Is there a case for an insolvent person staying in the family trophy home?

I argued on Saturday with Claire Byrne that insolvent borrowers who own a family home worth more than €500k should be obliged to sell it. The panel didn't seem to agree with me .

I thought it would be worth teasing this out a bit.

Say I have the following profile

• A company gone into liquidation but I have guaranteed its €2m overdraft.
• Investment mortgages of €20m on 20 properties now worth a combined €10m
• A family home worth €1m which is mortgage free
• I have earning capacity as an employee or in business of around €100k a year

For simplicity assume that all the loans are with the same bank - AIB - with whom I am on good terms and we want to work together to resolve this.


The bank's opening position is

• Sell all the properties
• You will then owe us €12m of a shortfall
• Sell the family home to reduce the shortfall to €11m
• Pay this off for the rest of your life.

I will respond as follows.


UK Bankruptcy is obviously a much better option for me, as I will get a fresh start after a year. But I will work with you if you agree to the following

• I will sell all the investment properties
• I will collect the rents and pay them over to you less my fees of €15k a month.
• This will maximise your return and minimise your costs
• In return, I want you to ring-fence the family home
• So you will write off the shortfall on the investment properties and you will release me from the personal guarantee

AIB is not happy with this proposal although they will get much more this way than if I just give them all the keys and make them take legal action for repossession of the property.

So they make a counter offer

• Sell all your investment properties
• Take a fee of €8k a month while you are in the process of selling them
• We will release you from the guarantee
• We will write off all the shortfall except for €1m which we will secure on your house on which we will charge you the SVR mortgage interest which is currently 4.5%

So I end up keeping the family home but with a €1m mortgage.

After a bit of tooing and froing, we agree the following:

• Sell all the investment properties
• I get a monthly fee of €10k
• I keep the family home with a mortgage of €500k at the SVR

This is a good compromise agreement. I get a fresh start with equity of €500k. The bank minimises its losses

Who will buy all these repossessed properties. ?
The banks will be taking big writedowns on their books to sell the properties.

And mortgages are not the sole problem in the borrowing market.

There are many variations of this case study.

Variation 1 - A much more modest family home
Let's say that the home is worth €300k and AIB leave it out of the calculation completely. So I end up continuing to live in a home mortgage-free. Few people would have any problem with this.


Variation 2 - Existing mortgage on the family home
Let's say that I have a cheap tracker, interest only, mortgage of €1m with Bank of Scotland on the family home.

So AIB should simply write off the shortfalls on the investment property loans and give me a fresh start. The family home doesn't come into it.


Variation 2 - Bigger loans and in NAMA

Let's say that the loans are much bigger - €100m - and so I am dealing with NAMA. Everyone knows that I am in NAMA, and I end up keeping the family home which is worth €3m. The properties are probably half developed so I am definitely the best person to maximise the value of these properties.

Although this would be a good deal, the public would not like it. I can imagine the healines: "Property developer gets €50m write off but keeps his home and his kids are still in private schools"

RichInSpirit said:

Who will buy all these repossessed properties. ?
The banks will be taking big writedowns on their books to sell the properties.

.

Click to expand...

Hi Richie

The would be put on the market and sold over time. It could take two or three years.

Yes, the bank will be taking a big write-down. But I am offering to minimise their losses.

Brendan why should this person be treated any different than the person who wrote this thread http://www.askaboutmoney.com/showthread.php?t=176994 ( couple traded up to a 4 bed home both lost their jobs)


I'm sure they have just as much emotional attachment to their home as you have with your trophy home.

Hi Mossie

That is an interesting comparison and throws up a dilemma.

It's in AIB's interest to keep me cooperating. I am the person who can maximise the sales proceeds of the properties. I will use that leverage to try to keep the family home.

In the case of an unemployed couple with only their home which has an unsustainable mortgage, they have little or no leverage. I am campaigning hard that anyone like them who has been engaging for three years should be allowed to sell their home and have their shortfall should be written off. I mentioned this on the same radio programme. I also stressed that I am prepared to pay higher taxes to fund MIS and Rent Supplement but I don't want to pay higher taxes to see people staying in trophy homes.

If a couple with an unsustainable mortgage wants to keep their family home, but can pay only the interest on the current value, I think that they should keep it as well.

So the government could direct AIB and ptsb and NAMA to bring in a policy that anyone with a home worth over €500k [or some such figure] must sell that home. It would certainly be fairer, but it would increase the banks' losses.

so to sum up the scnario, with regards to the 'trophy' family home.....Owner gets to keep it but it now has a mortgage (where as it was mortgage free in the past) and the mortgage is set at 50%+ current value of the house.

Tricky one that...if it was a 100% mortgage, I'd have no issue. But is a 50% mortgage too much of a 'deal' from the bank/taxpayers when in essence they hold all the cards?
I'm not sure to be honest how I'd feel about that deal

But I think Brendan's point was that the bank doesn't hold all the cards. If you're going to slap a EUR 1m mortgage on the borrower, they may decide it doesn't suit them and head off for a UK bankruptcy, which is much worse for the bank.

It's the classic dichotomy, isn't it? -- you owe the bank a hundred grand and you have a problem; you owe the bank a hundred million and they have a problem.

Usually the family home would be in a 'joint tenancy'.

If there was nothing untoward about how that came about, and the borrowings on it were paid back out of earned income - I don't see then how the family home could be brought into the debate.

Or am I missing something?

Hi Wiz

Both parties would have signed the guarantees.

If only one had signed the guarantee, then presumably the house would be sold and the wife would get half the proceeds.

Brendan

@BB That is the point - if one of the spouses or parties did not sign any guarantee then the understanding I have of the Land Conveyancing & Law Reform Act is that a joint tenancy wont be severed .. judgment yes - sale no.

OK, so a guy could give a personal guarantee.

But if his wife owns half the house, the bank can't access it.

If he was giving the house as security, obviously she would have to sign the paperwork as well.

I suspect that if someone is doing a deal with the bank, they would require the house to be put into the pot. If the wife refused to do so, then the deal might not go ahead.

Brendan

In answer to the question of who will buy all these houses/homes/BTL's. A large percentage of these properties are occupied by people. The problem in a lot of the cases is that the current owners got in too deeply and in some cases were unfortunate to loose their job or business in circumstances beyond their control.
A lot of the homes would be bought by in some cases by people who are in good financial circumstances and would be want to trade up at a reasonable prices. There was always and will always be a market where people want to trade up or down. Recession or no recession.
As for BTL's there was a lot of people who rushed headlong into the BTL business and went over the top in giving too high of prices and who also had a total amateur approach to the running of them. Some of these people and had large portfolios and were paying people to let them/repair them and generally manage them and who thought that in a very short period of time rents would rise enough to pay for everything or that the property would rise in price and they could flip them and make a quick buck. There was also the accidental landlords.
In the situations described above there are people who the banks could with reasonable safety lend money to and have the money paid back. The banks if they used their head could by lending sensibly create a more liquid market market while not inflating the market. The banks by letting a centralised system in head office decide who will get money are adding to their downfall. The individual as a borrower is not considered because nobody in the decision making process knows him or her. There are buyers out there but they need a reasonable finance. I hope I am not off topic as I was just addressing one post in the topic so far.