because your house is worth less than what you paid for it.

Trying to sort out this huge problem is about dealing with those who can't afford to pay their mortgage not those who are a bit peeved that they could be paying less.

 

[ontour]

NE is only important if you plan to sell.

NE is important if you can't afford your repayments and there is no sign of that situation changing.

- No NE & afford repayments - No problem
- NE & afford repayments - No problem ( mobility of workforce, suitable housing issue)
- No NE & can't afford repayments - No problem (can sell)
- NE & can't afford repayments - problem

It is not 'fair' but the situations the government need to resolve are those people that should sell rather than just those that want to sell or all people in NE. From a government finances perspective the NE is the critical part if they can not force all the banks to take the hit.

 

[PiedPiper]

But Delboy that's exactly what we did with bond holders lined them up and paid them off!!

 

[Importer]

Much as i hate to admit it, Mc Williams is spot on (again)

 

[Duke of Marmalade]

Much as i hate to admit it, Mc Williams is spot on (again)

Importer, what exactly did McWilliams say on the LLS? Very little about debt forgiveness, lot's about Granny's good room. What I think McWilliams is saying, but I am not sure, is that we should tell Merkel et. al. to stuff their loans, we can't pay, we are leaving your euro. I can understand why you hate to admit agreeing with that.

Whilst we are on leaving the euro, how about this from McWilliams in May 2009:

What can we do about this? The obvious answer is to leave the euro, reinstitute our own currency, allow it to plummet to reflect the real competitive position of our ruined, feeble economy and start again. The vast majority of economists and commentators say this is not possible. In fact, they ridicule those who suggest that this might be worth entertaining.
Let me just remind you that the vast majority of economists and commentators believed the “soft landing” mantra. New ideas go through a cycle. First they and their proponents are ridiculed, then they are violently attacked and only then are they accepted as a universal truth. I suspect the same will happen to the idea of leaving the euro.

This is how McWilliams sees McWilliams, a latter day Copernicus who originally gets ridiculed, then gets violently attacked, until finally his genius is recognised as the universal truth. Well, three and half years later and "leaving the euro" is more ridiculed than ever by everyone. This period of ridicule must be unusually frustrating for our long suffering prophet.

 

[Delboy]

But Delboy that's exactly what we did with bond holders lined them up and paid them off!!

keep lining them up, the more the merrier....the money will keep falling from the sky.
Now I better run out and buy a 1 or 2m euro house and pay the mortgage for the 1st few months or so, before reneging and putting my money away for more worthy bills. When this debt forgiveness comes along that you so want to see happen, I'll have myself a fine gaff at the expense of the compliant minority
happy days!

 

[PiedPiper]

With all the peace and love in the universe

Now Delboy, can I just tell you one last time with all the love in the universe. Homeless people will not help you. If its not love forgiveness and joy you are spreading then it may turn out to be m____re!!

Do you really want the can of white paint, do you really want to spread hate into the society that you live.

The high moral ground and begruddgery will not solve this crisis.

I hear your anger and feel your pain but wishing random strangers perish due to bad banks is not the way forward.

If you can't move on your thinking you can't move on.

With love and peace to all men. PiedPiper

 

[monagt]

This is how McWilliams sees McWilliams, a latter day Copernicus who originally gets ridiculed, then gets violently attacked, until finally his genius is recognised as the universal truth. Well, three and half years later and "leaving the euro" is more ridiculed than ever by everyone. This period of ridicule must be unusually frustrating for our long suffering prophet.

Its not a question of being right ALL the time but being right MORE OFTEN that the rest of of "knowledgeable" commentators.

He called the bust!

After all, you only find out who is swimming naked when the tide goes out

Warren Buffett.

If I had listened to DMcW from the start I would be a richer man today.

 

[Delboy]

There are cases before the courts which show clearly that people, especially those with BTL's in NE, are pocketing the rent and have stopped paying mortgages.
There's even a case study on 1 of the forums here where someone discusses this about their brother I think it is.

What cases what statistics thats all hearsay and simply an assumption maybe its you who is a little innocent. The person here was suggesting suspending payments and saving the cash to buy another house and balance it out which was an economic decision.

why should you be allowed to keep it

What are you do you really want to play god? Get a grip how and I keep asking this how are all these homeless people going to make your life better or the economy better or society better, it won't. A couple of thousand damanged kids will make society a much more dangerous and ugly place than it already is.

Why should those that sat out the madness or had the sense to buy smaller more affordable houses, now have to pay for this....
Hello you are paying for russian bond holders whose names you dont even know you are paying county managers more than the salary of Obama and Kenny combined, the dude running the FAI is getting more than a couple of european leaders together. None of this bothers you, you are doing nothing about it but you want ordinary hardworking Irish people to be made homeless?? And you think I am a little soft and innocent come on now!!

Your asking me do I read the papers did you read that PTSB, Ulster Bank and so on are buying back their bonds, ie buying back the loans. Why would they be doing that ask yourself some more difficult questions than is that fecker up the road got away lightly, and you might find the answers a lot more enlightling and less harmfull than running around with the paint can to thow out the unworthy.

You refuse to believe that any cases exist where people refuse to pay their mortgage or are acting irrationaly in their dealings with arrears.
And seeing as you wont answer my question on another thread as to whether you were part of the Anti Eviction group who protested in Dundalk (after saying you are a member of some such group), here's a little article for you to read about the man in that case
[broken link removed]
"As arrears grew, Mr Dooley rented the property out to tenants but still failed to make the monthly repayments, PTSB said."

Your either a troll, a very indebted person as the result of a bad house(s) purchase, or a very innocent poster.
I don't think it possible to have a rationale, adult discussion on you with this and your childish replies confirm that.
So I bow out of any further replies to you