Key Post What options are open to the Government and lenders to help struggling homeowners?

[Brendan Burgess]

As there are many discussions on this topic, I have started a thread to compile them all.

Proposals which are unrealistic

As the taxpayer will be the majority owner in AIB, BoI, PTSB and EBS, it is clear that any cost to the banks in dealing with struggling borrowers will be paid by the taxpayer. So if one says “the banks should…”, one is really saying “the taxpayer should…”

If the taxpayer has to spend money, then it must allocate it very carefully to those with the greatest need.


There is no point in debt forgiveness while allowing the person to retain ownership of their home
It has been suggested that where a borrower can’t afford a mortgage of €300k on a property worth €200k, the bank should simply write off the difference. The argument seems to be, that if the borrower can afford the repayments on a €200k mortgage, they are more likely to make them They will give up the ghost completely on a €300k mortgage.

This makes no sense at all for the bank or the taxpayer. In time, the house might increase in value and all the gain would accrue to the house owner and none to the bank/taxpayer. If the borrower’s earnings increase, they will have no obligation to pay off the part of the debt which was written off at the expense of the taxpayer.

The current Deferred Interest Scheme allows a borrower who can pay 66% of the interest to stay in the house for up to 5 years. After that, the banks will probably be flexible anyway. Many of these borrowers will self-cure through increased earnings or through the increase in value of their home.

If at some stage, the mortgage becomes unsustainable, the house can be sold and the shortfall dealt with at that stage.

Debt for equity schemes and similar schemes make no sense either
Many people propose these, but no one has given an example of how they work. Because they can’t work. You can only swap debt for equity where there is equity, i.e. where the house is worth more than the loan. These schemes exist in the UK, but to participate, the loan must be no more than 75% of the value of the home. They are not a solution in Ireland where the loans are typically 200% of the value of the home.

For example, take a home where the mortgage is €300k and the house is worth €200k. It has been suggested that the bank would reduce the loan by €100k and take €100k of the value of the house. This is not debt for equity. This is part sale of the house. The borrower would end up with a loan of €200k on half a house which is worth €100k. So their negative equity is still €100k. However, it is worse in that their loan to value has increased from 150% to 200%. The bank now owns half the house, so they would charge rent on it. So the overall borrower’s repayments wouldn’t change either.

There have been vague suggestions of “gain sharing”. The lender would reduce the loan by €50,000 but would take half of any increase in value of the home when it is sold. Again, when you work through these figures, they make no sense.

Can the banks repossess the house and rent it back to the former owner or the local authority?
Again, this makes very little sense. Banks are simply not in the business of being landlords. If the state wants to buy the repossessed homes and rent them back, that is a matter of social policy. But it would be allowing the repossessed home owner to skip the housing waiting list queue which would be very unfair to those already on the list. As it happens, the state doesn’t have the money to buy repossessed houses anyway.

The banks should write down negative equity
Negative equity is only a problem if the person has to move.

 

[Brendan Burgess]

Ideas which might work

Allow all those in trouble to access their pension funds where possible
Where someone is in negative equity or where they can’t afford their mortgage, and they have a defined contribution pension scheme, the state should allow them to access this scheme, subject to a fair exit tax.

This helps the borrower.
This improves the liquidity of the lender
This improves the capital position of the lender as it reduces the negative equity of the loan book.

This will not solve the problem for many people but it will reduce the problem for a lot of people.

The banks should facilitate those on cheap trackers to sell their home
Where a borrower on a cheap tracker mortgage has negative equity and/or serious arrears, the lender should facilitate the sale of the home and the repayment of the mortgage.

The recent stress tests were so severe, that the banks had to make large provisions against such mortgages anyway. They made provisions for the following three problems

• Negative equity
• Loss making trackers
• Arrears

The taxpayer is pumping cash into the banks to provide for these losses. Selling the property and writing off the shortfall helps everyone. The bank’s losses don’t increase because they have had to provide for them anyway. The borrower gets a fresh start.

This is not debt forgiveness. The borrower is giving up the right to borrow cheaply in exchange for a write off of the shortfall.


Struggling borrowers should be allowed to sell their homes if they want to
This is a serious problem. Where a borrower wants to sell a home in negative equity, the lender is often refusing unless the borrower is able to clear the shortfall. Up to now the rationale for this has been that the loss would be recognized in the accounts. Now that the banks have been forced to make provisions against such loans in the stress tests, this rationale is no longer valid.

Each case is different. The lender should offer a generous deal to the borrower who wants to sell their home. If the borrower is employed, they would have to agree to pay the shortfall at the old mortgage rate.



“Reluctant landlords” should be facilitated by changes to the tax regime for renting a new property
Where someone is in negative equity and needs to move for job reasons or for family reasons, but can’t sell their house, the state should facilitate this. They should be treated differently from professional investor landlords.

If they have a cheap tracker, they should be encouraged to sell their home and a deal should be done on the shortfall. If, however, they can’t sell their home, then they should be allowed to set the rent paid on their new home against the rent received on their old home. In addition, they should be freed from the onerous requirements to register with the PRTB, although the PRTB would still have a role in mediating on disputes between the landlord and the tenant.

Some conditions would have to be put in place to prevent professional landlords taking advantage of this scheme.

Discussed further in this thread.

Separating couples may need some special help
This is a particularly serious problem. Where a couple buys a house together, they are jointly and severally liable to pay the mortgage. The lenders are refusing to allow them sell the house if the proceeds of the sale won’t cover the mortgage. Often one just moves out and refuses to pay anything. This leaves the responsible co-owner in a bind. They are liable to pay their partner’s share.

I don’t know what the solution to this is. The main cause of the problem is that a responsible person bought a house with an irresponsible person and now they are paying the price.

Should borrowers be allowed to transfer their negative equity to a new home?
I don't think that this should be allowed, but I am including it in this thread for completeness. It's discussed at length here.

 

[Shawady]

There may be a some other options open to banks.

(1) If a homeowner is in arrears, but their parents own their own home and are going to leave it to their children, the bank may park a portion of the debt until the home owners receive their inheritence. For example, a person's parent own their own home worth 300K and have 3 children and give an undertaking to the bank their children will recieve 1/3 of the house sale at their death. The bank may then be happy to reduce mortgage by 100K, on the basis that they receive the balance when the parents pass on.

(2) Someone on a defined benefit pension that is due to receive a lump sum payment in 20-30 years time might agree to the bank to pay them this if they were willing to write off a similar amount of mortgage now.

(3) Someone paying monthly pension contributions may agree to exit pension scheme and receive a smaller pension upon retirement and pay the money off the mortgage. They would have a small pension at retirement age but at least would own their own home, which is an asset that could be used to release equity at that time.

 

[Bronte]

The banks should facilitate those on cheap trackers to sell their home
Where a borrower on a cheap tracker mortgage has negative equity and/or serious arrears, the lender should facilitate the sale of the home and the repayment of the mortgage.

The recent stress tests were so severe, that the banks had to make large provisions against such mortgages anyway. They made provisions for the following three problems

• Negative equity
• Loss making trackers
• Arrears

The taxpayer is pumping cash into the banks to provide for these losses. Selling the property and writing off the shortfall helps everyone. The bank’s losses don’t increase because they have had to provide for them anyway. The borrower gets a fresh start.

This is not debt forgiveness. The borrower is giving up the right to borrow cheaply in exchange for a write off of the shortfall.

How is this not debt forgiveness. You can sell a property at a loss and walk away?

 

[Brendan Burgess]

Hi Bronte

Let's say that I have the savings to repay my cheap tracker mortgage in full.

The bank may offer me a discount to do so. It's not debt forgiveness. It's a agreement to give up something valuable for a discount.

It is reported that PTSB are planning give people €105 credit for every extra €100 in overpayments. That is not debt forgiveness either.

 

[Bronte]

Still don't get it. Who wouldn't jump at the chance of selling a negative equity property with no outstanding debt. It's definitely debt forgiveness.

In relation to selling a property on a tracker not in negative equity and repaying the bank fully but at a discount. That's a discount or a bonus that's all. How does that equate with the first scenario.

 

[Brendan Burgess]

In relation to selling a property on a tracker not in negative equity and repaying the bank fully but at a discount. That's a discount or a bonus that's all. How does that equate with the first scenario.

It's the same thing in many cases, although I may not be explaining it well.

If I have a cheap tracker mortgage of €300k and the bank agrees to accept €200k in settlement, it does not matter if the house is worth €200k, €250k or €400k. Likewise it does not matter whether I am in arrears or not, as long as I clear the mortgage.

If the bank is only prepared to offer a 5% disount for the early repayment of trackers, then giving a higher discount to those in arrears to sell the house would be debt forgiveness.