Mortgage Arbitration Board

The Irish Property Bubble (2006) The Republic of Property
#1

Right, I think this post is just going to get lost in the “90% Drops!!” thread, so I’ll repost it here.

This is just something I’ve been mulling over for the last few days. If Something Isn’t Done we face complete economic collapse for decades to come. So we need to find a practical, do-able way out of this mess. So how do we clear the debt overhang ASAP, get the real economy gradually moving again, recapitalise the banks, avoid the taxpayer being stuck with €50bn in bad debts, and minimise ye olde Moral Hazard so that people may perhaps think twice before getting suckered into another bubble in 10 years time?

Look, if wages are static or declining and banks will not lend stupid amounts, then the only properties that will move are

a) new builds where builders simply have to shift stock, even at a loss, or go bankrupt
b) old pre-bubble houses with no, or a very low, LTV

all being sold to FTBs/STRs with a deposit.

The bubble generation and their houses are, quite simply, stuck where they are for decades to come, until they either pay off enough of the principal to be able to move or declare themselves bankrupt. And they need inflated wages just to pay the mortgage, but the pressure on wages is all downwards.

This is simply what happens after a massive credit splurge. Until the debt overhang clears, society and the economy atrophies. It’s why Japan is still stuck, going nowhere fast, 17 years after the bust. It could take them another 17 to get their economy moving again.

Ultimately, and despite the stench of moral hazard involved, the least worst option might be a shared Mortgage Arbitration Scheme for all those in negative equity.

This notion of mine, which would never happen in VI-infested screw-the-little-guy Ireland, might work something like this:

1) Prices are encouraged to hit the true floor as quickly as possible, with legalislation to enforce sane lending critera etc.

2) This will leave hundreds of thousands in negative equity, with an average probably around the €250K mark (200,0000 at €250K=€50bn. Sound about right?)

3) Impress upon everyone that there will be no Arbitration Scheme until everyone has fessed up and got real

4) While we’re waiting, get real on cutting out the massive waste and corruption that costs the taxpayer billions every year. We’re simply going to have to do this anyway, just get on with it FFS

5) This is a plan that would pan out over 8 - 10 years. Hell, it’s better than 25. Each year 4-5bn in negative equity is tackled, for the most deserving cases (where “most deserving” is doubtless subject to furious debate, but I’d suggest a mix of the poor who were sucked into subprime, and skilled workers earning under €65K in the 25-40 age bracket who we need to be moving and working to rebuild the real economy)

6) Share The Pain, Share The Gain: the banks take a hit and write off a chunk of the mortgage forever. Better to have 20% of a loan go bad than 100% of it, right? The taxpayer then redeems another slightly larger chunk (yes, yes, bear with me here), thus slowly recapitalising the banks without bailing out the builders;and allowing the mortgagee to restructure their payments on the now much-reduced mortgage. But not all the negative equity just disappears. Maybe 2/3 or so of it. Mortgagee goes from having €250K in negative equity to having €80K in negative equity, a €450K mortgage to a €280K mortgage. But they also still owe the State. Maybe not as in “you owe us €80K, pay it back when you can”, cos the whole idea is to get rid of the debt overhang and reduce the wage pressures, cost pressures and labour immobility pressures so that the economy as a whole can get back to being productive. Maybe those who avail of the scheme are subject to a 1% income tax levy for the next 40 years. Maybe in return for the scheme they get a reduced State pension or lose entitlement to certain benefits. Something like that, where the people who are bailed out will end up either contributing slightly more over a very long time or receiving slightly less (or both), over a very long time. It might even be cost-effective in the long run. And it impresses upon the banks that they can’t just get away with reckless lending; to the Punter that there is a cost for being foolish; and does not (in the long run anyway) penalise the prudent.

Course it would involve an honest government with balls of steel. Anyways, it’s an idea, just flying a kite…

#2

i was watching on CNBC, how Fannie and freddy are looking to the goverment to restructure distressed mortgages,

Maybe something like this:
bloomberg.com/apps/news?pid=20601087&sid=aXh_NhG7OLoY&refer=home

#3

did you come up with that yourself?

#4

Pah. Reduced interest rates and 97-year terms won’t do a lot for anyone who bought since 2002, it just drags things out even longer, the banks don’t get the slap they deserve, it won’t eliminate negative equity and hence improve labour mobility, it won’t do much to help along the general cost-reduction programme Ireland so badly needs, in fact this US plan is practically designed to perpetuate a Japanese scenario.

#5

What’s the problem you are trying to solve here? There’s lots of people who have lost money on their pensions, why should those in negative equity on property be bailed out?

If the problem is the lack of movement in house building and construction, let the builders reduce their prices to the level at which people will buy.

If the problem is lack of labour mobility because of negative equity, I would support a scheme to allow people move.

#6

Certainly food for thought.

The thing that’s usually brought up for any scheme that involves forgiving some mortgage debt is this: why do people who bought at stupid prices get bailed out at all? Ultimately banks and/or the state will claw this back from those of us who were sane/poor/lucky enough not to take on a mortgage. Moral hazard.

A pure market-based view would be, encourage the return to sane prices asap as you say, but if people, banks and developers get hosed, well, maybe they’ll learn a lesson. Of course, this will never be allowed to happen in Ireland either – no way will developers & banks shoulder their fair share of the pain.

#7

Clever thinking there Sidewinder. I think some kind of State board will be set up to bring banks and distressed homeowner together to hammer out an arrangement. But I think these arrangements will be individually tailored to personal circumstances.

However, residential mortgages are not the biggest problem faced by the banks, commercial property (incl BTL) and developer loans dwarf the former in terms of toxicity and threat to the economy.

By comparisons to those lads, the residential mortgage sector is a model of fiscal rectitude.

#8

No, the Voices told me :nin

It’s pretty obvious once you decide what your objectives are. Cheaper and more effective than Lenihan’s stupid “universal guarantee”/“gouge the banks to pay the HSE wasters”/“borrow 10bn per annum to bail out builders” scam, too. Figured all that out over a feed of pints on Thursday, then promptly forgot about it again until today.

The problem I’m trying to solve is the entire State going bankrupt, 20+ years of zombie banks, and general economic meltdown. And it’s not a simple bailout, cos those who decide to avail of the scheme must pay for it, over many many years.

Let’s face it, the ugly reality is that this bubble was so humongous that it will sink the entire economy, possibly for generations. You all know I’m in no way a fan of bubbleheads, Cannys, Zanu FF, snakeoil salesmen and parasite bankers. But we are where we are, and the fecklessness of the muppetry will take us all down with them. Sadly, and as usual, it is up to us to propose a solution to clean up the mess they created, cos God knows they aren’t capable.

It’s something like this or emigrate. I’m not seeing any other option right now.

#9

A good point, that’s another €100bn or so? On land and unsold stock that is probably only worth €30bn max.

I admit this is a glaring hole in my grand scheme :laughing:

Maybe this area holds the key though to starting the real slide towards sane prices. That €70bn loss though would simply sink every bank in the country about 8 times over…

Oh well. Emigration it is then :nin

#10

Caveat: i am an idiot.

That said, my economics training consisted of a dozen lectures at Uni, of which i remember feck all.
However, i do remember on some TV lecture a classic model of an economic sytstem which used water as a substitute for money.

I keep remembering that model, its a good expalination of an economic system, aspecially the bit where the operator tried to manipulate the flow of water(money)
He ultimetly kept failing and usually got wet in the process.

Whats my point?

I am begining to lean to a hands off aproach with this whole economic mess.
Let the water find its own level. which inevitably it will do anyhow, nomater how we fanny around with intrest rates etc.

because ESPECIALLY in finance, there is no such thing as a free lunch, and every action generates a (possibly unequal!) opposite reaction.

Leave the fuck alone i say, let the pack of cards collase or not. then deal witht he aftermath.

XD

#11

I agree. Radical solutions are required.

  1. Let people cash in their work/private pensions tax free to pay off their debts (i.e. the money that’s in their pensions can be used to pay off their mortgages). Available to people who sell their homes and have negative equity.
  2. New standard tax increase of 5% on people with a mortgage. It goes straight into paying off principal.
  3. Government fixes all mortgages of the bust banks at whatever thirty year treasury rate it can get (when selling the debt) and adds a very small margin. Perhaps with payments made through the tax code?
  4. Remortgaging or securing any other debt against a home with a government mortgage disallowed. If you want to realise your asset, sell it.
  5. Life loans for those who have to sell and move on at same rates as above (you carry the remainder of the mortgage with you), secured against future entitlements.
#12

I also agree but Im not sure how it could be structured. Im of the opinion that unless something drastic is arrived upon - along the lines of which Sidewinder is advocating above - we are going to see mass emigration and jingle-mail by people fleeing debt. The majority will be in the 25-40 age group and those left behind will pay anyway.

Its time to dump the ideological fetish that has been the “free market” (which lets face it never really existed anyway) and start looking at radical solutions.

The alternative seems to be 15 years or more of stagnation/decline.

#13

Look at it this way, we are not a bunch of random individualists who happen to be sharing a space temporarily.

Think of it more this way: we are on an oar-driven lifeboat hundreds of clicks from shore.

A section of the guys on board (who represent to foolish gullible buyers who bought gaffs at ruinously high prices - basically everyone who bought in the 21st century) have made a terrible, terrible error. Maybe they accidentally spilled most of the drinking water overboard, something like that.

Your approach is akin to suggesting we throw these guys overboard. Your approach has the virtue of being fair, and serious-minded.

BUT, by punishing the guilty with davy jones´s locker, you´re condemning everyone on the lifeboat to certain death. There are simply not enough rowers left to get to shore before you all die of thirst.

However much they deserve to be thrown to the sharks, it is suicide for you to actually do so.

#14

Exactly.

While I do have sympathy with the “let them all hang, let the cards fall where they will” position, I don’t think it recognises the catastrophic failure of the Irish economy that Canny and Bertie have led us into.

No point in feeling smugly vindicated if yer living in a country with 30% unemployment, a completely collapsed financial sector, and anarchy on the streets. And that is exactly where we are heading, full steam ahead, over the next 3 years.

It’s not just Canny that’s in Denial about the scale of this mess.

Besides, if it’s vindication you want, what better way than to have been right about the stupidity of the bubbleheads, and being the only people capable of cleaning up the mess? Think of the sheer unassailable moral-and-practical-high-ground scorn you can summon against any waffling bubblehead spouting VI sh1te over the next few years.

#15

Interesting Read SideWinder however a couple of issues:

Why? Through balancing probability and being prepared to take a risk by bucking an enormous trend (and suffering scorn and tut-tutting of family and friends) I am in a position where I am not suffering any pain as a reesult of the downturn.

My risk, so I feel fully entitled to take my reward.

and learn nothing. Risk insulation will leave us exposed to the same thing once some level of liquidity returns. In the long term, letting the market play itself out may cause a lot of pain to those who bought into the bubble, but maybe it will help engender a collective generational memory that will prevent such excesses for a long time to come. POrobablyo not but I can hope.

So in conclusion, hands off my hard won pain free status, I took my risks and stand by my actions, let others do the same.

#16

SW

do you really believe this? any proof to back this up, any rationale?

#17

Ozzy, it’s already been said a few times by a few people on this thread. The catastrophe facing us really is extreme. The entire economy is essentially dead, it just doesn’t know it yet.

You might think you are sitting pretty right now, but by this time next year there won’t be an economy. How safe do you think your income stream will be then? How do you fancy living in a collapsed society? Have you got your shotgun and bean store sorted?

I’m debt-free myself, Pinsters generally have been prudent and sensible. We didn’t create this mess. But we are going to have to fix it, or emigrate, because if the mess isn’t fixed by people who have a clue then this country simply won’t be worth living in for another 30 years.

Course, you may feel you’ve no obligations to the rest of society or to the nation at all, you may be happy to just leave and live in another, better-run country. And that’s your choice. But those left behind, those who do have a sense of societal obligation or national sentiment, are going to have to come up with some plan to drag the country out of the sh1te and get the economy moving again.

No man is an island, etc. And it is likely that the prudent will be hardest hit if we leave the formulation of What To Do to bloody Canny and his mates. They’ll just steal your reserves to plug the holes in their finances without a second thought. At least this way they have to pay for their mistakes and foolishness and greed, albeit over an extended period of time. The punishment should also be something that benefits society as a whole as well. Maybe a few of them will reflect on that in the wee hours.

shrugs

The difference on this thread seems to come down to whether you believe there is such a thing as society or not.

#18

You tell me which sections of the Irish economy are going to show growth, never mind strong growth, over the next 5 years.

All I hear is a lot of fingers-in-ears “it’ll all be grand shure”.

Every sector of the economy is critically ill and facing large cutbacks in activity and employment. The Government is broke and planning to run insane levels of budget deficits for years and years to come. Our entire financial system is insolvent. The FDI transfer pricing scam is over, and we are too expensive, too far behind in infrastructure, too corrupt, and too poorly educated to attract much new FDI. There are absolutely no coherent plans for any large scale indiginous industry to replace the jobs of the 150,000+ people that will lose their jobs just from the construction/property bust and all their associated hanger-on industries. Our broadband is a joke. Our political class are utterly clueless (not to mention corrupt). We are riddled with closed shops and restrictive practices and croney Licence Capitalism industries. We’re the most expensive country in the Eurozone, with the most indebted populace in the world.

Wake up people! We are still in the very, very early stages of the collapse. Things are going to get a lot worse over the next 3 years, and I’m not seeing any moves towards getting the economy moving again and providing real jobs in real productive wealth-generating businesses.

You tell me just how we can avoid complete economic meltdown.

#19

SW - aren’t there already mechanisms in place to help people? If you become unemployed and can’t pay your mortgage then there is “rent allowance” . While arguably in may not be sufficient some kind of deal could be brokered whereby interest is stopped and the bank receive the payment directly from the government. I agree with you that something has to be done but it will have to be in conjunction with the mechanisms already in place.

#20

The problem is these mechanisms will bankrupt the country and leave us with the zombie bank immovable wage problem.

I have to say for what it’s worth I don’t instantly hate sidewinders solution.

Can anyone tell us what is the major risk with such an option.

Could we afford it?