Inviting in new lenders prepared to take on exiting mortgages is the only way to solve arrears and negative equity problems, says Arthur Doohan
THERE is a simple way to eliminate most of the “negative equity” problem and a big chunk of the mortgage arrears problem, and it can be done at no cost to the taxpayer, the state or the banks.
Imagine for a moment that you owe someone €2,000. Imagine also, that they owe someone else €2,000 and that they have given that person an IOU for the amount. Lastly, you meet this third person and they sell you the IOU for, say, €1,000.
Now we all know times are tough and money is more scarce than before. If you go to the person you owe the cash to and say, “Listen, I haven’t got the €2,000. But I do have your IOU for €2,000 and I am going to give that to you and we’ll call it square,” is that fair? I think it is. Yer man would probably prefer actual cash, but he hasn’t lost anything other than some notional ‘opportunity loss’ that would come from having the freedom to decide what to do with the cash.
The question is; is this still fair if the amount is €200,000? I think it is because the principle is the same. What do you think?
The ‘bonds’ that we have heard so much about are simply the IOUs of the banks. I believe that the banks should be prepared to accept their own ‘markers’ in settlement of debts.
The bonds of the guaranteed institutions are trading at a deep discount. If you had a €200,000 mortgage and could buy one of their bonds for €150,000 you could repay the bank with its own bond. They would be no worse off having exchanged a mortgage with a ‘face value’ of €200,000 for a bond with a face value of €200,000.
Where would you get €150,000? If there was a lender willing to take on your mortgage at €150,000, they could buy the bond on your behalf and do a swap with the original lender and leave you owing only €150,000.
Seen in the context of the Irish domestic economy, overvalued and over-indebted family homes are a huge problem, but in an EU context then it is a very small problem and in a global context, it is a tiny problem.
The bulk of these family homes in negative equity are fully performant and the only thing stopping a remortgage to a new lender is the excess of debt over the valuation. There are plenty of lenders who would love to have an Irish mortgage portfolio at sensible valuations. I believe that they would come here if we opened the doors to this type of business. I also believe that a new lender with a clean balance sheet and a good Central Bank behind it would have no problem getting back enough of the deposits that left the country over the last 18 months.
If this was done on a sufficient scale, then there are a range of benefits that would follow. It would free up much needed cash that would be spent in Irish shops. It would put a floor under the residential property market. It would bring new lenders into the economy who would soon start lending to the SMEs. It would reduce the burden and size of the guarantee carried by the state and the taxpayer.
There are a lot of technical details that would have to be hammered out, but the numbers that I have seen say that the bulk of family home negative equity and about half of the mortgage arrears problems could be solved by this method.
The most important thing about this proposal is that, in these straitened times, it requires no ‘money down’ in advance on the part of the Government, the taxpayer or the banks. No Peter is robbed to make Paul happy. If no lender comes forward we will not be any worse off for trying.
This method has been reviewed by accountants, economists, lawyers and bankers. Not one has found a fatal flaw that prevents us doing it. Because it is ‘voluntary’ it does not upset the crowd in Brussels and Frankfurt. The bondholders will go for it because of the ‘bird in the hand’ principle.
It has also been reviewed by some of our civil servants in the Department of Finance. They told me they didn’t fancy the idea because “there was no advantage in it for the ‘pillar’ banks”.
If you disagree with that point of view then I ask you to register at the offsetdebt.net website and help me make your voice heard.
* Arthur Doohan is a former banker who traded and brokered cash, bonds and derivatives in the City of London for 15 years. He is the founder of the Offset Debt campaign. See offsetdebt.net
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