Moral hazard of banks writing off debt

[Bronte]

This is a process that has only really begun and above figures do not include PIA's/Bankruptcies.

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There is talk of it only being the beginning, but no actual meaningful figures on PIA's or bankruptcies. Based on my reasearch the PIA's etc are a total joke and not fit for purpose. There is not going to be a tidal wave of insolvencies. There is going to be deals done via personal negotiation or via IMHO etc.

You mention cases you know. Give us one case with real details and as close as you can figures, and confirm that these people are living the high life.

 

[Sunny]

I think this is a contradiction...negative equity should have nothing to do with people going into arrears, but you are proving my point (and Delboy's) by implying that negative equity leads to arrears.

SIGH......

I never said negative equity leads to arrears. It does however lead to rising arrears in the later buckets because people can't offload their property if they get into difficulty.

 

[Delboy]

No they aren't. Last reasrch I saw from Greece anyway showed three month arrears of 15.5% and climbing. I think Ireland's peaked (hopefully) at around 18%. Hardly off the radar compared to theirs. We also had a larger property crash than either of those Countries so negative equity is a bigger problem. We had larger mortgages v income due to the generosity of our banks during the boom. And there are other differences if you really want to compare.

Ok, your referring to short term mortgage debt whereas I was referring to long term arrears. This graph illustrates the point I was making
http://cdn.theatlantic.com/static/mt/assets/business/Quartz_Ireland_Chart1.png

 

[Bronte]

That graph is truly shocking, it's amazing the resilence of the Irish people in the face of figures that stark. Those figures would be an awful lot better if we had a properly thought out insolvency system and if banks had got their act together and out of the sand 5 years ago.

 

[goingforgold]

You mention cases you know. Give us one case with real details and as close as you can figures, and confirm that these people are living the high life.

Who mentioned people living the high life? I'm not sure if you are deliberately trying to misunderstand my point?

This discussion is about moral hazard and I originally posted this in response to a person who was asking for solutions to mortgage debt (negative equity and arrears).

I believe that people should look into all their options if they are in serious negative equity and/or arrears. Why should they pay off all their debt and be slaves to a bank for the remainder of their lives when they can avail of much better deals from the bank by proactively defaulting on their mortgages, or even going as far as giving up their jobs and going bankrupt in the UK for 12 months. I say this because people ARE getting debt writedowns (some even remaining in their homes), and as the precedent is there I believe people should do what it takes to protect their finances and that of their families.

 

[Gerry Canning]

It is going to be very difficult to filter out chanchers and smart asses from genuine cases.
And the people to sort things, sadly are our failed banks?

Someone in severe negative equity may with some justification decide to join the bandwagon.

I cannot disagree with most of the posts, all make good enough points.
But the problem of arrears/default/chanchers can only be resolved by actively writing down an appreciable amount of Mortgage debt.
In writing off debt, there is NO doubt Mr Chancher will feature a lot higher than any of us will like under moral hazard. However , unless we can set up a broad brush stroke type of resolution ,that will sadly include chanchers , we will only end up in the stalling/non resolution that we see.

Time to take the bitter pill methinks!

 

[callybags]

It is going to be very difficult to filter out chanchers and smart asses from genuine cases.
And the people to sort things, sadly are our failed banks?

Someone in severe negative equity may with some justification decide to join the bandwagon.

I cannot disagree with most of the posts, all make good enough points.
But the problem of arrears/default/chanchers can only be resolved by actively writing down an appreciable amount of Mortgage debt.
In writing off debt, there is NO doubt Mr Chancher will feature a lot higher than any of us will like under moral hazard. However , unless we can set up a broad brush stroke type of resolution ,that will sadly include chanchers , we will only end up in the stalling/non resolution that we see.

Time to take the bitter pill methinks!

I disagree.

While ther will always be chancers, I don't think it will be anywhere near as widespread as posters are making out.

It's not rocket science for banks to perform standard checks to establish the real situation with borrowers.

They have had plenty of practice over the last 6 or 7 years.

 

[goingforgold]

Agree @Gerry Canning...think we need a broad solution here rather than picking and choosing who gets what.

To be fair, if I had 200K of negative equity and was just about meeting mortgage repayments, and I saw someone in a very similar situation getting 200K debt written down just because their ability to pay is marginally worse than mine (or not depending on how honest they are), then I would be looking to get myself a similar writedown by hook or by crook!

I think there is such a thing as being honest to a fault here...people have to do what's right for their families

 

[Gerry Canning]

callybags;

You may disagree, but it is a fact that whilst Mr Banker has had plenty of experience , sadly he is a slow learner.
Not sure what you mean by standard checks , but I hope they are an improvement on Banks previous checks.I am finding it a bit tedious that anyone can allow any opinion, other than Mr Banker is a proven incompetent . I also find it tedious to believe any one can have faith in their judgment.

I find it worrying that Mr Banker who has had OUR Billions to sort the problem havn,t even really started.

Apologies if I sound crankey.

 

[Bronte]

Who mentioned people living the high life? I'm not sure if you are deliberately trying to misunderstand my point?

.

No not deliberately misunderstanding you, but genuinely misunderstanding you. I thought you were against debt write downs because of moral hazzard.

 

[kmick]

Speaking of moral hazard are these the same private banks who took €62.8 billion out of the public purse to recapitalise themselves while also paying off the bondholders who were supposed to be carrying the risk? In the process writing down (to comply with European directives under Basel etc) these loans which they now in most cases want repaid in full -thereby essentially charging their customers twice for those loans. Once from general taxation (7% USC Charge anyone?) and twice in loan repayment.

Cry me a river senior bankers.

 

[bugler]

I'm not sure you are on the right thread. This thread is about moral hazard, where people may be encouraged or inclined to engage in risky or morally dubious behaviour because they are protected from some, or all, of the consequences of that behaviour, or they are given incentives to do so. It matters because it changes the nature of markets and may pass on costs to other blameless people. (Some) people will act differently based on the available incentives to act in a certain way. Bankers availed of it, and so do property owners. Saying it doesn't happen is a bit like thinking insurance fraud doesn't happen. A lot of people have suffered the ol' whiplash in Ireland though, I think we'll agree!

Look at it this way. If I want to borrow to buy a house, and the bank says I can borrow 400k, I might think it prudent to borrow much less than that. Say only 300k. But my brother (on the same wage) is a bit more reckless, he is going for the full 400k.

We both buy our houses. Naturally enough my brother's house is nicer than mine. Maybe it has a much bigger garden, maybe it's in a better area. Maybe both.

The economy turns. Both my brother and I suffer cuts to our wages. Thankfully I was prudent and I can absorb these cuts by making some changes to our family budget, while continuing to service my mortgage fully.

My brother though, maxed out his borrowings, and despite making some cuts to his lifestyle, he isn't able to meet his repayments. There was a time when this led to repossession if some sort of agreeable arrangement could not be reached, and then my brother would have regretted his unwise decision to max out his borrowings, but no longer.

Now repossession is to be the "last resort". Ireland has effectively decided that really only the hopeless cases (and maybe not even all of them) should lose their properties. So instead the Government, the whole political establishment really, and as a consequence the banks, will offer my brother every possible arrangement so that he stays put. Capitalise arrears. Interest only. Deferred interest. Split mortgage. Debt write down. Some or all of these methods will be employed so that he can remain where he is.

When I look at my brother, I'll feel a bit foolish. After all, what did I get for my prudence? If anything I feel it's me who should be getting something done for me, I made the "right" choice. Maybe I should start spending a bit more...maybe I should upgrade my car? The mortgage can wait, right?

Particularly when you consider some of the things the mortgage holders advocates have argued for (retention of private school places for children, holidays, for instance) it is very hard to see why someone should be prudent. Why not just load up on credit, send the kids to private school, buy a nice car, book that holiday and then hope for the best? If it all goes wrong then everyone has decided that you must be accommodated so that you don't suffer much and you stay in the house.

Personally, as someone likely to buy a house in the next 2-3 years, I've learned the lesson. I should not be afraid to borrow the maximum amount because there will be no real negative consequence for doing so. The bank and state have negated the risk. So I will.

 

[Delboy]

Well summed up Bugler...thats exactly the type of scenario that highlights the madness of this debt write off programme while retaining the home.

That family in Cork that borrowed 478k and now get 195k written off- that must be some house in Cork that cost 478k plus, even during the boom.
But now they get to keep it with just a 200k mortgage

 

[goingforgold]

Well summed up Bugler...thats exactly the type of scenario that highlights the madness of this debt write off programme while retaining the home.

That family in Cork that borrowed 478k and now get 195k written off- that must be some house in Cork that cost 478k plus, even during the boom.
But now they get to keep it with just a 200k mortgage

+1

This is exactly the point of this thread...

I am pointing out that borrowers should now use the system available to them to get the maximum debt writedown they possibly can. I'm not even saying I agree with it but as I've pointed out in previous posts, I think one would be almost foolish not to look at all debt writedown options available, and manipulate their situation to get what they can.

 

[Bronte]

Personally, as someone likely to buy a house in the next 2-3 years, I've learned the lesson. I should not be afraid to borrow the maximum amount because there will be no real negative consequence for doing so. The bank and state have negated the risk. So I will.

I basically agreed with your post until this last bit. You are not serious? To be honest if this crisis has done anything for me, it's made me realise being risk adverse is a good thing. Any of the people related to me that overborrowed and who will be getting right downs etc are in a whole heap of of a financial mess and total and utter stress for years.

 

[Gerry Canning]

Dellboy & Going for Gold &bugler.
I do not disagree with your comments, indeed you all talk sense .

From a pragmatic view and to solve this issue within our lifetimes ,there is and must be very unpalatable write-downs.
Leaving things as they have been these 6 years is a slow crash.

We have bailed out Banks/Bondholders , we have got little in return.
To have people hung out on unsustainable mortgages ,simply will not work.

As things stand, people will walk away, go for bankruptcy ,hand back keys etc.
We then have a clatter of unsellable houses, too many repos etc.
Surely it is better to writedown to closer true value .In that way we retrieve more than legal/repo routes.

And yes , some chanchers will con us !
And that is tough to take.

 

[44brendan]

The above example does certainly illustrate a situation where a borrower took a higher level of risk certainly. However it has little to do with the moral hazard issue, where borrowers are deliberately not paying their mortgage on the basis that they want to retain funds to meet a high lifestyle. In my own banking experience I have seen very few examples of this. In most cases the banks will trust the SFS sent in by the client and agree to loan repayment reductions, provided expenses provided are within a reasonable level. However, subsequent reviews of these arrangements will include a greater level of interrogation of information provided and segragate those who can't pay from those who won't pay. Ultimately this type of strategy can work in the short term but not the long term!

 

[Gerry Canning]

going for gold;

You are correct ,negative equity can easily lead into an arrears mind-set .
I just cannot see that in the scheme of things it will be a major issue.
Anyone who uses negative equity as a ploy whilst having adequate funds to repay and keep a reasonable life style will be quickly found out.
I have sympathy for the person who can never see his/her way out of a lifetime of debt and who does not have enough income to maintain a reasonable life style, in that case unless he defaults Mr Bank will not come to a more socially acceptable arrangement.
It is a tough call.

I know Banks are not too bright but they are not that stupid {I hope}as to permit those who can afford play the poor me card.

 

[callybags]

The above example does certainly illustrate a situation where a borrower took a higher level of risk certainly. However it has little to do with the moral hazard issue, where borrowers are deliberately not paying their mortgage on the basis that they want to retain funds to meet a high lifestyle. In my own banking experience I have seen very few examples of this. In most cases the banks will trust the SFS sent in by the client and agree to loan repayment reductions, provided expenses provided are within a reasonable level. However, subsequent reviews of these arrangements will include a greater level of interrogation of information provided and segragate those who can't pay from those who won't pay. Ultimately this type of strategy can work in the short term but not the long term!

+ 1.

This is what I have been saying, but not nearly as eloquently as put by 44brendan.

 

[bugler]

The above example does certainly illustrate a situation where a borrower took a higher level of risk certainly. However it has little to do with the moral hazard issue, where borrowers are deliberately not paying their mortgage on the basis that they want to retain funds to meet a high lifestyle. In my own banking experience I have seen very few examples of this. In most cases the banks will trust the SFS sent in by the client and agree to loan repayment reductions, provided expenses provided are within a reasonable level. However, subsequent reviews of these arrangements will include a greater level of interrogation of information provided and segragate those who can't pay from those who won't pay. Ultimately this type of strategy can work in the short term but not the long term!

You seem to equate "moral hazard" with strategic default. Why? My example above is more "pure" as an example of moral hazard than a case of strategic default. Strategic default (not paying when you could reasonably pay) is more akin to fraud. I could pay my contractually obligated debts to you, but I won't.

We have taken the risk out of borrowing for home purchase. I was offered a mortgage of 310k, but I only wanted and applied for 275k because I am risk adverse and somewhat prudent. I see now that was a mistake, I should take the 310k, if anything goes wrong I get a chunk of the mortgage parked, reduced or so on. The banks carry all the risk here, so I have changed my behaviour accordingly. When I refresh my approval it will be for the maximum amount. I have nothing to fear from even a modest pay cut, the bank will accommodate me, they are effectively obliged to.