A Modest Proposal....

I can’t say I’m a big fan of Matt Cooper’s bailout of people who overpaid for their houses and now can’t afford them. It was also interesting to hear the BS on the program about the “US system” - I’m very familiar with that market and there’s no bailout there. They only write-down your loan if you surrender the house!!

However, I do accept his premise that we do need to do something to get the economy going again. Many of these people can’t move house or move to where jobs are, etc, etc, etc. They remain “trapped” in houses which don’t get onto the market and sell for their real price.

Visiting the US lately, I was impressed with the flexibility of the system. People take a big loss like this, lose a bunch of money but they move on with their lives and don’t sit around crying for Johnny Taxpayer to do a “Little Nama” for them…

Might I suggest the following instead:

  1. For properties where mortgage is less than euro 1m and where its the owners actual residence, we remove the concept of recourse providing they surrender their house. In other words, lender could only take the house and not pursue them for the outstanding balance.

  2. House is sold - at a reasonable price - and borrower moves out. The former resident would just have bad credit presumably cutting themselves off from the credit markets in the future (no bad thing, necessarily - some people need to discover the concept of saving). They could move on with their lives etc.

  3. Lenders would be a LOT more careful in the future at throwing cash at FTBs

There are two downsides I can think of. A. Not having access to borrowers future earnings would obviously increase the banks losses = putting us on the hook. But how much would this be vs all those delinquent mortgages? B. We’re retroactively modifying a contract between 2 consenting parties. Something that’s immoral IMHO.

Would love thoughts on this? I’m sure there’s problems I haven’t thought of.

One alternative is that we just run a campaign asking all of those people to emigrate to England.

Eat Matt Cooper!

Ed: Howitzer had a similar thread earlier in the week -

I will lead to more expensive mortgages in future if there is no recourse (as banks will seek to make up the potential losses somewhere else). Not that having recourse seems to be particularly helping at the moment!

You are conflating a few issues, negative equity in general, negative equity reducing workforce mobility and the inability to service a mortgage. It seems to me that your proposal would allow anybody in negative equity to walk away from their mortgage. We should not make it easy to walk away for those people who can service a debt. There is a need for some type of solution but I think this one is too loose

This is an interesting point; even recourse was overvalued! When recourse is most likely (e.g today) - the banks either don’t want it or, thanks to unpredictable government intervention, can’t get it. Another reason mortgage rates should have considerably larger margin in the decades to come.

Thanks for the feedback. A couple of thoughts…

  1. I agree that I probably was conflation objectives so let me clarify what I think the issue is and what I think it would be good to achive.

a. At the moment, we have massive negative equity combined with the inability of many owners to service their mortgage. Both of these are distinct problems but together are especially nasty (e.g. if you didn’t have negative equity, inability to service would be no big deal as people could just sell and walk away). These are compounded by the fact that banks aren’t doing repossessions but at the same time have recourse beyond the mortgaged property. My proposal aims to:
i. Take a good portion of people out of what would likely be lifetime debt bondage whereby almost all of their incomes are spend on servicing debt - reducing aggregate demand/spending and depressing the “real” economy (e.g. the Matt Cooper argument).
ii. Take houses out the hands of people who can’t afford them and shift them to people who can afford them at a realistic price - something that would actually benefit both buyers and sellers… At the moment, the market is sticky as distressed mortgagees have no incentive to sell/walk-away and the banks don’t cahones to repossess. The “work-out” that I am describing is what actually happens when companies go bust.

  1. Someone raises the moral hazard argument that people who could actually afford to service their debt will walk away just because of negative equity. In the US, this is actually surprisingly rare although rising - see article below. To do so, would cut the person off from credit markets in the future due to their “bad credit”. In intimate little Ireland, the negative reputative and “face” cost of this would be even greater than in the mobile/anonymous US.

nytimes.com/2010/02/03/busin … wanted=all

To be clear, I’d also restrict this to their principal residence and not to investment properties.

  1. I have no problem with residential mortgage capital being more expensive than in the past. Capital that was too cheap and didn’t reflect the inherent riskiness of residential lending is what helped inflate our bubble. Taxpayers are now paying for this “mistake”. I’d rather have mortgage borrowers pay for this in the future as well as having to pony up larger amounts of equity.

  2. I have a fear that in Ireland, political factors mean that without a solution where forgiveness is combined with losing the house, we’ll just end up in a situation where Johnny Taxpayer pays for some (but not enough relief), mortgagees continue in debt bondage and powerful VIs continue to have an interest in artifically propping up prices.

Face it - with the history of landlords, etc - we as a country simply don’t have the stomach for mass evictions. I have experience of trying to collect a (small) debt and the legal system made me feel like a criminal :slight_smile:

  1. I still like the idea of doing all of this by just running a “Hand in Your Keys and Skedaddle to England” advertising campaign.