Why do the banks not do negative equity mortgages?

RIAD BSC I do understand exactly where you are coming from - I can do the mathematics. What I don't like is the presumption of value that you are using to base the calculation on. I do not see the banks that you and I now own knowingly handing out 100+% mortgages as a solution, by virtue of this thread existing at all it has proven bad enough that they handed out 90% of the then value of the property.

As to my being disparaging? I chose that phrase quite carefully. How are we to start differentiating for these new "humane" mortgages? How are we to discriminate? What is to be the selection criteria? Who is to be the arbitrar of these new "humane" considerations? Bank managers? If we consider these mortgages, we must consider them for all.
 
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So-crates... I'll say it again. These people already have NE mortgages with the banks... all they want is to be allowed transfer the NE to a different address. That is a whole different ball game to giving out a freshly-minted 125% mortgage to someone who doesn't yet own a home, which is what you seem to object to....

What "presumption of value" are you referring to? I don't understand what you are saying there. The NE would be defined by the sale price they receive for their house before moving. There is no assumptions at all.

You say you object to banks giving 100+% mortgages to these people..... You forget that these people already have 100+% mortgages.... It has already happened! They just want to change address!
 
How can this be so difficult to understand?

Example:
A home owner in Dublin has an outstanding mortgage balance of 300K. The current house value is 200K, which means 100K NE.

If that home owner is offered a better job in Cork, it is currently not possible to sell the house in Dublin and buy a new house in Cork.
However, if NE transfers were allowed, that house owner could sell the Dublin house for 200K, and buy another house in Cork for the same 200K.

Result of the operation:

  • No extra financial risk: the house owner is in the same situation as before, a house in 100K NE. Just a different address as RIAD BSC pointed out
  • No extra risk to the banks: home owner keeps borrowing the same amount of money from the bank
  • No extra risk to the state: no debt forgiveness or anything like that
  • The operation creates a new buyer, who acquires the house in Dublin
  • The operation creates a new seller, who sells a house in Cork
  • Allows job mobility, which is good for the economy
 
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RIAD_BSC said:
Brendan, your views on this matter....
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I feel that Brendan does display sympathy to those involved. The problem is such that there is no easy solution.


Transaction costs, of perhaps 15,000. That's a significant amount of extra debt.




Clearly they're not trying hard enough. It'd take decades to pay 175K, on an income of 150K a year? I think it could be paid off in two to three years. What else would they be spending their money on?

It's people who earn 35,000 a year that are the problem, not those earning 150K.
 

I'm not sure what to say in response to your post.

I'm not branding anyone "greedy" or "self centred" for disagreeing with me.

I'm referring to those whose arguments are "I wasn't greedy...let them eat cake" and "if they get bailed out, I won't pay my mortgage". I'm also referring to those who make flippant comments about holidays, cars, trips to New York etc. There are people in this country who are on their knees because of the greed and avarice of bankers and builders and because of the absolute incompetence of government, regulators and bankers. As I've said before, we're primarily a society rather than an economy. Something has to be done to help these people. I want to see my taxes used to help these people. I don't care if I don't get a portion of my debt forgiven or if the fact that I'm repaying my debts somehow excludes me from any wider restructuring. That's what it means to be part of a society. But I'm not entirely social minded. The only way this country will bounce back is for the overburdended middle class to emerge from beneath the debt mountain and get the economy going. And when that happens, we'll all be in a better place.
 

I posted a reply to you earlier but it was very brief, so I'm editing it here. You said it was good to have a real example. All helpful suggestions are welcome.

Reasons why the bank think it doesn't make sense?:
I asked my bank several times if I could carry the negative equity but they said no straight away. They said the Financial Regulator will not allow them to create a negative equity mortgage. I emailed the CEO of EBS and provided figures, much as I did here earlier, and he said that negative equity mortgages were something they didn't do and would not be looking at just yet. The only option they will entertain will be for me to pay them the shortfall of a sale upfront.

Can I afford interest rate hikes?:
I can afford the 4.6% I'm currently paying. I was previously on a fixed rate of 5.8% and that was okay too. I could afford another percent or so. Genuine question - how much extra percent should I stress-test for?

Why do I want to move?
I currently live in a 1-bed apartment in a city centre location, I think it is approx 40msq. The idea would be to move to a more suitable size home to start a family. Honestly, our neighbourhood is not a nice place to bring up kids even if there was enough living space. Yes I was short-sighted to not plan ahead for kids when I purchased but that is the shortsightedness of being in your mid-20's.

We don't have any debts other than the mortgage. I have a credit card for occassional online purchases - if I order something I immediately transfer payment from the current a/c. We own a 2nd hand car that we bought outright. In previous years when I got a payrise I instanly increased the amount of my savings. I guess what I'm trying to make a point of here is that we don't live on credit and try to make decent financial decisions. Unfortunately the apartment mortgage was a bad mistake. I want to pay for this mistake (I don't want debt forgiveness) but would rather pay for it while living in a more suitable home. If I had to live here for another 10years I would go mad - and children would be an IVF option only (I'm not trying to curry sympathy, but there is an age where this becomes a fact).

Current situation:
Joint incomes of 60k, stable jobs.

Current mortgage is 179k with 24yrs remaining. The monthly repayment is eur970 (standard variable 4.6%). Neg equity could be estimated at 50k.

If I were allowed I would buy a new home valued at approx 200k.
I have deposit of 20k.
I would require a mortgage of 180k, plus to be allowed to carry forward 50k negative equity.
Total new mortgage of 230k, hopefully to extend the term to 30years. At the current variable rate of 4.6% it would be monthly payments of eur1,100.

Even if I were allowed to get a negative equity mortgage tomorrow I wouldnt do it instantly. I would prefer to save for another 12months and increase my deposit, knowing there was light at the end of the tunnel. But waiting another 5years would be quite dispiriting - this doesn't mean I want instant gratification on this subject, in reality I have been saving for some time to get my deposit together.
 
Folks

This is a very long thread, which I split from another thread yesterday.

Can you stay on topic. This is about negative equity mortgages. It is not about debt forgiveness.

Can you also stick to the issues. If the abusive comments about me were made about anyone else, they would have been removed.

This is an interesting and important topic. Argue the points and not the person.

From now on, any personalised attack will be removed.

Brendan
 
As I am being abused on this topic, let's just look at what I said

http://www.askaboutmoney.com/showpost.php?p=1158567&postcount=33

The only negative equity mortgages which lenders should allow would be where borrowers are trading down, as this improves the situation for both lender and borrowers. Giving someone in negative equity more money is just not a good idea.
Click to expand...
In this Key Post on the topic under the heading "Ideas which might work"

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.
Click to expand...
I don't try to shut people up by abusing them and belittling the work that they have done. I provide a forum for people to exchange ideas. I discuss those ideas and even if I don't agree with them, I will often promote those ideas for consideration.


and
and
So, I am very aware of the problem. I know some people personally in this difficulty and I have read enough reports on Askaboutmoney to be very much aware of it.

I have sought solutions and documented them in a systematic manner.
I spoke about the topic on DriveTime yesterday
and
I will circulate that thread to the relevant politicians, civil servants and Financial Regulator today.

For the official record, this is what the Expert Group said on the topic
I have also sought to establish the factual position which, I understand, from speaking to lenders, is as follows. Two banks, probably Ulster and Bank of Ireland, told the Financial Regulator around 6 months ago that they were proposing to do trade-up negative equity mortgages. The FR was uneasy about them, and asked/told them to hold off while they reviewed the issue. As far as I know, the FR has not made a decision on the issue.
 

Thanks for the comprehensive reply.

Did the CEO write back to you himself? Did you argue the same case you outlined here. Banks are trying to sort out the mess but you must think of it from their point of view. You can afford your mortgage, they are making money off you so why should they budge. That's your problem. You can appeal to their better nature. Maybe they will accomodate you. Things seem to be changing all the time in the banking world. How about trying to negotiate selling your house and taking the negative equity with you as a loan at maybe mortgage rates, and go and rent for some time in a more suitable place?

In relation to children which is off topic but relevant because the main reason people want to move is to get a place more suitable. Do not let where you live now put you off. I have one bed apartments only suitable for couples but during the boom we had many couples (Poles/Latvians etc ) who got pregnant and had babies and stayed for quite some time, even though we didn't thing the place was suitable for them size wise, we also had couples with older kids. Personally don't know how they did it but they weren't waiting to have kids, liked the rent and the flat and did whatever in order to have a family. It can be done.
 

In light of Leaky1's honest assessment of his situation on his modest salary could you Gekko give us a full account along the same lines of the people with the 100K to 120K salaries.
 


You have explained the argument against negative equity mortgages very well there Complainer. I fear if negative equity mortgages became a reality, it will lead to more problems down the line and we need to learn the lessons from the past. The market should be allowed to dictate what happens to house prices and they should be no more interventions from governments or banks.

I read here about couples who are delaying having families because they are only living in nice modern one or two bedroom apartments.

I think people seem to forget that it wasn's that long ago when 14 or 15 children were brought up in one room shacks. We have come a long way.
 
Personally I don't see why Negative Equity mortgages should be automatically banned but having said that, people are right to be sceptical about them. They are not going to be a solution by itself and given the banks history, the regulator is perfectly right to tread very cafefully. The same thing happened with 100% mortgages. The banks swore they would only be offered to a tiny fraction of qualified people but within days, there were adverts on the back of buses for them.

As long as the banks and the borrowers are responsible, it is an option that has to be examined. There are of course risks but no matter what we do, there will be risks. We are in a hole here and ranting about the past or people's mistakes isn't going to help anyone.
 
So, having read this discussion, here is a summary of my views.

I have huge sympathy for people who are in negative equity and who need to move.

I don't think that they should be allowed to increase their borrowing as that only increases their risk. If they have a large income which would justify a higher mortgage on an affordability basis, they should apply that higher income to reducing their negative equity.

They do have a problem in that need a larger house. A larger mortgage makes the problem worse for them, not better. There is no need for them to own that larger house, they can rent it.

So, they should be facilitated in selling their home in negative equity. If they have a cheap tracker, they should be given a discount for paying off the cheap tracker early.

If they can't sell their home, they should be allowed set the rent paid on their new home against the rent received on the old home.

I am not opposed to transferring a negative equity mortgage to a house of the same value
There is a sort of "logic" about moving from a house worth €200k in Cork to a house worth €200k in Dublin and simply transferring your mortgage of €300k. I was opposed to this when the transaction costs were much higher mainly due to stamp duty as it would increase borrowing.

While I am not opposed to it, I would recommend to people considering it, that they should just sell and rent instead.

Trade-down negative equity mortgages should be allowed, but...
they might not be of great value to the borrower. At the time of the Expert Group report, my concern was that the stamp duty and transaction costs would wipe out most of the money saved and the borrower might end up with less house but with the same amount of borrowing.

Say, I have a mortgage of €300k on a house worth €200k. I need an increase in property prices of 50% for my negative equity to evaporate.

If I trade down to a house worth €100k, I will have a mortgage of around €210k on a house worth €100k. So I will need house prices to increase by 110% to evaporate my negative equity. (Of course, if you sell the original house and don't buy another one, you will be stuck with a €100k shortfall and you won't benefit from any increase in house prices.)

My interest costs will be a lot less on €110k, but is it worth the trading down? My advice to someone in this situation would be to consider staying put but taking advantage of the Deferred Interest Scheme - as suggested by the Expert Group.

Trading down because you have to move location, is probably ok. Trading down because you can't afford the repayments, is probably not a good idea, but worth considering.
 


You have explained the argument against negative equity mortgages very well there Complainer. I fear if negative equity mortgages became a reality, it will lead to more problems down the line and we need to learn the lessons from the past. The market should be allowed to dictate what happens to house prices and they should be no more interventions from governments or banks.

I read here about couples who are delaying having families because they are only living in nice modern one or two bedroom apartments.

I think people seem to forget that it wasn's that long ago when 14 or 15 children were brought up in one room shacks. We have come a long way.
 
Again, a quote from Brendan that I take serious issue with: "They do have a problem in that [they] need a larger house. A larger mortgage makes the problem worse for them, not better. There is no need for them to own that larger house, they can rent it. So, they should be facilitated in selling their home in negative equity."

So, even if they can easily afford the repayments on the larger home and mortgage, they should be prevented from buying it? That makes no sense. It should not be up to you to decide if there is "no need" for them to own it or not.

You are also denying those people the opportunity to transfer their NE over to a new property and allow future house prices rises to help inflate the NE away. You are forcing them to crystalise their loss at the bottom of the market. That's just plain bad financial advice.

I'm sorry if you think this is all too strong, Brendan, but the expert group made such a mess of this issue, I think you guys should be fair game for very heavy public criticism on it....

That is, unless the expert group issues a recommendation that might help fix its previous mistake, by agreeing that NE mortgages are suitable for some people who can afford them..... If the expert group doesn't say something, then nothing will ever be done to help these people
 
Bronte said:
In light of Leaky1's honest assessment of his situation on his modest salary could you Gekko give us a full account along the same lines of the people with the 100K to 120K salaries.
Click to expand...

It's not my situation so it wouldn't be right for me to discuss it in greater detail.
 
So, even if they can easily afford the repayments on the larger home and mortgage, they should be prevented from buying it? That makes no sense.
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Riad, It makes absolute sense.

Being overborrowed is a problem for the borrower and a problem for the lender. Increasing the borrowing makes the problem worse.

If the person can "eaily afford the repayments on the larger home", then they can easily afford to increase their repayments on their current home and, over time, eliminate the negative equity.

It might well be a bit academic at this stage, as I believe that the Central Bank forced the lenders to make provisions for performing loans which were in negative equity. This suggests that the Central Bank won't allow banks to increase the lending to people who are already in negative equity.

You might want to make a submission to the Central Bank on the topic.
 

Hi Riad

We don't allow speculation about house prices on Askaboutmoney. But I will leave your comment there as it shows the flaw in your argument. You are assuming that we are at the bottom of the market. I don't think that this is a valid assumption.

If someone is on a low salary and is in such deep negative equity that the only way of recovering is to wait for house prices to increase, then they should hold onto their home as long as possible. If house prices fall, they will be just a bit more insolvent.

If someone is in the situation you describe and they have a high income, they have to make a judgment. If house prices continue to fall, their negative equity and problem will get worse. They may well be better off selling now and paying off the shortfall. If they wait and house prices fall further, their options may be further restricted.

It's important for people in negative equity to understand that there is no magic wand. It is going to take time to resolve their problem.
 
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