What the Expert Group should be telling the Minister

[Brendan Burgess]

This is the text of an article I wrote, published in today's Sunday Times. They made some slight edits to the text, but this is the original as submitted.

What the Expert Group should be telling the Minister
Last year’s Expert Group on Mortgage Arrears, of which I was a member, came up with a range of recommendations to help people in arrears. Most were common sense ideas such as banning banks from charging penalty interest and banning banks from using arrears to shift borrowers off cheap trackers. We also defined a mortgage as sustainable if the borrower is able to pay the interest. We went further and said that if a borrower can pay 66% of the interest on a loan then they should be allowed up to 5 years to get back on track. We also recommended changes to the operation of Mortgage Interest Supplement and the social housing system.

85% of people are paying their mortgage on schedule and we did not want any of our recommendations to adversely affect these borrowers so we recommended against debt forgiveness and we recommended against taking any action to deal with negative equity where the borrower could otherwise afford the repayments.

So what is left for the new Expert Group led by Declan Keane to recommend?

Accept that repossession is often in the best interest of the home owner
Politicians fall over themselves to stress that they will do everything possible to keep the family in their home. Why? Some people overstretched themselves and borrowed an irresponsible amount. Others borrowed responsibly but have suffered a permanent significant reduction in their income. Why burden them with a mortgage which they can never hope to repay? There are between 10,000 to 20,000 mortgages in this position. In most cases, they would be far better off selling their home and having the mortgage shortfall written off. This will allow them a fresh start. This is normal practice in most other countries. Although the arrears position in the UK is far less serious than in Ireland, they have dramatically more repossessions and it’s just accepted as a sad, but inevitable part of mortgage life.

Develop a protocol to facilitate the surrender of homes with unsustainable mortgages
Recognizing that a mortgage is unsustainable does not mean that 10,000 families will be out on the side of the road in the morning. When the bank and the borrower agree that the loan can never be paid off, they can agree that the mortgage holder can live in it for 12 months or until it is sold. The borrower can apply for social housing but they should not be given favourable treatment over others who are already on the housing waiting list. Why should someone who borrowed irresponsibly be given preference over anyone else?

In some cases, it will be cheaper for the state to pay someone’s mortgage interest than to rehouse them.
The state provides Mortgage Interest Supplement, Rent Supplement and Social Housing to those who cannot afford to pay for their own housing needs. In some cases, especially where the borrower has a cheap tracker, it will make more sense for the state to pay the interest on their mortgage than to rehome them. The different organs of state must work together to make sure that a coordinated response finds the best solution which balances the needs of the home owner, the bank and the taxpayer.

Other than writing off the mortgage shortfall where a house has been repossessed, there should be no debt forgiveness
The government needs to be absolutely firm that other than those who lose their home there will be no debt forgiveness.


Offer a 20% incentive to those with cheap tracker mortgages to switch to fairly priced tracker mortgages
If a borrower has a €300k tracker mortgage on which they are paying 2.5% interest, then their repayments are the same as someone on a €240k mortgage at 5%. If their house is worth only €200k, then their true negative equity is only €40k and not €100k.
The banks should be encouraged to provide a strong incentive to these borrowers to switch to a market rate. The borrower would have a much lower debt although the repayments would be the same. The negative equity would be much more manageable and the motivation to clear it would be stronger. Borrowers who want to move would be much freer to do so. If the banks will argue that 20% is too high or too blunt an incentive then come up with some incentive or some system to reflect the fair value of the tracker.

Forget about debt for equity schemes – they are of no advantage to the borrower unless there is debt forgiveness.
There are two types of debt for equity schemes. In the first the bank buys a share in the property from the borrower at its market value. This does not help the borrower in any way. They pay less interest but they would have to pay rent on the bit of their home owned by the bank. The borrower ends up paying the same each month, but having a smaller stake in the house.

The second type of debt for equity involves the bank buying half the house in exchange for writing off half the mortgage. On a house worth €200k with a €300k mortgage, they would pay €150k to buy €100k of house. This is debt forgiveness. I don’t agree with this, but if the government wants to do this, then call it debt forgiveness.


Treat reluctant landlords better than professional landlords
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 landlords.

If they can’t sell their home, then they should be allowed to set the full mortgage interest against the rent received. In addition, they should be freed from the registration requirements of the PRTB, although the PRTB would still have a role in mediating on disputes between the landlord and the tenant.


Allow limited access to their pension schemes
Where someone is in negative equity or where they can’t afford their mortgage repayment 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 and improves the liquidity and capital position of the lender

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

Exclude cash gifts from parents from Gift Tax
Many parents would like to help their children get out of negative equity or mortgage arrears. This could be encouraged by making such gifts exempt from Capital Acquisitions Tax. This should be a once-off exercise for a limited period only and should not form part of the long-term tax system.

Conclusion
There is no magic bullet. There is a serious problem. It will take time and pain to work our way through the hangover of the housing bubble. The government can help ameliorate that pain, but they can’t make it disappear. They should make sure that they don’t do anything to make it worse.

Brendan Burgess is the founder of askaboutmoney.com and was a member of the Government’s Expert Group on Mortgage Arrears and Personal Debt.

 

[onq]

This piece written by someone I would regard as an expert assumes that people wilfully over-borrowed - in my experience this is not so, certainly not for the people I know.

My experience of having lived through this period is that people were offered bad financial advice from experts then in terms of how much they could borrow.

The above piece is offering further bad advice in that it suggests selling on a depressed property market is an appropriate strategy.

Because of the lending practices of banks, who had a lot of debt forgiveness shown to them, the property market has again fallen by more than 10% this year, when by rights it should have at least begun to bottom out.

If there are lines to be drawn in the sand, someone needs to take control of the banks and get them lending again - we own the banks, so get on with it!

They lent to one in ten applicants last year - so stated by my loan officer - and we have seem reports that they are at 50% of that this year.

This amounts to artificially depressing the local market so that if forced sales occur, someone can sweep in and clean up!

When banks are lending normally again and the property market in Ireland stabilizes, that will be the time to see what the ambient relative value of property is, based on the economic conditions at that time.

Advising forced repossessions and consequent sales into a unrepresentative, artificially depressed property market created and perpetuated by our perfidious banks is simply bad financial advice.

It will further depress the market and may drive many to drastic measures.

 

[monagt]

this piece written by someone i would regard as an expert assumes that people wilfully over-borrowed - in my experience this is not so, certainly not for the people i know.

+1

85% of people are paying their mortgage on schedule

But how are they actually paying it? Avoiding proper food, no health insurance, help from parents,...........................etc.

Why does "out of touch with reality" come to mind?

They are OK on cheap trackers

No, they are not!. Many are on 35 year mortgages as it is, which should never have been allowed.(IMHO)

McWilliams is right, the debt must be reduced as it was for the Banks and the Developers. Again it is people in the know that are getting debts written off.

[broken link removed]

And the rest of us? Well obviously if you're in deep trouble with your mortgage you agree with debt forgiveness. And if you're not? Well, one can only hope you would be enlightened enough to see beyond your personal circumstances to the fact that debt forgiveness will, ultimately, benefit all of us.

 

[Duke of Marmalade]

Brendan

Agree with most of those recommendations.

Giving upfront value for a Tracker is very problematic. The reason these are good now is because of the artificially low ECB rate. Say in 2 or 3 years ECB went back to a more "normal" 4% these trackers would be viable again for the bank. So giving an upfront value now based on current conditions staying in place for a long time is something of a give away.

I think Irish Permanent allow people to retain negative equity when moving house. I think this could be a useful recommendation. It would suit two categories of persons (1) the young couple wanting to start a family and who can afford a higher mortgage but are trapped in their two bed appartment or indeed people in a similar position who need to move house for any reason, and (2) people who over stretched and now want to trade down and get a smaller mortgage.

BTW I loved the way you rubbished that Stephen Donnelly's call for a UK style debt for equity scheme on Prime Time. I note that the same guy has a piece in today's Sindo where he has at least had the nous to not repeat that gaffe.

 

[orka]

I agree with most of the recommendations but also agree with DoM about the difficulties in determining the value today of the long-term value of the tracker - interest rates will change, some people will surrender their tracker anyway if they move house and some people will make extra capital payments voluntarily to reduce their negative equity - so it's not a simple 'value today of 20/25/30 years' difference between tracker rates and variable rates'. But it is an interesting concept - that as well as a negative equity liability, the person's personal balance sheet also has an asset in the form of the tracker mortgage.

I'm also not sure about:

Exclude cash gifts from parents from Gift Tax
Many parents would like to help their children get out of negative equity or mortgage arrears. This could be encouraged by making such gifts exempt from Capital Acquisitions Tax. This should be a once-off exercise for a limited period only and should not form part of the long-term tax system.

Parents can already give 332K tax-free which should be enough to help with most negative equity cases - so the value of this will only come later - when the parents are giving or leaving in a will the balance of more than 332K. I just don't see a need for this - and I can't see it being popular - benefiting as it does only those whose parents will be giving them more than 332K over a lifetime. I could also see it being abused by those in NE who can manage their payments but with rich parents doing a bit of tax planning.

 

[Brendan Burgess]

BTW I loved the way you rubbished that Stephen Donnelly's call for a UK style debt for equity scheme on Prime Time. I note that the same guy has a piece in today's Sindo where he has at least had the nous to not repeat that gaffe.

Thanks Duke

But that didn't stop him saying it again on Marion Finucane today. He said it works in the UK, America and Sweden.

Here is a list of people who are proposing debt for equity.

It's mindblowing stuff.

Brendan

 

[Brendan Burgess]

Orka said

Parents can already give 332K tax-free which should be enough to help with most negative equity cases

Good point. I am not 100% sure of it myself. My reason for suggesting it is that there are many parents who would see it as tax-saving and so would be motivated to do it.

It would have to be limited e.g. to €200k maybe.

 

[Booter]

There have been recent noises that the government might be considering raising the rates and/or thresholds for mortgage TRS - maybe the group could suggest something specific in this regard. I think TRS is already confined to those who bought during a certain period of the late Celtic Tiger, so it would be targetted at those most likely to be suffering difficulties with high mortgages

 

[Brendan Burgess]

There have been recent noises that the government might be considering raising the rates and/or thresholds for mortgage TRS - maybe the group could suggest something specific in this regard. I think TRS is already confined to those who bought during a certain period of the late Celtic Tiger, so it would be targetted at those most likely to be suffering difficulties with high mortgages

The problem with this is that it helps all people who bought. It would be better to target the limited funds available at those who are in the most dire need.

brendan

 

[Bronte]

Treat reluctant landlords better than professional landlords
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 landlords.

If they can’t sell their home, then they should be allowed to set the full mortgage interest against the rent received. In addition, they should be freed from the registration requirements of the PRTB, although the PRTB would still have a role in mediating on disputes between the landlord and the tenant.

I don't see the point of this as it will only distort the rental market. Also why on earth should they be allowed an exemption from the PRTB which has nothing to do with money but all to do with regulating the interaction between landlords and tenants?

The other points seem reasonable. But would see no need to change the CAT rate as the threshold is quite high.

In relation to wilfully overborrowing. Must be my imagination during the boom but it certainly looked like people were borrowing and spending like no tomorrow. Everytime we came back we couldn't get over what was going on. Not to mention false P60's, inflating self employment income, adding on all kinds of dubious income such as potential rental income to get a larger mortgage. Yesterday on the Marian Finucane show there was a tale of a gardai and and it person who borrowed 590K and everyone on the show seemed to think that was perfectly reasonable and normal. Five hundred and ninty thousand ! (Anyone able to provide me with the source of that story as I only heard a snippet)

 

[Brendan Burgess]

Hi Bronte

The PRTB bit is because it's a major administrative headache. And if the borrower doesn't register with the PRTB, they don't get the tax relief. I think that the PRTB has a useful role in resolving disputes, but the registration process is unnecessary - and not just for reluctant landlords.

In any business, one can deduct the costs from the income in calculating profits. But not the business of renting your property. I think that people who have been forced into this business should be allowed to set their costs against their revenues. But maybe limit it to the first 3 years.

 

[Duke of Marmalade]

I think there is a lot of confusion over the term "debt forgiveness". Some debt forgivers are definitely asking for people who can afford their mortgages but are in negative equity to have the negative equity written off in whole or in part. The real extremist in this school is David McWilliams who argues that a "feel good" middle class will revive the economy. Then there are those like Stephen Donnelly who believe that people in negative equity are entitled to some compensation for having been swindled by the banks and the State, at least a somewhat less looney tune than McWilliams.

Colm McCarthy in this article brilliantlly rubbishes this branch of the debt forgiveness school.

The sane branch of the debt forgiveness school maintains that it should only apply to those who can't pay. These people are effectively arguing for a more humane way of dealing with that situation than repossession and forced bankruptcy. These people are not arguing for further bank losses or taxpayer subsidies but for a better way of dealing with "can't pays" than we currently have.

Honohan, Noonan, McCarthy, maybe even Brendan, belong to this branch. It seems clear that the Expert Group will also think along these lines and certainly not along the lines of the other branch.

The fact is though that we already have a very benign, by international standards, approach to "can't pays" although I understand that our bankruptcy laws are somewhat Dickensian. The first Expert Group came out with a very useful contribution to this approach.

As Brendan points out, "debt for equity" or "mortgage for rental" schemes have the danger of appearing to be consistent with the latter approach but in fact represent taxpayer subsidies. If someone can afford the commercial rent on their home but not the mortgage then it may be preferable for the bank to take ownership and rent back rather than repossess and bankrupt. However with mortgage rates artificially low at the moment it is hard to see much difference between the commercial rent and the repayment of interest only on the mortgage.

Finally, every time you make it that bit less painful to default on your mortgage you increase the moral hazard. The Expert Group will need to balance the desire that we all have to help those in mortgage distress with the potential for mass strategic defaults in a moral hazard regime.

 

[Mpsox]

When I read the court section on repossessions in the papers, the one thing that jumps out at me is that the bulk of these seem to be sub-prime lenders. I don't see any specific proposals here to tackle exhorbitant rates charged by these lenders. I'm not sure if it is legally feasible but would putting a cap on the maximum amount of interest that could be charged by a lender (ECB + a %) be feasible?. If it forced these lenders out of the market altogether, then perhaps that could be an added bonus.

On trackers, I would not agree with your analysis of what negative equity is. If I have a mortgage of €300k and can only sell my house for €200k then the reality is, that if I want to/have to sell and move, then I still need to find another €100k and the recalculation based on interest rates is largely meaningless to people in that position.

In addition, you've overlooked one key element of giving up a tracker, namely that you give control of your interest rate to the bank. I have a tracker and assuming the banks will always raise interest rates on a non-tracker mortgage when the ECB does (which they always do), I'd need more then 20% of an incentive to mitigate the risk of the bank either adding interest rates hikes on top of ECB rises(which they've done this year) or not passing throught cuts in the future

Conor Popes article on the behaviour of the banks in yesterdays Irish Times was depressing.

 

[Brendan Burgess]

In addition, you've overlooked one key element of giving up a tracker, namely that you give control of your interest rate to the bank. I have a tracker and assuming the banks will always raise interest rates on a non-tracker mortgage when the ECB does (which they always do), I'd need more then 20% of an incentive to mitigate the risk of the bank either adding interest rates hikes on top of ECB rises(which they've done this year) or not passing throught cuts in the future

Hi MP

That is why I said:

Offer a 20% incentive to those with cheap tracker mortgages to switch to fairly priced tracker mortgages

A fair price is probably ECB + 3%. I use 20% loosely. Someone on interest only at ECB + 0.5% might want more. Someone with a repayment mortgage on ECB + 1.5% would get a lot less.

Brendan

 

[44brendan]

Just come across this post and I have to say the proposals do make impressive reading. like some other posters I would have reservations in respect of the purchase back of tracker rates and changes in CGT but accept that they may have some merit.
The difficulty is apparent from the heading. "What the Expert Group should be telling the Minister". I suspect that the nettle will not be grasped on this issue and again we will be faced with compromise legislation that does not properly address the problems.

 

[csirl]

Hi Bronte

The PRTB bit is because it's a major administrative headache. And if the borrower doesn't register with the PRTB, they don't get the tax relief. I think that the PRTB has a useful role in resolving disputes, but the registration process is unnecessary - and not just for reluctant landlords.

In any business, one can deduct the costs from the income in calculating profits. But not the business of renting your property. I think that people who have been forced into this business should be allowed to set their costs against their revenues. But maybe limit it to the first 3 years.

PTRB registration is simple - it takes only 5 min to fill in the online form - its not an administrative headache. Apart from the tenants rights aspect of it, it is also useful in pinpointing where people are living which is great from a tax/sw enforcement perspective.