Gurdgiev grossly exaggerating the mortgage problem...again

[Brendan Burgess]

[FONT=&quot]On Thursday’s [/FONT][FONT=&quot]Vincent Browne Show[/FONT][FONT=&quot] Gurdgiev said ( at 9 minutes in) [/FONT][FONT=&quot]
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I find it extremely, extremely symbolic that on a day when Moodys Investor Services has flagged to Ireland that the expected losses on mortgages are going rise to about the level €35 billion given that the government and central bank has provided for just 9 billion in a stress test on the banks to cover for those losses that the junior minister for housing gets a payoff…

[FONT=&quot]So he is implying that the government faces further losses of €27 billion on mortgages![/FONT]
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[FONT=&quot]Why does he persist in grossly exaggerating the potential cost of mortgage default to the Irish taxpayer? [/FONT][FONT=&quot]
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[FONT=&quot]What Moody’s said: (as quoted in the[broken link removed])[/FONT]
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“In the unlikely event that all negative equity loans were to be written down to the market value of the home, we estimate that 25 per cent of all mortgage debt would be written off,” said the agency.

Why can Gurdgiev not distinguish between "the unlikely event" and "the expected losses"?

The €35m figure is 25% of €140 billion the total of owner occupied and buy to lets – state owned banks and non-state owned banks.

Gurdgiev must be aware that Moody’s report is rubbish. There is no proposal to write off all negative equity loans.

Gurdgiev must also be aware that the €140 billion refers to the total market which includes both state owned banks and banks not owned by the state.

Gurdgiev should be aware that Moody’s estimate of 25% is way over the top.

Even if Moody's "unlikely event" happened.

Total Irish mortgage market|€140 billion
State owned banks|c.€70 billion
25% write off €17 billion
Already provided by AIB, IL&P,EBS|€7 billion
Potential additional provisions needed|€10 billion

And this assumes that the full cost is borne by the state i.e. that the owners of the securitised mortgages pay nothing and the providers of Mortgage Indemnity Guarantees pay nothing.


So Gurdgiev converts an "unlikely event" which would cost €17 billion into "expected losses of €35 billion. This is grossly irresponsible.

Why does Gurdgiev continue to grossly exaggerate this?

Brian Lucey and Constantin Gurdgiev and others came up with the following estimate in an Irish Times article on 11 November 2010.

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.

However, in this Sunday Independent article, Gurdgiev says "I tend to think that around €5bn would do. It depends on how you do it and to what level you do it," he said.


I challenged him on the Vincent Browne show to explain how it could be €49 billion one week, and €5 billion the next and he spat out some ridiculous explanation of how things had changed since the earlier estimates.

But they must have changed again as he is back to the €35 billion figure.

I wrote a piece in August which tries to arrive at more accurate figure based on the data: "How much would debt forgiveness cost?"

 

[The Ghoul]

I don't know why he does this - is he a publicity hound, a spoofer or a vested interest? Anyway a lot of people take everything he says as gospel.

I think the more pessimistic someone is the more likely they are to get air time. Gurdgiev's grumpy, sour demeanor as he slouches in his chair on TV programmes is also a plus point.

It appeals to people looking for a "hardman" (preferably non Irish) who'll "tell it like it is". Others that have this appeal include Colm McCarthy and Michael O'Leary.

 

[Importer]

I like him, agree with him most of the time and trust him...

 

[Mrs Vimes]

Why does Gurdgiev continue to grossly exaggerate this?

I think the most likely explanation is that "good news is no news"

 

[paddy26]

Brendan,

Is there any data on how many mortgages are covered by Mortgage Indemnity Guarantees?

Also, and kind of off the point. Do tracker mortgages qualify for the LTRO (as collateral)? If so this should dramatically improve profitability for the likes of PTSB who have plenty of trackers allowing them to potentially be less of a burden on the state.

 

[Brendan Burgess]

Is there any data on how many mortgages are covered by Mortgage Indemnity Guarantees?

Hi Paddy

The only users of MIG in Ireland are the EBS and KBC. My understanding is that they have made fewer than 10 claims between them over the past ten years. It is only paid out in a repossession. That is why I would not make any adjustment for it. The providers of this insurance, Genworth, must be laughing all the way to the bank as there are so few repossessions in Ireland.

Do tracker mortgages qualify for the LTRO (as collateral)? If so this should dramatically improve profitability for the likes of PTSB who have plenty of trackers allowing them to potentially be less of a burden on the state.

Yes, they do and maybe some adjustment should be made for these as well. The banks provided for losses and these are documented in the PCAR documentation. But they also provided, separately, for future losses, some of which would be due to trackers. PTSB's average cost of funds is around 2.2%, so they are losing on trackers but compensating for these losses by screwing the captive audience of SVRs.