Strategic Default - REVISITED

Last nights prime time SCD bubble programme and posts on the PIN got me thinking again re the situation:

  1. If you are paying your mortgage, Irish banks are holding your loan at full value (regardless of negative equity)
  2. Over half the Irish mortgage book dates from 2006-08 - which means, including stamp duty is +50% out of the money
    (See page 53 of this report
  3. BOI has capital to only cover commercial. AIB has no tangible capital (mostly tax assets), IPBS + UB are on life support
  4. HOWEVER, they are getting ECB money @ 0% and open market at c. 2.5% (Draghi’s tracker back to them)


If you are a variable rate customer with material negative equity - stop paying your mortgage now and force the bank to at least give you tracker terms. They may complain but they will do it as they have the funding for it and must avoid taking the loan write down (which would dwarf the losses on the change in the annual mortgage).

Irish banking is about the illusion of the balance sheet while routing Draghi money into the economy. You can get the benefit of it now instead of paying higher rates for 5-10 years to line banks pockets while your tracker neighbour (with same negative equity) does better. You are going to get the benefit of it down the line anyway.

I would also bet that if you are a tracker customer with material negative equity that you will at least get away with c 2 years of payments before they start getting around to you and issuing orders. At which time, you just re-start paying the mortgage and they will stop hassling you (not worth the fees and your loan can be held at par again).

The idea that the leglislation is only in place now for banks to foreclose is an illusion (ask Tom McFeely). They have always had the power but they just haven’t the capital to take the losses on it. They still don’t and the Draghi money should incentivise them however to cut even more deals with struggling homeowners.

The only problem with the above strategy is that the banks will have to crush anyone who employs it in court. I presume the banks’ strategy will be to have enough court cases and repos to scare the majority into paying, but not enough repos that they have to realise unacceptable losses. The longer term strategy is to trade their way through this. But what happens with next year’s stress tests? Will there be a cosy consensus between the banks and ECB to maintain the illusion and avoid showing them to be bust, or will it be much more severe on the banks to prove to the markets that Europe is finally getting serious? And does the latter mean we end up with bail-ins for the Irish banks?

The trick is to be efficient with them and not be extreme about it (i.e. start paying 2/3 rds)
They will do the deal as it makes financial sense for them
In any event, they don’t want to rack up the legal fees (quite material even for small cases)
People who do it bald faced may get roughed up
However people who are reasonable / persistent / dogged will do well in my view

Or how about paying what you contractually agreed to pay?

But what about the deals the the banks are quietly cutting with others (this is going on a lot)?
What about the people who had a tracker but in the small print did not who have been nailed?

The Irish banks have been targeting older mortgages where the negative equity is smaller (even positive) and the small print of the contract allow them to increase the rates to subsidize the trackers?

Given the Irish banks have had all their contracts re-written (at every level), why shouldn’t all parts of society get to share fairly into this (and not just trackers)?

Don’t forget to add some consideration [something nominal] to make it legally binding - otherwise you’ve offered nothing for altering the terms of the contract and the bank can agree to less payment now -then ask for everything you missed in the interim at some later point.

Very good point

Grand - I’ll have the bubble era rents I paid in Dublin back please.

I have said it before and I will say it again, banks are cutting deals everywhere with difficult mortgage cases to avoid crystallising the loss (which equates to 50 years of interest in many cases). They are moving large segments of the book to effective 1-2% 200% LTV trackers (backed by 0% ECB money). Even if you only get one for a few years by being difficult, it is a lot of money saved. He who shouts loudest and is the most difficult …

Is the argument not circular?
If you stop paying, the banks can’t lend as all their capital is used up subsidising the “can pay but won’t pay” brigade.
If banks can’t lend, people can’t buy,
in which case, people can’t sell unless prices are reduced greatly to avoid the need for a mortgage.
Surely that will people back in negative equity and then left with higher taxes to repay the loans the government have to take to pay for bailing out the banks again. 8DD

Normally there is an aspect of truth to what you are saying except that there are various segments to the Irish mortgage book - some of which are getting nailed (post 2005 and not a full tracker to the yield has risen) some of which are doing really well (pre 2002, tracker now paying minimal interest). In this situation the more pressured segments who default or threathen can be accomodated by the others.

What is different in Ireland however is that we had a choice to either re-structure our system properly (i.e. restructure bondholders etc.) to right size all debts so that they are sustainable. The ECB refused but gave us almost unlimited amounts of 3 months rolling debt at 0% instead if we bore the burden.

For example, the decision not to sell Board Gais is related to this and Rabitt will use the ‘carry’ from the ECB to fill the budget gap. The problem for the mortgage holder who is getting nailed is that their ‘bailout’ was taken and given to other members of society.

By defaulting and getting your mortgage restructured to a 1-2% tracker at 200% LTV, you are reclaiming this (to the detriment of the other uses / projects / payoffs that that Pat Rabbitt and the others will otherwise put this ECB funding package to).

It’s still a can kicking exercise that passes the bill onto somebody else and that will keep the economy depressed far longer than it should.

+1 gaius

my ‘strategic default’ theme is a small rebellion against this !

observer35, you can stop paying your mortgage if you wantt but you’re not going to negotiate a tracker rate. There’s a process in place to restructure mortgages for people who cannot afford them. If you cannot afford your mortgage then you’ll have to corroborate your claim to have insufficient income to do so. If you can do this then you’ll be assessed for the many MARP restructure options, if none of them work you’ll be asked to sell or repossessed. Check out the revised CCMA, you’ll be deemed non-cooperative quickly enough. Don’t you think there’s people cheekily asking for write offs and rate reductions every day?

You do realise that if you don’t pay and let two years of arrears build up then there’s a higher balance outstanding and the overall cost of credit goes up? Why would a tracker payer stop paying their mortgage and start repaying two years later? Makes no sense. At best their arrears might be recapitalised and their repayments pushed up, they’ll only have cost themselves more money.

It’s the same as borrowing their repayments for two years from the bank at the very low tracker interest rate. Seems like a good deal to me if they wanted to borrow money now for 2+ years.

Self employed…doctor the income returns with the friendly local accountant (same as they do for the student grants), and hey presto, you all of a sudden on paper cannot afford the mortgage…so you go and get a deal.
Happy days…the PAYE worker who can just about afford their current mortgage picks up another bill…same old same old 8-

Always difficult to assess the self employed, you can only really go by notice of assessment, accounts if there are any, and look at bank accounts for credit turnover. None of the capital of the mortgage is ever going to be written off and you’re going to damage your credit record so it’s not really worth your while going to the trouble.

Oh, I think you’ll find a lot of them will think it is worth the trouble. Credit rating will be allright after x period of time…until then, the wife can apply for the credit. This is Ireland, if it can be scammed, it’ll get hammered