IMF urges debt forgiveness for indebted mortgagees

pqrdef

The_White_Horse wrote: »

You cannot punish the hard working and prudent to assist the rest.

Since when?

A society that really did look after the hard-working and prudent would be very different from what you imagine.

ILW

pqrdef wrote: »

Since when?

A society that really did look after the hard-working and prudent would be very different from what you imagine.

Good or bad?

Graham_Devon

Bit more on this now....

The IMF report stated that restructuring of household debt "can significantly reduce debt repayment burdens and the number of household defaults and foreclosures".

DCU senior economics lecturer Tony Foley said a relief scheme could mean a homeowner's mortgage being written down to be more in line with the value of the property. "The IMF argument is that if we transfer money from people who are better off to people who are worse off with negative equity and such like, we will improve expenditure in the economy."

So it seems the idea would be that any homeowner in negative equity would get their debt written off to a point where that are even again. Would obviously reduce the monthly payments.

It acknowledged the pitfalls in that one section of society would have to subsidise another, potentially causing friction.

Potentially?

The bank of Ireland has already started to treat owner occupiers as special cases, offering business loans at a reduced rate to normal, so long as they are owner occupiers.

"The decline in economic activity is too large to be simply a reflection of a greater fall in house prices. And it is not driven by the occurrence of banking crises alone," they say. "Rather, it is the combination of the house price decline and the pre-bust leverage that seems to explain the severity of the contraction."


Because of this strong relationship between the debt burden before a crisis and consumer behaviour in the years afterwards, the IMF says governments should consider intervening to help households write off or restructure their mortgages.

pqrdef

Graham_Devon wrote: »

The IMF argument is that if we transfer money from people who are better off to people who are worse off

What are they, communists?

Graham_Devon

Dunno, but what they don't say is who they will be transferring the money from. Just say the "better off".

So would it be raiding peoples savings? New higher tax rates? A completely new "bailout tax" of some sort applied to certain people in soceity to give to those who took on too much debt?

Not anywhere does it mention banks or lenders taking any losses.

ash28

Graham_Devon wrote: »

Dunno, but what they don't say is who they will be transferring the money from. Just say the "better off".

So would it be raiding peoples savings? New higher tax rates? A completely new "bailout tax" of some sort applied to certain people in soceity to give to those who took on too much debt?

Not anywhere does it mention banks or lenders taking any losses.

They do give several examples of how such schemes have worked in the past - whether successfully or not.

The US during the Great Depression had such a scheme and cost was born by the government and the lenders. They did this by extending loan terms and/or reducing interest rates for the mortgage payer and they also wrote some debt off - they would write debt off to bring the mortgage holder into an 80% LTV position.

Iceland - they used 3 (well 4 but 2 of them are almost identical) methods.

Debt servicing (for loans/foreign currency mortgages) reduced though extension of term and restructuring - cost born by gov't and lenders

Debt servicing scaled down to ability to pay(debt scaled down to 100% of collateral value if remain on reduced payments for 3 years - cost born by lenders.

Mortgage write down for households with 40% or greater negative equity - debt reduced to 110% of pledgable assets - cost born by the lenders.

Participation in the mortgage write downs were voluntary on the lenders part but they did sign up to it because the written down value was greater than the recovery likely through mortgage payer bankruptcy.

In reality the cost was born indirectly by foreign creditors - the 3 banks that were formed after the banking collapse aquired the loan books at "fair value" that took into account the need for write downs.

Hungary
With the depreciation of the Hungarian forint after the start of the global financial crisis, concerns that the rising debt service was undermining private consumption compelled the authorities to help foreign-currency-indebted households. This was without consultation with the banks.

During a 5 month window banks were forced to allow customers to repay their mortgage at a preferential exchange rate of about 30% below market rates. All losses born by the banks.

Columbia
In 1999 Columbia suffered from high interest rates, a housing market collapse and high unemployment. Defaults increased - many borrowers took their case to court and in the end the constitutional court issued a ruling that mortgages were no longer full recourse and mortgage holders now had the option of walking away from their mortgages - the court also ruled that capitalisation of mortgage interest was illegal.

This triggered massive strategic defaults on mortgages and the country suffered from a huge credit crunch - funnily enough.

I don't think this country is in quite the same position as Repuplic of Ireland where property values have fallen on average by just over 50% (up to now) and through job losses etc some people just aren't in a position to repay mortgages. And perhaps never will be again. Some mortgage write down might be beneficial in the long run.

Would I be happy to see it happen here? No, I don't think I would. But I can understand why it would be an attractive option for some governments to help get the countries out of a prolonged slump.

Here is the report for anyone interested.

http://www.imf.org/external/pubs/ft/weo/2012/01/pdf/c3.pdf

N1AK

pqrdef wrote: »

Option 3: State takes over house and mortgage and rents house to occupant. No reason the State should help people to acquire equity in property.

I'd prefer the state to get involved in a slightly less extensive manager. Negotiate a interest only agreement with the bank and cover it until the occupier can pay the mortgage again. Money spent doing this would be a low interest loan paid back by PAYE.

It would be interesting to see what would happen if the government proposed that instead of helping with mortgages it would take over mortgages on properties that were to be repossessed and rent them to the current occupier. I think it would get some pretty negative press.

pqrdef

N1AK wrote: »

I think it would get some pretty negative press.

I expect so. But why should people be able to stooze other people's money to build up capital if they can't even pay the interest on what they're borrowing?

The first requirement for mortgage debt forgiveness has to be that borrowers don't get to make any profit on the house, now or later.