Mortgages in Ireland should be non-recourse

[BIG-notorious]

Higher credit costs make credit more expensive and so houses cheaper.

At the moment the main restraint (such as it is) on borrowers and prices are the Central Bank limits. Demand has been stupidly outpacing supply for a decade so an extra couple of percent won't make a big difference.

You'd prefer people were evicted in 3 or 4 months? That'll never happen, nor should it.

People are more important thank a lender's balance sheet.

 

[ClubMan]

You'd prefer people were evicted in 3 or 4 months?

Not necessarily but 3-4 years is still a ridiculous timeframe.

 

[BIG-notorious]

Not necessarily but 3-4 years is still a ridiculous timeframe.

Remember that most borrowers in arrears don't just stop making payments and laugh at the lender. They're a tiny majority. They pay what they can when they can and usually are desperate to hold on to their home.

Legal proceedings are issued more to pressure borrowers than to actually take the property. Actually taking a property and selling it is very much a last resort for a lender- who is anyway getting compound interest on the loan.

What would you consider a reasonable timeframe?

Would a quick Personal Insolvency Agreement be better outcome all round? (Don't know much about PIAs but when they're in the news they look like sweet deals for the borrowers).

 

[ClubMan]

What would you consider a reasonable timeframe?

12 months.

 

[BIG-notorious]

12 months.

Faster than in Spain apparently:

The 6 stages of a bank repossession in Spain

One possible way to acquire property in Spain is through a public auction. These properties that fall under a gavel are known in Spanish as ‘ejecuciones hipotecarias’, or bank repossessions in English.

www.idealista.com

12 months is at the very edge of what I'd consider reasonable if the clock starts after 3 months of arrears have been accrued and assuming the clock resets when arrears go below 3 months.

Realistically this is unachievable in Ireland due to the inefficiency of both legal practitioners (why would ya when you're getting paid by the hour) and of the court system.

• Ireland had 3 judges per 100,000 people in 2022, the lowest in the EU. Spain had 18, which is also the EU average. So the Irish legal system isn't speeding up any time soon. https://ec.europa.eu/eurostat/stati..._and_prison_personnel_statistics&oldid=635715

 

[Dazzler123]

Legal proceedings are issued more to pressure borrowers than to actually take the property. Actually taking a property and selling it is very much a last resort for a lender- who is anyway getting compound interest on the loan.

What would you consider a reasonable timeframe?

Would a quick Personal Insolvency Agreement be better outcome all round? (Don't know much about PIAs but when they're in the news they look like sweet deals for the borrowers).

Don't forget that before legal proceedings are even drafted the level of arrears are very large already because of the time taken to go through the CCMA process.

Taking the property and selling it is only a last resort for lenders because of the cost and time involved in doing so. If a borrower digs their heels in and fights the lender in court, the legal costs could easily be 100k, which the lender will never recover. And it'll be 3-5 years of no payments from the borrower so compound interest won't matter.

The PIA process is excellent for borrowers. Not so much for the bank.

 

[ClubMan]

Faster than in Spain apparently:

What's Spain got to do with anything?

 

[BIG-notorious]

What's Spain got to do with anything?

It's one of the countries which formed part of the research in that paper I linked but apparently nobody could be bothered reading.

 

[ClubMan]

one of the countries which formed part of the research

Why pick Spain?

 

[TomEdison]

Higher credit costs make credit more expensive and so houses cheaper.

But not more affordable! House prices fall because demand is suppressed because fewer people can afford to buy a house.

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.

Oh, no, that doesn't stack up at all. Remember, if the loan is non-recourse then the bank won't lend unless, even in a situation where the house prices have fallen, and arrears of interest are mounting up, he can repossess and sell the house in a time so short that there is no reasonable prospect that even the reduced sale proceeds will be insufficient to cover the amount outstanding, accumulated interest, and costs.

In the US market, repossession proceedings typically commence after 4 months of default and (if defended) are completed in 180-200 days, though this varies from state to state.

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.

My guess is that the appropriate comparator in the US would be margin above the 30-year corporate bond rate, since that is how mortgage lenders would finance themselves.

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.

I'm not sure they are directly comparable, for the reason just pointed out, but for the purposes of the discussion lets run with it.

There is nothing to stop lenders right now from offering non-recourse mortgages — it would be perfectly lawful. And if borrowers wanted to eliminate the risk of negative equity, and didn't object to the more stringent lending criteria and higher interest rates, there would be a market for such loans. You would be able to choose a recourse or non-recourse mortgage just as you can now choose between fixed and variable rates. But this doesn't happen. Why not?

One possible answer is the one I have pointed to — the unavailability of speedy respossession in the event of default makes non-recourse mortgages unviable.

Another possible answer is that borrowers don't want to pay what it would cost, in terms of more stringent lending criteria/higher interest rates, to eliminate the risk.

 

[TomEdison]

Why pick Spain?

"It is interesting to compare Ireland, Spain and the US: because they had similar [housing price and mortgage debt] patterns pre-crisis and at the start of the [global financial] crisis."

 

[TomEdison]

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.

Fair enough! What the paper says is:

Mortgage recourse systems . . . cause deeper and more persistent recessions. Default . . . redistributes wealth towards the borrowers with the highest marginal propensity to consume. This redistribution has positive aggregate e§ects . . . This mechanism can account for up to 30% of the recovery gap during the Great Recession between the U.S. (mostly a non-recourse economy) and European economies with recourse mortgage systems.

And . . .

Non-recourse mortgages allow over-indebted households to default and start afresh, rather than reduce their consumption for years.

So, the gist of it is: in a situation like the global financial crisis of 2007, an economy with predominantly non-recourse mortgages will cope better than one with recourse mortgages.

But the paper also points out the downsides, some of which we have already identified:

. . . access to mortgage credit is much more expensive for low income, high debt mortgagors. That is, transitioning from recourse to non-recourse mortgages will increase mortgage rates specially for the low-income leveraged mortgagors . . .

And . . .

The higher defaults associated with non-recourse mortgages may depress banks' equity.

And, interestingly, the paper also notes:

Debt relief mechanisms or equity mortgages are even better policies than non-recourse mortgages . . . Debt relief policies allow underwater mortgagors to lower their payments or reduce their mortgage principal [without losing up their homes] . . .

 

[BIG-notorious]

But the paper also points out the downsides, some of which we have already identified:

If you find a law or policy anywhere which has no negative aspects then you'll be the first in history. There's downsides to everything.

 

[TomEdison]

Sure. But the corollary of this is that pointing out that a policy has upsides doesn't establish that we should adopt the policy.

(Doubly so in this case, where paper that you yourself cited points to a different policy which, it suggests, may be better than the policy of non-recourse mortgages that examines.)

To be clear, I wasn't pointing to the downsides in order to say "therefore, we should not adopt this policy". Rather, before making a decision one way or the other, we need to identify the upsides and the downsides, consider whether the policy can be modified to increase the upsides or mitigage the downsides, and then weigh the upsides against the downsides.

One point that I am convinced of is that, to have a non-recourse mortgages, we'd have to have a quick and fairly ruthless repossession regime. And, if such a regime were in place, it would not just be used in cases where it had to be, to avoid the mortgage debt exceeding the value of the property.

 

[BIG-notorious]

Rather, before making a decision one way or the other, we need to identify the upsides and the downsides, consider whether the policy can be modified to increase the upsides or mitigage the downsides, and then weigh the upsides against the downsides.

As with all decisions!

One point that I am convinced of is that, to have a non-recourse mortgages, we'd have to have a quick and fairly ruthless repossession regime.

As I point out above this is currently unachievable in the Irish legal system. The first criminal case I found in the Crime & Law section of the Irish Times website is about someone who has just been sentenced after pleading guilty to an offence 2 years ago. The first civil case (other than emergency applications) I found originated in 2020.

There simply far too few judges in the system for justice to be done in any reasonable timeframe. And I would guess there's not enough admin/support staff where they need to be in the Courts system (although experience tells me there's places where there's too many staff where they don't need to be also). The law itself isn't the issue, it's the boring administrative stuff is the problem.

fairly ruthless repossession regime

Depends on your definition of "ruthless". There's an argument that if there's any capital being repaid then possession should not be granted because the lender is losing nothing. There's other arguments around loan to value ratios and number of months in arrears. There should probably be thresholds around at least 2 of those— it seems manifestly unjust to repossess when someone who's 6 months in arrears on a €100k mortgage on a €1 million euro property but still paying of €20 of the capital each month. If the same property is worth €125k then it's a whole other ballgame.

 

[TomEdison]

As I point out above this is currently unachievable in the Irish legal system. The first criminal case I found in the Crime & Law section of the Irish Times website is about someone who has just been sentenced after pleading guilty to an offence 2 years ago. The first civil case (other than emergency applications) I found originated in 2020.

I agree. And, my point is, if we do decide to adopt a policy of having non-recourse mortages as the norm, we have to start by reforming the repossession system — legal change, plus allocation of the necessary additional resources to the court system.

Depends on your definition of "ruthless". There's an argument that if there's any capital being repaid then possession should not be granted because the lender is losing nothing. There's other arguments around loan to value ratios and number of months in arrears. There should probably be thresholds around at least 2 of those— it seems manifestly unjust to repossess when someone who's 6 months in arrears on a €100k mortgage on a €1 million euro property but still paying of €20 of the capital each month.

It's not strictly true that so long as any capital is repaid the lender is losing nothing. The lender, remember, finances the mortgage by borrowing himself, and he relies on the mortgage payments to fund the servicing of his own obligations. If the borrower doesn't repay capital and interest when due, the borrower has to find funds from elsewhere to meet his own obligations, and that comes at a cost.

The lenders would also point out that if their only recourse, in the event of default, is to enforce their security against the property, then in the event of any default they must be allowed to enforce their security against the property; otherwise there a class of defaults for which there is no sanction at all, and no incentive for borrowers to avoid those defaults — that will be the first thing a borrower will stop doing if he is financially squeezed, since all his other obligations can be enforced against him, but this one can't.

My understanding is that, in the US, if you're in default, the lender can enforce — period. Depending on the borrower's attitude and effort and the circumstancse of the case lenders may, and often do, show forbearance and grant temporary relief, but that's a matter to be hammered out between the lender and the borrower.

We've identified two downsides to non-recourse mortgages — more and faster repossessions, and more expensive mortgages. I think there's probably a trade-off between them; the less lender-friendly the repossession regime is, the more risk a non-recourse loan presents to lenders and, therefore, the higher risk premium they will require — i.e. the more expensive and difficult-to-obtain mortgages will be. A price has to be paid for non-recourse mortgages, but to some extent we can decide which price we will pay.

 

[BIG-notorious]

I agree. And, my point is, if we do decide to adopt a policy of having non-recourse mortages as the norm, we have to start by reforming the repossession system — legal change, plus allocation of the necessary additional resources to the court system.

I'd suggest that if we're to wait until the court system has the capacity to enforce the law (civil or criminal) efficiently before having laws on the books then not only would no laws ever be introduced but most of the laws currently in force would need to be rescinded also. Adding the necessary additional resources to the court system is probably at least a decade long project.

otherwise there a class of defaults for which there is no sanction at all, and no incentive for borrowers to avoid those defaults

You assume that the only motivation a borrower has to make repayments on their mortgage is to avoid being evicted from their home. But realistically there are a whole range of other benefits attached to keeping up your mortgage repayments:

• You can move home far more easily as you'll be able to get another mortgage and don't have to buy for cash
  • This allows you to downsize with cash as well as upsizing
• You can get loans for a range of other purposes as you have a clean CCR record (including upgrading/renovating their homes)
• You have an inheritance to leave to your loved ones

There are to be fair a tiny number of people who would get the mortgage and then laugh at their neighbours for repaying their loans, but those people are already out there.

Probably for most people leaving an inheritance and being able to move would be the big ones. Unless you absolutely intend to hold the property indefinitely down the generations, the property is going to be sold eventually and the mortgage lender will be first in line for the proceeds when that happens.

that will be the first thing a borrower will stop doing if he is financially squeezed, since all his other obligations can be enforced against him, but this one can't.

That already happens though. If the choice is between eating this week and getting the lights turned off next month then I'm going to eat this week. If I need to choose between the light and heat being turned off next month and the house being repossessed next year, well at least I'll have somewhere warm and well lit for the winter.

A price has to be paid for non-recourse mortgages, but to some extent we can decide which price we will pay.

No free lunches.

In fairness, the actual requirement is less for non-recourse and more for a system which works for the lender (because without them we've no economy) and the people who fall into arrears— because if we effectively and for the long term disenfranchise people from the economy and society then they've got not much to lose no matter what they do, and THAT is a really big problem.

This may be less academic than we all hope. Apparently US per capita household debt is (after inflation) a lot higher than it was in 2008. We all know that that's totally fine right up to the point that it isn't. (Irish household debt is in far better shape than in 2008).

 

[Brendan Burgess]

So which would I prefer as a First time buyer ?

1) A full recourse mortgage at 90% LTV charging say 3.5% - with repossession after 4 years of arrears.
or
2) A non-recourse mortgage at 80% LTV charging 5% - with repossession after 12 months of arrears.

I would definitely go full recourse as it has always been my plan when borrowing money to repay it in full. And I would like to think that if I did hit a problem I could work with the bank over a few years to get back on track.

I suspect that 90% of FTBs would go for the option of full recourse mortgages.

 

[Purple]

So which would I prefer as a First time buyer ?

1) A full recourse mortgage at 90% LTV charging say 3.5% - with repossession after 4 years of arrears.
or
2) A non-recourse mortgage at 80% LTV charging 5% - with repossession after 12 months of arrears.

I would definitely go full recourse as it has always been my plan when borrowing money to repay it in full. And I would like to think that if I did hit a problem I could work with the bank over a few years to get back on track.

I suspect that 90% of FTBs would go for the option of full recourse mortgages.

In my opinion the advantage of a system where all mortgages were non-recourse is that credit would be more expensive and so property would be cheaper. That falls down in the international market we are now in where the price is not set by retail (private) buyers but by massive amounts of international capital looking for a home in a low bond yield environment.

 

[Brendan Burgess]

credit would be more expensive and so property would be cheaper.

It is not quite that simple.

For example, at the moment, developers cannot build apartments at a profit. If the prices fall 20%, there will be even fewer built.

I would like to see house prices fall significantly. But we would have to bring down the cost of building and the cost of land to achieve that.