A bailout with nasty strings attached for negative equity

The Central Bank
1

So this is a proposal for getting people out of the mire and allowing the recovery to begin. It aims to somewhat alleviate the self-imposed burden of the Cannies who, being a lot less bright than they imagined themselves to be, saddled themselves with ludicrous debt to get on the ladder.

I’d like thoughtful, non-glib critiques of the idea, and it would be good if you were open to its pluses in addition to its faults.

So, the first step would be to start a programme to loan everyone in negative equity a long-term loan. Equal to the amount of their negative equity.

The term of the loan could be 50 years. Therefore the repayments would not cripple the economy. You can settle your debts and still have money left over after sheltering and feeding yourself. “Something to live for” let’s say.

Major string 1: the long-term loan is strictly (I would suggest putting it into the constitution) open to people who overborrowed for their PPR during the 2000-2007 boom. Nobody else can ever borrow for longer than 30 years.

Major string 2: you must, repeat must surrender the house if you get an offer that, along with the government loan, clears your debt. You can only reject an offer if you get a higher counter-offer from someone else.

There are other matters to consider. For most people, there will be further generations who will pay the outstanding amounts. I would suggest that the state automatically takes the shortfall out of the estate of anyone who dies without clearing the loan. For the few people with no kids or godchildren, there would have to be some insurance arrangement.

A fifty-year loan should mean payments low enough that even a fairly modest pension could accommodate them, so there’s not necessarily a problem with over-66 people having such a loan.

This would be fair to people like me who stayed out of the boom: we would finally get a chance to own a house for a semi-sane price.

It would also remove a severe shackle to the economy. We currently have about 200,000 professional people imprisoned in negative equity, and that is poison to the economy. The economy needs people to be free to move, this is a well-established fact. Low mobility equals a weak economy. If a Dublin professional is free to take up a job offer from a Ballina start-up, that is good news for everyone. Right now, part of our economic paralysis is the fact that people are trapped by negative equity in a part of Dublin.

2

Jaysus, that’s even better then intergenerational mortgages! You can assign the debt to the offspring of people you don’t like! You have to remain Catholic but that’s a small price to pay! :stuck_out_tongue:

3

https://www.uk.filo.pl/ireland_history_no_surrender.jpg

4

One immediate problem that I don’t see any resolution for - short-term interest rates are way lower than even medium term, never mind long-term ones.

10-year fixed rates are about 5%
1-year fixed about 2.5%

Fixing for 50 years would involve a crippling increase in interest cost.

I don’t see a way around this at the moment, it is something that has been bothering me for a while…

5

And that’s as far I need to read.

  1. Not financially possible
  2. Not necessary for the majority who are paying their mortgage.
6

If they choose not to accept your debt, then that means they can’t inherit anything from you. Which, if they don’t know you or don’t like you, will mean nothing to them. It certainly won’t affect your credit score unless you sign a document accepting the debt.

Which means your criticism is non-substantive.

7

Just reform bankruptcy laws. You lose everything and start again with a clean slate after 2 years.

8

I wouldn’t go along with market rates. The events of 2008 show us the folly of paying attention to markets as if they were the word of a deity.

I’m not saying that the setting of interest rates should have no reference to the market, but the market should certainly not dictate the rate.

9

Well, it’ll bring a whole new meaning to looking after the spiritual well being of a child if you have to take on their parent’s negative equity for them… :stuck_out_tongue:

10

Going down that road causes more moral hazard than my idea.

My proposal is tougher on Canny McSavvy than yours. My proposal makes a repeat of this terrible affair much less likely than yours.

If we go with your proposal, there will be another bubble later, and a much worse one.

If you know that all you need to do if you lose the gamble is eat humble pie for 731 days, then Ireland might as well be renamed Bubble Island. We will be in a permanent cycle of bubble followed by two-year bust periods.

11

I like the idea of converting the negative equity part of the mortgage into a loan.

It should only be taken out at the time of the mortgageholder moving and be a one-off debt relief.

The bank should share the pain of the loan, so therefore the interest rate should be set at a low rate ECB tracker.

The debt stays with the mortgageholder until paid or death it is not passed down to the next generation, in the event of a divorce then the debt is split between the douple.

It will at least allow those that must move to move!

12

So, all you can come up with is this talk of kids? When your critics can only come up with lame jibes at side-issues in your proposal, it seems your proposal is fairly sound.

13

The first thing would be to find out who has trouble funding their existing mortgage, who needs to move and who actually needs this sort of assistance.

Right now you’re proposing this for everyone in negative equity. However if your negative equity mortgagee can 1) service their loan and 2) does not need bridging finance because they do not need to move, then they do not need your ill-thought out loan-idea to cover their negative equity. They already have debt on it after all.

Why? If they are happy to live there why should they have to move if they are clearing off the associated debts?

14

I would not have a problem with the debt being able to move between generations, provided the person accepting the debt agrees.

Obviously, if the next generation doesn’t want to take on the loan, then all that happens is that the creditor takes what he can from the departed’s estate, then the debt dies.

But in the year 2041, a €141-a-month payment will be very small beer indeed, even if inflation between now and then stays very low.

A lot of people will be happy to take on that burden in order to inherit the rest of the estate.

15

What in heaven’s name made you think that this applied to people in negative equity who are happy enough with their situation and can cover their debt?

Surely it’s obvious enough that this would only be relevant to the hundreds of thousands that are currently in arrears.

16

Ah, so we should set up another patriot bond that won’t match inflation?

Are you going to cash in your gold and buy them?

17

And wasn’t that the very thing, that has lead us to where we are now - ignoring the market?

The market has never set the interest rate and will not be allowed to for the forseeable future.

18

Jeez, you’re really determined to say nothing constructive, aren’t you?

19

This part:

It is absolutely no wonder I don’t take your policy proposals seriously when you can’t be precise enough with language when describing them. In any case, proposing additional debt for people in arrears is ultimate folly. What you want to do is change the payment terms of a proportion of their debt and government guarantee it for the original lender.

20

Well not matter what you think of it the market determines the price of everything in the economy, including the price of money.

If you want to charge below market rates someone has to pay for it, and that means the state pays for it.