The idea that the economy is a morality play seems to be taking hold in some quarters. This is particularly the case when it comes to this term “strategic defaulter”. The strategic defaulter is someone who can pay his debts but decides not to. The central bank suggests that these defaulting characters lurk everywhere, sticking their two big delinquent fingers up at the banks.
Some people have suggested these new villains – the so-called strategic defaulters – may constitute as many as 30pc of mortgage arrears.
It is very convenient – particularly for banks – to paint the picture that there are good and bad borrowers, and bad borrowers are those that take the mickey while the good ones struggle with their responsibilities and go without to pay back debts.
It makes for good radio and can provide all sorts of fodder for the ham indignation fraternity that sometimes replaces economic analysis here. The truth is we have no evidence at all about this devious character, the strategic defaulter. We have no data on how many people in mortgage arrears are willfully not paying their debt. There are obviously some people like this, but the notion that the average person is a willful defaulter is mendacious.
What we do know is that arrears are rising and rising.
Many years ago, those of us who suggested that the housing boom was nothing more than a bubble and the collapse in house prices would leave a generation in negative equity unable to pay their massive mortgages were laughed at.
In fact, the few of us who publicly forecast this sorry predicament were ridiculed by the very bankers and the central bankers who are now suggesting the country is full of cunning strategic defaulters.
Our mortgage arrears crisis has deteriorated over the past year. Of those who own their houses and live in them, 13pc are now in arrears. If you take the 42,235 mortgage loans already restructured and not in arrears, the total ‘problem loans’ is close to 18pc of all Irish mortgages.
“In arrears” means people who haven’t paid the mortgage for more than 90 days – missing three consecutive months’ payments. There are an enormous amount of people and families in this position.
The amount of loans that are beginning to default but haven’t yet crossed the three-month threshold is another 6pc of total mortgages. Assuming that these people, having missed one or two months’ payments, are likely to miss three, the total arrears is set to increase.
The question is whether a significant proportion of these families are choosing not to pay because they couldn’t be bothered and they are not worried because the chance of getting thrown out of their houses is almost zero?
Despite what the central bank governor stated recently, there is no evidence that the number of people willfully defaulting is rising. It is a supposition, but nothing that we have any hard facts on.
In the US, where there is a more relaxed attitude to walking away from homes and mortgages, the estimates about the number of strategic defaulters range from 15pc to 25pc. It is hardly likely that this number could be higher in Ireland.
So what’s happening?
Rising arrears are much more likely to be the delayed effect of rising unemployment. People who lost their jobs initially tried to pay what they could in the expectation that they might pick up work in the future. It is only after this hope has been extinguished by a long period on the dole and dozens of rejection letters that the person stops paying – not because they want to default but because they don’t have any money.
So rather than the central bank pointing the finger at delinquent defaulters who are sitting on cash, it would seem more constructive for it to articulate a coherent economic strategy that might increase employment and reduce arrears.
Failing that, the central bank could push the banks to write down mortgages more quickly. This would reduce arrears because the monthly mortgage would fall for the debtor.
If our central bank doesn’t want to do this for fear the banks will not have the capital to absorb such writedowns, it might be better for it to go to the ECB and tell the troika that Irish banks need more capital and taxpayers and depositors don’t have any left to give.
Rather than doing that and having both the courage to stand up for taxpayers and display clarity of purpose, our central bank is taking the adolescently sneaky way out by suggesting that the debtors – rather than the lenders – are the problem.
In the real world, when a bank is faced with mounting arrears, the solution is called co-responsibility, where the debtor and lender sit down, negotiate, and both take a hit. For the creditor (the bank), that means accepting there will not be full payment, and for the debtor (the mortgage holder), that means sticking to the new terms. For the person that has a huge mortgage and has lost their job, it must be more attractive to give the keys back to the bank and both the bank and the person accept that there is no way of paying. In such a case, the mortgage needs to be cancelled and the house put on the market, leaving the bank to claw back what it can. This has to happen in extreme cases.
For the others, debt writedowns are essential. In the US, they typically reduce monthly mortgages by one-third, and the evidence shows that few default again. Defaults after a significant write-down fell from 42pc in 2009 to just 15pc in 2012.
The implication of rising arrears, falling income and a stagnant labour market means that rather than inflaming a nasty debate about the “character” of debtors, our central bank should be looking for solutions to an evident problem. If this means going to the ECB and the troika and looking for a new deal, well so be it.
It is not sustainable that defaults keep rising because hundreds of thousands of people will be locked out of the economy wallowing in a financial limbo. Hope and a belief in the future is what gets most of us out of bed. If the negative equity generation loses hope, the political ramifications could be incalculable.
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lovely morning in paradise
Most people do the best they can.
Bankruptcy laws need radical amendment to allow a finish with the old and a new start. Debt is strangling the total economy world wide.
Tony, Have to disagree with you on that, bankruptcy only facilitates a massive transfer of wealth in the wrong/traditional direction, we need some out of the box thinking for solutions and strategic manuovering of Banks and Government into weaker positions vis-a-vis distressed family home mortgages at least, and maybe distressed SME’s to protect jobs, some sections of concerned entities are working on this but I fear they will be too late… here’s hoping, but it has to be a solution which addresses all concerned equally, I have always maintained that the ordinary distressed family home owner should not bear the… Read more »
Good Morning David and all the regular contributors to this wonderful forum. Today is the last comment I shall make, goodbye all. There cannot be drug dealers without drug users. Thus to blame the crisis on the banks is simply facetious. The people who are now in negative equity bought in at the top of the madness. They were completely living in a state of self-delusion and overwhelming greed. As I have said on this forum before I had my stag party in the “Snail Box” with 4 childhood friends. I did not go on a mini-European tour lasting 3… Read more »
If you pardon the expression David, but you might as well be “pissing against the wind” as trying to suggest that the Irish Central Bank is capable of anything creative!
Up to the most recent appointment of Honohan as Governor of the Central Bank (who was an external academic), all previous incumbents’ or some might say incompetence of this position were indoctrinated in none other than the Department of Finance, a Department I might add that is at the heart of everything that is wrong and rotten with this country.
It is only when the gombeens that run the country realize that it is not in their own self interest that you will see write down of unsustainable debts.That screeching noise that we will all be hearing before to long is the sound of the barrel bottom being scraped….
It’d be tempting to use intemperate language and to say ‘it’s a financial war’ between debtors and creditors. Instead, let’s use calmer terms. It’s a ‘power struggle’. On the one hand, the creditor banks want to be paid on time, in full, because any other solutions, from write-downs to extend-and-pretend, leaves then with big holes on their balance sheets, holes they can’t adsorb. Some poster on this thread posted a link to Max Keiser and Reggie Middleton discussing the probable collapse of the Irish banks, and subsequent bail-in of depositors. Here it is for those who missed it. Ireland chat… Read more »
Two things about this. 1. Debt relief while keeping the asset the debt is secured against is nothing more than wealth transfer from the solvent to the indebted. 2. Look at what MABS are saying about the age profile of the people coming to them with arrears problems. Over 60% of them are in the 41-65 age bracket. http://www.citizensinformationboard.ie/publications/social/downloads/MABS_Clients_and_Mortgage_Arrears_Jan2013.pdf Their comment is as follows: “It is reasonable to assume that this cohort (those aged 41 to 65) should be approaching the end of their payment term, or in some instances should have paid their mortgage, in full.” That’s our landlords… Read more »
Economics is far more than a morality play. If we’re to take money seriously then economics has to be moral. At the moment the banks are not foreclosing on people who bought houses during the boom. Despite the fact that many of them are not paying their mortgages and that many will never (sadly) be able to pay their mortgages. This, in effect, is a state run cartel restricting houses coming onto the market and keeping house prices higher than they would otherwise be. That has an immoral impact on anyone renting or looking to buy. Whatever the situation for… Read more »
Eireannach, Pushkin, what you say in regards to people who bought into the boom though logical, flies in the face of reality. Psychology tells us that most of us become caught up in whatever is the current reality, be it Tulip Mania, co-operation in the murder of Jews and other undesirables during the 3rd Reich or our own property & stock market bubble. Indeed were it not for the fact that people are ready to soak up whatever ideas or “truths” are thrown at them, there would be no such thing as private media because they simply would not be… Read more »
@ David “It makes for good radio and can provide all sorts of fodder for the ham indignation fraternity that sometimes replaces economic analysis here.” (and thousands of words in the print media too)WE TRY OUR BEST HERE TOO! ———————————————————————————– It is mentioned that MABS gets calls from mostly over 40s those people you have previously mentioned are least likely not to need help. ‘Ham and cheese indignation’ —————————————————————————————- Ireland, as you well know, is not the USA and is not a reserve currency, Ireland cannot “print money”. To do what you suggest we need sovereignty… “An economist has 101… Read more »
Master of the High Court says “30% of all mortgages are void by uncertainty” and the Banks had better come to terms with the fact they they have no security in those cases. Now it doesn’t mean the bank won’t get paid but it does put the borrower in a stronger bargaining position and that is great news….
Excellent stuff with evidence supporting the thrust of the article. Today you proved you are on the side of the people and I am proud of you.
Found this 15 year old post: “a bank takes deposits, then loans out all but a fraction of that money, the banking system as a whole takes more deposits based on this “new money” in circulation, all but a fraction of that “new money” is loaned out, etcetera, etcetera. But it is never possible to pay out anything but a small fraction.” http://www.siliconinvestor.com/readmsg.aspx?msgid=5753608 The banks are now skint. Why did they lend out so much of other people’s money? Did people force the banks to take such risks? Or were the banks so arrogant they thought found a way to… Read more »
Giving that the banks are the biggest and most successful ‘strategic defaulters’ in the history of civilization the phrase ‘…kettle calling pot black’ comes to mind.
Banks have a built-in corporate incentive to push the borrower into default. Step.1. The borrower signs a loan agreement with the bank. This loan is placed on the banks balance sheet as an asset. In the VERY small print the borrower gives the bank power of attorney, with this power of attorney the bank issues a prospectus onto the stock market to sell the borrowers loan agreement ( loan note /mortgage deed) through securitisation. Through securitisation the bank sell all Right, Title, Interest and benefit to the borrower’s loan. Depending on the credit rating of the borrower at the time… Read more »
If the banking kleptocratic eunuch jelly bells get to go again with another ponzi property bubble when their press-gang fox hunt of the strategic defaulters gets really going breaking family homes up, sending children and parents into a penal limbo will the media simply go along with it as if its all an accident again?
“The problem is not whether the borrower has a 4 X 4 in their front garden.
Grow up and deal with the sick reality of the unethical and immoral banking.”
Clare Leonard
I think the article demonstrates the impossibility of resolving the mortgage arrears problem under the present system. For a start, the mortgage arrears problem was started because banks create the money the lend; yet they only create the principal of each loan but expect the principal plus interest back. It’s systemically impossible for all loans to be repaid not matter how prudent the banks may have behaved. But just as every euro has a matching debt, every bank liability (our current accounts) has a matching asset (our debts to the banks). If people default, the banks’ assets go down and… Read more »
Negative equity generation needs hope . Who pays for it ? Do borrowers continue to be blind sided by their lenders while the bank park their loans and make a profit subsequently with third party investors while the borrower still suffers but this time in a captured state of a new Taliban marriage with the lender .Are existing borrowers wearing burqas to hide something ? It is time that borrowers should rally and appoint a leader to negotiate before some legless politician acts as a pretender to their lost cause . Is the Financial Regulator an IMPOSTER ? Is he… Read more »
Market Crash is highly likely between now and November. http://blogs.marketwatch.com/thetell/2013/08/09/marc-wolf-faber-still-thinks-an-1987-style-crash-is-coming/ Ireland’s current “recovery” is hanging by a thread. (Does it feel like as if we are in a recovery, when the main streets of most Irish towns included boarded up shops ? ). A key part of the “recovery” is the level of inward investment from US multinationals, and the consumer market in Britain. And these are both vulnerable to a stock market crash. The D4 banks are still is an ugly state. And on top of this Australia has peaked out, and is heading for a massive thud to… Read more »
My interpretation of David’s argument is that the economy is suffering because too many economic participants are spending too much of their income on mortgage repayments rather than in the domestic economy, which in turn destroys domestic jobs which in turn increases the overall destructive ratio of income-to-debt. To break this vicious circle there must be debt restructuring for our indebted economic participants so that their income is freed up to spend in the economy which will create jobs and reverse the spiral. But surely this argument, would logically follow, that going forward, the income-to-debt ratio must be universally capped… Read more »
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Little boxes on the hillside, Little boxes made of ticky tacky, Little boxes on the hillside, Little boxes all the same. There’s a green one and a pink one And a blue one and a yellow one, And they’re all made out of ticky tacky And they all look just the same. by Malvina Reynolds; copyright 1962 Malivina Reynolds wonderful song never mentioned Price /Location/Growth… You can’t be selective about parts of an economy when the foundation of the economy is flawed. I have read here that the definition of insanity is doing the same thing over and over again… Read more »
David McWilliams, There is strategic default in Ireland. The figures are clear about it. There has been a mess in the banking system, with them seeking money back from first small businesses and then the government. More critically perhaps there is a huge delay in the court system, and has been since the credit crunch in 2008. As a consequence many people have learned that there is no consequence for not paying. Bills wages redundancy and for houses. Solicitors in particular are aware of it. There is a shunting of defaults along the line. Some are deliberate, some are involuntary.… Read more »
With reference to Joe R above, The “moral hazard” started when the banks were bailed ‘a strategic default’, as a result the majority of Irish people would rightly rage if people were evicted on mass, the judges are Irish people too. The government is fully aware of the reaction there might be to mass evictions and “moral hazards”. So nothing happens David McWilliams is suggesting another “moral hazard” the consequences of which will be far reaching. It is not the leaking roof that needs replacing there no point in replacing the roof if the foundation is unstable, we need to… Read more »
Reading the comments above, I do see a lot of unity albeit from both sides of the camp as it were. Basically we all want it to be better. But we need a more unified narrative that puts everyone on the same page. We are all people – just with different views of the same thing. Winning arguments is pointless. Winning knowledge or an insight which can unify thinking is what I love to see emerge (fat hope!) The banks are a problem…whether it be due to malice, amorality, incompetence or the plain facts of life relating to the dynamics… Read more »
This ‘government’ continue to fall about the ground laughing at their ongoing tactics to split and turn the citizens of this country against each other… but they won’t be laughing for very long! There is no doubt that they grasped the ‘crony capitalism’ mantle and took it to another level. As for the foreclosure faucet that is currently in drip drip mode… oh now move it on to a slow trickle at first, not enough to cause outright public uproar but a contained insurgency. A very delicate balancing act& i don’t think ol’ noonan is exactly a high wire officianado… Read more »
Pat Flannery,
There is a planned mortgage strike campaign underway, whether it will have effect or not remains to be seen, I support it wholeheartedly as a mechanism to bring the Bank’s and Government to the negotiating table in relation to distressed mortgage’s,
https://www.facebook.com/pages/Mortgage-Strike-Ireland/185009315001022
Grey Fox,
Earlier on this thread, you claimed that I believe the spin about strategic defaulted.
Now, you have posted a link to a FB page of a mortgage strike campaign, aimed at ‘bringing the banks to the negotiating table’.
Is such a strike not the perfect dictionary definition of ‘strategic default’?
By B Lucey: We know little about them so stop being meme to those in mortgage arrears :
http://brianmlucey.wordpress.com/2013/08/10/we-know-little-about-them-so-stop-being-meme-to-those-in-mortgage-arrears/
Clare Leonard & Grey Fox: Having read the documents you have provided it seems to me that the reason the sale (of bundled loans into the securities market) is not put on the bank’s balance sheet as a liability, may be because of a hidden buyback agreement. If I sell my car to you with a guarantee to buy it back whenever you ask me to, I really haven’t sold it to you at all. I have merely lent it to you. Therefore before I make up my mind on this Irish situation I would need to either see a… Read more »
P.S. This has to be the most awkward site I have ever posted on. DMcW?
“Historically, the most terrible things – war, genocide, and slavery – have resulted not from disobedience, but from obedience.”
? Howard Zinn
The converse is also true
Disobedience can lead to better laws eventually
Hi Clare, Thanks for the link. You really are a great researcher. I very much appreciate it. It appears from a quick reading of IAS 39 (Revised) that all the de-recognizing tests apply at both consolidated and entity level (I assume they are referring to the consolidation of the SPV) and that if the entity retained substantially all the risks and rewards it must continue to recognize the asset i.e. it cannot offset it on its balance sheet with a “liability” entry. The facts as we know them then would point to a hedging/risk management agreement between the originator and… Read more »
Hi there, Within this podcast Bill Black and the speaker discuss amongst other things the anglo tapes, mouths agog… Plus the snippet circa 18.00 mins about HSBC and their valued customers, mexican drug cartels tailoring exact box dimensions to fit the teller’s window while making their ‘lodgements’ to speed up the process! Ah sure no time to wait in line… poor fellas. :O It’d be priceless if it wasn’t so serious. The tide is going out on the global banking system and the majority of participants seem to be ‘sans shorts’ Utterances and pithy soundbites about restoring Ireland’s reputation from… Read more »
To Clarify
Their are no research ,facts or any evidence to substantiate the term or actions of alleged “Strategic Defaulters”
Media repeated this term which has been used by banks to turn people against each other.
and its working very well as is evident by all the posts above me.
Well done Financial Sector,Clearing House and Department of Finance.
Barry Callaghan
Government warned to ‘prepare for war’ over pensions cut
http://www.independent.ie/irish-news/government-warned-to-prepare-for-war-over-pensions-cut-29489715.html
Be Advised
“To the posters who don’t want to bail out their Neighbour”
You are already bailing out Failed Banks,Insurance Companies and our Government.
Whether you wish to acknowledge this fact is irrelevant.
Trying to practice Humility,Compassion & understanding is a difficult task and one which should be practised every day.
Barry
Old Woman of the Road
O, to have a little house!
To own the hearth and stool and all!
The heaped up sods against the fire,
The pile of turf against the wall!
To have a clock with weights and chains
And pendulum swinging up and down!
A dresser filled with shining delph,
Speckled and white and blue and brown! ……
By Padraic Colum
O, to have YOUR little house… The mission statement of every bank investor
Joe R, I take your point on securitisation but the fact is, Securitization facilitated the building of residential units in Ireland at a rate of 70-90,000 per year from 2003 – 2007, they loaned the money, sold the loans, loaned the money, sold the loans…again and again, in doing so they took responsible lending out of the equation and got drunk on their own success, killed the goose and the Irish economy in the process and these are the people/companies who put themselves out there as the consummate financial professional, as pillar banks, they had a duty of care to… Read more »