In this country, it’s about the only thing left you’re not paying for!
Why? Why are we supposed to formulate a plan to allow people to stay in homes they can’t afford? Most people in trouble only own a very small portion of the house. Anyone with a 100% IO mortgage hasn’t even paid a penny toward the purchase of the house. They don’t own these houses and if they can’t afford to pay for them, they should not have them. People can’t just have whatever they want because they want it.
Legally the people own them. 100%. A mortgage only gives a bank the right to take legal ownership if the contract is defaulted on. It confers no right of ownership on the bank.
de law is de law.
But we are talking about defaulters.
this is specifically about people who are in default, but despite that fact the bank would be happier if they stayed put, and in many cases so would the people in the house so not it is a question of what will be done.
Quick few points jotted down. Will expand on later.
All related to PPR
- Every mortgage from 2001 on automatically qualifies for a complaints procedure for mis-selling.
- New bankruptcy law allowing default and clear in 5 years.
- Banks can offer existing customers to switch to new contracts which are not subject to the mis-selling but come under the new bankruptcy law.
- Under the new contracts customers can only avail of the new bankruptcy clause after 5 years of servicing their new mortgage.
I liked the idea when you first floated it (well “liked” may be the wrong word here). I still say it’s the best solution.
Banks should be incentivised to deal with their historical mistakes. It was their job to make prudent loans. If they advanced monies without appropriate checks then they mis-sold. For this they should pay. So any mortgage since 2001 becomes eligible for review and can be submitted to a complaints procedure.
For those who borrowed above and beyond their means the job of servicing this debt leaves them facing a default. Defaulting on a loan in negative equity is no solution. Defaulting on a loan that is performing at the moment but could become impaired is a dread - why continue to carry it when the outcome looks inevitable and by which time the loan could be in negative equity?
Two things have to happen in tandem to offer some hope to the lender and the borrower.
Firstly, the bankruptcy law is changed to allow defaulters to be cleared of all debt after 5 years. Secondly those who have existing mortgage contracts with the bank are offered an optional upgrade. They can stick with their existing loan which isn’t covered by the new bankruptcy law or they can switch to an upgraded loan which forfeits the right to a mis-selling application but benefits from being covered by the new bankruptcy law - but only after 5 years of servicing the upgraded loan. Any new loan application is automatically covered by the new law.
New loans being covered puts prudence back in the system and allows lending, and house prices, to adjust to a new market level with the risk priced in. Loans which are upgraded give the bank the comfort of knowing they are getting customers committing to at least 5 years of continuous performance, enough time for both parties to start to put their houses in order. Old loans can and should be subject to a review for mis-selling. The lessons of the past should be learned and doing this whilst operating new loans under harsher conditions highlights why the new system requires a return to proper risk management.
People who borrowed now have a choice - they can role the dice and seek redress or they switch in the knowledge that there is an opportunity to meet their obligation but that if things go wrong they can default at some point in the future without too onerous a consequence. Banks will get a handle on their cash flows but will also be forced to cleanse the system.
I don’t think you understand what equity is, so a quick lesson in Irish law is required:
Common law (i.e. case law) and statute law (i.e. legislation) are the two main types of law in Ireland. However, because somethings following the law creates an unjust result, the chancery courts developed a new type of law, now called equity, whereby certain cases can deviate from the strict letter of the law where it would be unfair to do so.
There are several types of mortgage in Ireland, but for these purposes we’ll look at legal mortgages. A legal mortgage is when you give the legal title to the bank in exchange for a sum of money. It is in law the exact same as selling it to the bank, except that the bank allows you to remain in physical possession of the property.
Thus, the banks as legal owners can repossess the property whenever they want (after the legal redemtion date, usually just a few months; and subject to s.20 of the conveyancing act 1881). However, this is subject to equity or justice, which creates the system of equitable redemption i.e. the bank cannot repossess if there is a reasonable liklihood of repayment within the lifetime of the mortgage.
thus, the term equity in a property refers to the fact that, while the bank owns the whole property in law, the lower the % value remains owed to the bank, the more it is said that the occupier has equity in the property.
Now, when you are talking about a debt for equity swap this makes no sense, because you may as well simply say more debt. You argue that people can pay their mortgage with equity rather than cash, but this is the exact same as saying that people should be allowed simply not pay their mortgage with or without paying interest on the arrears. Banks already offer term extensions, moratoria and capitalisations of arrears which amount to more or less the same thing, only you have to pay interest on these sums, they are usually not for 3 years and it goes on your financial records.
There are only two ways of a mortgage rescue scheme - a government paid for bailout or a system whereby the banks take a back seat when it comes to repossession. I don’t think the government can afford another bailout, and the more we force the banks into such a scheme the less likely they are to lend to other people.
Thus a mortgage rescue scheme is a way of doing more or less what we’re doing at the moment, only giving it a buzzword name so people think that the govt/banks are actually doing something for them.
Is this a workable solution? Any glaring errors?
thanks for the legal background, but i’m talking about the accountancy of it, that the loan is one asset, the property is quite separate yet still an available asset, that is where the scheme will focus upon. it doesn’t have to be with compounding interest necessarily - that would be open to debate because it isn’t a ‘business as usual scenario’, the cost of funding perhaps but general penalty interest etc. couldn’t be a part of it imho. if a bank takes a portion of a property as a swap or any other scheme they can value the loan at x and the property at y , there would be certain conditions attached regarding the way out for the borrower.
From the accountancy point as well as the legal point it is the exact same - the bank owns the property on condition that they release it to the borrower when the loan is repaid. “Equity” in a house is not a separate asset, it is merely the extent to which, should the matter be put before a judge there and then, the judge would refuse to allow the bank to retake possession. The bank doesn’t need to “take a portion of a property” as it already in law owns the entire property subject to the terms of the loan, and I presume you are not suggesting that they physically repossess a portion of the property and install their own tenants there.
So a debt for equity swap has the exact same effect as a moratorium/capitalisation/term extension or put another way it is just an officially sanctioned way of the bank allowing you to not pay your mortgage/forgiving you for missing payments.
yep, that’s what it boils down to, a way of not paying your mortgage and not being turfed out. but the accounting is not the same as the legal aspect of this, a loan has a certain value, call it what you want depending on circumstances but we’ll call it X, the actual property has a value of Y, and they are not the same, so the bank can forgo certain aspects of repayments on X by taking a holding in Y, you are talking about equity from the owners side, I’m talking about it from the bank side, the bank has the first lien based on the loan, but they could hold further rights based on the ownership of the asset. the difference would be the rate of compounding of the debt v.s. a straight moratorium.
MB’s piece in the tribune on this subject makes good reading:
tribune.ie/business/news/art … he-hit-fo/
I’m sorry, but there seems to be a fundamental misunderstanding between us on this. The banks in a traditional mortgage (i.e. a legal mortgage (unregistered land) or legal charge (registered land) as opposed to an equitable mortgage (rare now as they are very messy) own the land. The banks, after a notional redemtion period e.g. 6 months, own the land completely in law. At law they have all rights of ownership subject to the borrower’s equitable rights of:
- physical occupation, so long as they are likely to repay the loan during its term; and
- redemption, i.e. once the last payment on the loan has been made, the borrowers have the right to demand the ownership be transferred back into their name.
Supposing the bank want to give someone the benefit of 20k grace. Are you suggesting, from an accountancy point of view, that instead of changing the asset on the bank’s balance sheet from a loan of say 200k to a loan of 220k that they keep the asset of 200k but add a new asset of 20k “ownership” of the land? To my mind, that just sounds like a crafty way for the banks to pretend they are more solvent than they actually are.
The only other accountacy difference is the way in which the banks categorise their securities. For example, instead of saying 5,000 home loans are in negative equity, they could say that no loans are in negative equity, albeit that the actual amount owed by the borrower to the bank in aggregate secured by the property would amount to negative equity? Again, that just seems like denial.
How so? A moratorium is accounted for by a bank by notionally allowing arrears to build up on a loan (during the moratorium period) and then capitalising the unpaid interest into the principal. It is the exact same as an equity release, which is the exact same as a new loan. If you owe a bank 200k at 3% plus another 20k at 3% it is the exact same as owing them 220k at 3%, no?
i get the beneficial ownership and the other legal aspects, but this is about putting a scheme in place that gives people time to get back on their feet without compounding interest.
you’ve pretty much answered it for yourself!
assumption: interest… the bank could offer a low fixed or they could perhaps only charge cost of funds, this isn’t just about money, it will be political too. but again, nobody knows what’s coming, i’m just saying that something is.
So why go to all that trouble? Why not reduce interest rates across the board or give every mortgage a % of non-compounded interest? Better yet, why not make the banks reduce the amount that is actually owed?
All these schemes are just different (and increasingly more complicated) ways of saying let people off some of the debt. Not having a go at you personally, but it seems to me that these schemes are just a way to say that people are looking at the issue. We cannot avoid the banks earning less on each mortgage than they would with the current terms (assuming full performance). Essentially they all add up to the bank paying money towards mortgages, and unfortunately when the bank pay, the taxpayer foots the bill.
We don’t need tricks or gimicks, people are just going to have to pay their mortgage or default.
Having been out and about the last couple of days, like Newstalk up in Athlone (Would they ever stop phoning up that guy in Gort), I’m surprised nobody has mentioned the top fella off of EBS was going on about getting a scheme nationwide to allow lenders to park a proportion of the mortgage on ice so to speak. Freezing also the interest liable on that stake, there wasn’t too much detail obviously in a 30 second soundbite on the radio.
Also, apparently there’s some association for Irish Mortgage Holders (another new fangled society!), who were lobbying so that banks are not the final decision makers on whether a home gets repossessed or not, they want an independent analysis.