All about banks and mortgages…

Posted: March 3, 2011 in news
Tags: , , , ,

While driving my kids to school this morning I listened to David McWilliams talking on Newstalk radio. David was talking about the ECB/IMF “bailout” and about the growing mortgage crisis in Ireland. Now I have always respected David for his frankness and clearcut analysis. However this morning I disagreed with the duality in his argument.

Here’s why:

On the ECB/IMF “bailout” he argued that this was not a bailout and that we as a population could never repay this loan. The interest payments would eat up 10% of our GDP and anyone considering this as something that would constitute a solution to our problems was wrong. He went on to state that a default was coming down the line and that it would be better to enter into a structured default now rather than have a systemic collapse further down the line when everything spins out of control and we have no choice in what happens. Furthermore the bondholders, who are the ones who benefit from this bailout, wilfully & knowingly bought these bonds hoping to make a high profit. They were also aware of the risks associated, or they should have been, and now it was time for them to be made face the risks of this type of business.

So far I agree with him.

He then went on to say that the best way to deal with the impending mortgage crisis is to create some sort of “debt forgiveness” scheme. One where people with negative equity would somehow not be held responsible for the chunk of money owed above the value of their house. People could not and should not be forced to pay their mortgages in full.

That’s where I disagree. Compare the first argument to the second;

  1. I am a bondholder and I buy quantities of bonds in a risky market hoping on a high return. The market goes the other way and I now have to face the truth that I am losing money.
  2. I have bought a house on a mortgage, as the value of my house increased I re-mortgaged it counting on the value to go up and up. Now reality has struck and the value of my house has plummeted (to a realistic value) and the amount of money that I owe is more than the property is worth. Or even better; I have bought a string of properties, all on a mortgage, have rented them out and was counting on the rent to pay the mortgage. I now have no tenants or tenants at a greatly reduced rent and owe more on the properties than that they are worth.

In McWilliams argument the party in the 1st argument should be forced to face the flip-side of their actions while the party in the 2nd argument should not be made to face the results of my risk and should get a huge chunk of my debt written off.

Not exactly fair in my opinion……

 

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Comments
  1. liam says:

    Hi Evert,

    I’m not in the least bit interested in defending McWilliams, hes a big boy and can look after himself, but I think you are being a tad unfair to the concept which is the subject of your post. So three points:

    1: Is there really a contradictory duality at work here? Its perfectly reasonable to say that we won’t pay for the losses of those who invest in Irish banks or any other private enterprise. How we deal with people who have mortgages on the homes in which they live is in my view a quite different matter.

    2: Unfortunately I didn’t hear the segment you are referring to, but I do think your example number two is somewhat selective: that scenario constitutes a business and should face the same risk/reward arrangements you suggest in example one, I’m sure you will agree.

    I’d offer a slight different scenario, which perhaps you haven’t accounted for here:

    “I bought a house which was sold to me by a bank that was more concerned with growing market share than examining my ability to repay. Despite that, I made the payments, but am now in negative equity and stuck in a 2 bed house in Ballygobackwards, a mere two hour commute each way to my job which is under threat and in which not only have I not had a pay rise in three years, but am paying out even more in taxes, and if fuel hits €2 a litre, I go over the edge financially”.

    3: The concept of debt forgiveness here does not necessarily mean writing off of debts. As things stand those who are in arrears have the following choices:

    – Continue to pay, but don’t eat
    – Accept repossession, move out and still have to pay their debt in full and on time, or go in to Ireland’s 12 year bankruptcy process. In the mean time, perhaps the house lies idle since the bank can’t sell it even at a steep discount.
    – Flee the country

    Debt Forgiveness encompassed the idea of adding another option. Or two. Such as agree to reduce significantly the payments on the house, in return for which the bank gets a share in the future sale price of the house? Your a bright lad, I’m sure you can come up with other ways for people to allow pay their debts without having to force people out of their homes.

    I don’t have access to the mortgage statistics, and the rates of default it seems are largely based on speculative interpolation of limited data. However, I would not be in the least bit surprised to find out that the majority of those who are in negative equity and in mortgage arrears are first time buyers. Its always those at the bottom of the pyramid that pay when a Ponzi scheme collapses.

    Whatever you ideological perspective on people who got on the property ladder during the boom, it is hard to argue that forcing thousands of people to abandon their financial hope for the future is reasonable and in the interests of anyone.

    Cheers,
    -Liam.

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