Mortgages in Ireland should be non-recourse

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BIG-notorious

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TomEdison said:
Remember why the sales to the vulture funds happened in the first place — the banks' business model, in the conditions of the time, had proven to be unviable.
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There's another element as well.

In the US at the time "jingle mail" was increasingly common, where borrowers sent the keys to their property to the bank in the mail because walking away from the property and walking away from the debt were one and the same thing.

In Ireland by contrast, the mortgage was secured on the property as a first legal charge but it was owed by the borrower personally. So for a borrower in negative equity they could still be in debt for €100k or whatever the negative equity amount was even after leaving their home and it being sold by the lender.
  • They would remain liable for a large debt
  • They would have to find and fund housing for themselves
  • The 5 year clock for their CCR record of the mortgage would not be reset.
    • Although all loans over €500 being recorded on the CCR happened after the crash; a younger and much less responsible me discovered this after repaying my credit cards and eliminating my mortgage arrears (negative equity was never an issue) when I went to remortgage and was basically told that as visa and my lender weren't signed up to the CCR's predecessor all of my financial bad behaviour had disappeared like it never happened. Yay!
So there was no incentive for people to facilltate the sale of their mortgaged homes because they lost everything and gained nothing. It's also arguably why commercial borrowers fought tooth & nail to retain their commercial properties (some still are) because they were usually on the hook personally for their larger business borrowings.
  • This was an intended feature of Irish mortgages; I recall the expressions on a number of clients' faces when I explained to them that the debt could follow them after the sale of their home by the lender if prices fell below the mortgage balance. And then I generally said something along the lines of "But sure that'll never happen"...
It's safe to say that there's no chance of expedited mortgage repossession proceedings on Irish principal private dwellings.

But I'd argue that mortgage terms should be secured on the property only, and once the property is in the possession of the mortgage lender the debt should disappear and (subject to the 5 year limit on the CCR) the borrower is then free and clear of that loan.
  • This would incentivise the lenders to be more cautious in their lending
  • Borrowers would have a reason to hand back properties with loans they couldn't repay, so they could start again, and hopefully negate the need for lenders to sell the mortgages to vulture funds to crystallise their losses.
  • Even if vulture funds were required, the ability of borrowers to just walk away would incentivise them to treat them reasonably fairly (there's no such incentive now) so as not to kill the goose laying their golden eggs: I'd lay heavy bets that a mortgage with a reasonable rate being repaid more or less on schedule is usually more valuable than the secured property laying vacant for at least 6 months while paying legal fees, auctioneer fees, accruing interest on the loan which financed the mortgage while the mortgage balance was frozen.

There's more than one way to skin a cat. Or pluck a vulture.

TomEdison said:
Back in the day, when the banking crisis was being resolved, what would have happened if sales to the vulture funds had not been possible?
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The lenders would have a whole load of poorly valued debt on their balance sheets and this would have impacted their capitalisation levels
  • If anyone looks at their Credit Union annual statements over the last decade, there's always a "bad debt" and "bad debt recovered" section. They write off bad debts while still pursuing them, so they overstate their losses. If your problem is that people don't owe you enough money (and this is the CU's problem) then it's just an accounting exercise. If you've a huge amount of borrowings- which require refinancing- against a huge amount of lending then the "bad debts" section can be a huge problem even if the majority of those debts turn out to be problematic rather than actually bad.
  • Business hates uncertainty, and the value of a mortgage in arrears during the crash was horribly uncertain. Without offloading them or otherwise crystallising them (ie vulture funds) no refinancing of the bonds owed to the bank etc. And the ECB probably wouldn't have helped out so much either (and giving a loan at 3% when the alternative was 10% or even 4% amounted to a gift of many billions of euro to the Irish taxpayer- attaching strings in such circumstances is not unreasonable).
TomEdison said:
There may be another way to approach the problem, which is to focus not on the interest rate that the bank lenders charge but on the margin they give themselves over their cost of funds. Would it be feasible to identify that margin, and then regulate the vulture funds so that could not take more than that margin over their cost of funds?
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Far to easy to game that system. All I have to do is set up a shell to buy the loans and a holding company to borrow to fund the purchase. The holding company lends the money to the shell company at a markup and the borrower is paying credit card rates on their mortgage again.
 
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BIG-notorious said:
But I'd argue that mortgage terms should be secured on the property only, and once the property is in the possession of the mortgage lender the debt should disappear and (subject to the 5 year limit on the CCR) the borrower is then free and clear of that loan.
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Logically, it should lead to more cautious lending, as you point out. One of the cautions might well be that lenders would want more headroom — if they have recourse only to the value of the property to recover the debt then they absolutely want to know that, in any foreseeable house price decline, the value of the property will still exceed the debt plus accumulated interest.

They are also carrying more risk here — the debt is secured only by the value of the property, rather than by both the value of the property and the borrrower's covenant to repay. If they carry more risk, they will require a higher return. So, if the market works will, this would be expected to lead to more expensive mortgages, as well as a requirement for higher deposits.

Finally, you point out that borrowers might be more open to facilitating quick repossession if that would clear their debt. I'd put this the other way around — an effective right to early repossession, regardless of the borrower's attitude, would be essential before lenders could consider making non-recourse homeloans. If your only way of recovering the loan, in the event of default, is to repossess the property then you absolutely have to know that, upon default for any reason, you can repossess the property before arrears of interest mount up and cause the sum owing to exceed the value of the property.
 
TomEdison said:
They are also carrying more risk here — the debt is secured only by the value of the property, rather than by both the value of the property and the borrrower's covenant to repay. If they carry more risk, they will require a higher return. So, if the market works will, this would be expected to lead to more expensive mortgages, as well as a requirement for higher deposits.
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Yes.

In the US I believe they have mortgage insurance; if your deposit is less than 20% you have to take out insurance which covers the debt if you default.

So people with riskier profiles pay more and the safer bets get better value. As it should be really. (edit- as it already is in Ireland, with better rates for lower LTV).
 

Why are Mortgages not Mortgages?

A mortgage, by definition, is a loan secured on “real” property. Therefore the lender is securing the loan against the property in question. If the borrower cannot pay their debt then the lender can take ownership of the property. That’s how mortgages work; the property is the collateral and...
www.askaboutmoney.com
 
Is that not what the old indemnity bonds that customers had to take out were for? To bridge the difference between 80% of mortgage and value of house, things went belly up the bank *hopefully* got back at least 80% value from the sale and the bond paid out the rest.

Wouldn't have worked mind you for some of the massive negative equity cases!
 
I meant negative equity in the sense that in the case of default through job loss etc the scale of the drops in value back in 2008 for example the banks would have done well to get back 80% on sale price of house so the bond wouldn't have worked as well as intended in past times.
 

"However, without recourse, access to mortgage credit is much more expensive for low income, high debt mortgagors."

It looks from the research linked above that changing to a non-recourse mortgage system should increase the average mortgage rate by about 1% all things being equal. But all things are of course clearly not equal so borrowers with higher LTV and lower income would pay far more while those with higher income & lower LTV would pay far less.
  • For comparison, it seems that for a first time buyer buying a €500k home the difference in the lowest variable rate on a 70% Vs 90% LTV over 25 years for a property with a BER rating of B is 0.2%.

I only skimmed it but it looks on balance like changing to a non-recourse would overall be worthwhile, while there would of course be winners and losers.
 
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BIG-notorious said:
Borrowers would have a reason to hand back properties with loans they couldn't repay, so they could start again, and hopefully negate the need for lenders to sell the mortgages to vulture funds to crystallise their losses.
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I think you have this the wrong way round.

For the family home

I have a house worth €100k and a mortgage of €100k.

Under the full recourse system
  • I will keep making payments and try to stay in positive equity as I will be liable for the shortfall.
  • If I can't afford repayments, I should hand it back now as I will be liable for any shortfall which builds up.
Under the non-recourse system
  • If it's looking tough, I should stop making payments and build up a fund in case I lose my house.
  • I will never voluntarily hand it back. Let the bank come after me. I will have free accommodation for the 8 or 9 years it takes them to repossess the property.

You seem to be arguing that people would be more likely to hand it back, because by doing so, they begin the 5 year process of repairing their credit record? This is usually far from the minds of people facing the loss of their home.
 
Non-recourse lending would result in

  • Absolute maximum 80% LTVs - this might be a good thing, although try to tell that to someone trying to get onto the housing ladder.
  • Much higher mortgage rates in the 60% to 80% LTV range
  • They might not change much for LTVs <60%
 
@Brendan Burgess the research i referenced suggests you're wrong about the max LTV and people handing back their properties- it's called strategic default apparently.

The writers seem to have done the research on what actually happens in recourse countries (Spain and Ireland) vs non-recourse USA. Which is a far cry from either of hypothesising about what would happen.
 
Well we know what happens in Ireland now.

We don't know what would happen if it were non-recourse. And I would not extrapolate from the non-recourse states in the USA where repossession take place quickly to Ireland where it takes years.

Maybe Irish people would hand back their keys quickly. But I can't see why they would.

If we hit a big default situation again, I really can't see anyone handing back their keys as there is no alternative accommodation available.



Brendan
 
Brendan Burgess said:
If we hit a big default situation again, I really can't see anyone handing back their keys as there is no alternative accommodation available.
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Assuming there's no mass emigration like there was during the last crash, I'd agree with you. You'd be a fool to leave even a rented home or a house-share without being physically dragged out unless you had accommodation to go to 100% sorted out.

But WITH mass emigration all bets are off. And you'd be very brave to bet against mass emigration in a time of high unemployment, given that 20% or so of the population already emigrated to get here, and probably every single one of the other 80% has multiple immediate or extended family members who went in the other direction.
 
You're right. It's ridiculous to imagine hundreds of thousands of people leaving the country over a short period in order to pursue better economic opportunities abroad. Sure we've got record employment and record house prices and a ton of tax money coming into the exchequer.

What could possibly go wrong?
 
BIG-notorious said:
It's ridiculous to imagine hundreds of thousands of people leaving the country over a short period
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Probably not ridiculous but very unlikely.

Hundreds of thousands of Irish people are unlikely to leave over a short period.

I suppose it's remotely possible that hundreds of thousands of immigrants might leave.

I would not make plans for recourse or non-recourse mortgages based on that forecast.

Brendan
 
There seems to be agreement among us that non-recourse mortgages would require a much quicker and certain eviction/reposssession mechanism to be available to lenders, and that it would mean tougher lending criteria and more expensive mortgages.

Given all that, what's the policy argument in favour of non-recourse mortgages? Why would we think they are a good idea?
 
TomEdison said:
Given all that, what's the policy argument in favour of non-recourse mortgages? Why would we think they are a good idea?
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Not sure what I (or anyone else) could add which would be more persuasive than the 15 page thoroughly referenced research paper I linked above.

TomEdison said:
There seems to be agreement among us that non-recourse mortgages would require a much quicker and certain eviction/reposssession mechanism to be available to lenders,
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Depends on your definition of "quicker" really. I think 3 or 4 years for a PPR is reasonable, as would be 2 years for any investment property. Which are achievable right now if the lender and their legal team are on the ball. I have direct knowledge of the fact that neither lenders nor their legal teams are on the ball in terms of getting things done as quickly as they can be done.
  • That's more for PR reasons than legal reasons BTW; nobody wants to be the lender that tries to throw people out of their homes after a couple of missed payments. The judges wouldn't wear it anyway, but a couple of years and they'd give an order for possession.
TomEdison said:
it would mean tougher lending criteria and more expensive mortgages
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For some.
  • Average 30 year fixed rate in the US is currently 6.8% or 2.3% above the Federal Reserve rate
  • Average Eurozone rate is currently 3.36% or 0.7% above the ECB rate
I'm not sure the US rate is directly comparable with the Eurozone average, as it's 30 years fixed I'm guessing it's not- I couldn't quickly find the Eurozone equivalent.
  • Assuming they're directly comparable, the average mortgage interest rate would rise by around 1.5% if there was a switch to non-recourse. That's hardly a murderous rise in interest rates, and in my opinion a reasonable price to pay to eliminate the possibility of negative equity for a huge number of mortgagees.
 
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