Lenders move to offer "Negative Equity Loans"

seamus

http://www.independent.ie/business/personal-finance/homeowners-to-get-negative-equity-loans-2228649.html

Rather than paste the whole article, the basic points are that:

Irish Nationwide, BOI and PTSB are set to introduce 125% mortgages (or possibly more) to allow people to transfer negative equity from their current home to a new one.

It's expected that it will be offered on a per-case basis for people who can both afford the repayments (obviously) and who have a genuine need to move.

Ulster Bank and ESB already offer these products on a limited basis.

---

This is the kind of idea which has been kicked around here for a while. There are obvious problems with it:

- You're allowing people who are already on the wrong side of the balance sheet (i.e. liabilities > assets) to contine to borrow.
- You risk reigniting the subprime lending which lead us to this crisis in the first place: > 100% mortgages aren't a big deal when the borrower can afford it long-term. It's only when iffy borrowers end up in the mix that we're in trouble.

It does however, solve the issue with people "stuck" in negative equity in homes which are unsuitable for their needs. Although there are claims that it risks re-inflating the property bubble. I however believe that it could hasten the crash and bring about a quicker end to it;

That is, we see at the moment there are a lot of sellers who are reluctant to drop their prices. We have to assume that anyone selling now, *needs* to sell (otherwise you wouldn't) and that their prices are staying static because this reflect the minimum that they can accept before they get into negative equity territory. And since you can't sell a house in negative equity, the house prices are still being slightly inflated artificially by this.

However, if it's possible to move on a negative equity loan, these sellers are now free to sell for the best price they can get as opposed to the minimum they can afford, and we should see a further slump in house prices over the 6/12 month period that these loans come in.

Interestingly, the 125% figure quoted actually creates a floor in how much a couple can borrow. That is, if they're €50k in negative equity with a mortgage of €400k and decide to move somewhere much cheaper (say €150k), they won't be able to because they'd need a 135% mortgage. Though I'd say the actual percentages won't be hard-and-fast.

It'll be interesting to see the rules that banks build up around this. I'd be surprised if those availing of these loans will be allowed to change homes very often and will probably be locked into the lender at a slightly higher rate.

bobbysands81

One of the main reasons for unsustainable price inflation in the first place was cheap and available credit.

Why have we not learnt from our mistakes?

seamus

bobbysands81 wrote: »

One of the main reasons for unsustainable price inflation in the first place was cheap and available credit.

Why have we not learnt from our mistakes?

It was simply the availability of the credit which caused it - indiscriminate lending with no long-term view on it.

There's nothing wrong with lending and there's nothing wrong with cheap credit. There's no reason to believe that negative equity loans will fuel a price bubble unless they're offered to anyone and everyone buying whatever kind of property they like.

"Learning from our mistakes" will be up to the banks regulator to ensure that the banks are consistent and prudent in their criteria and lending.

the_monkey

bobbysands81 wrote: »

One of the main reasons for unsustainable price inflation in the first place was cheap and available credit.

Why have we not learnt from our mistakes?

exactly , this is crazy !!

seamus

seamus wrote: »

"Learning from our mistakes" will be up to the banks regulator to ensure that the banks are consistent and prudent in their criteria and lending.

I should add that if the regulator hadn't been replaced, I would have said that this scheme would have just become another half-arsed abomination. Now I think it's only 90% likely to become a half-arsed abomination which will bite us in the ass in 10 years.

20goto10

I don't see what the problem is here. They're in negative equity anyway, this allows them to move (which until now was impossible) and it's obvious they will have to take their outstanding mortgage with them and add it to the new mortgage. Where is the problem in this?

bobbysands81

20goto10 wrote: »

I don't see what the problem is here. They're in negative equity anyway, this allows them to move (which until now was impossible) and it's obvious they will have to take their outstanding mortgage with them and add it to the new mortgage. Where is the problem in this?

Think of it this way...

Person buys House 1 for 500k - they need to move and they sell for €250k.

Said individual then buys second house for 350k - what happens if that house is only worth 250k in a couple of years?

Good money ends up chasing bad money and the individual is 350k down as a result. There's a lot of danger here and this could be an attempt by the banks to stave off the American way of handing in your keys if you can no longer make your payments with no further recourse to the individual.

D3PO

20goto10 wrote: »

I don't see what the problem is here. They're in negative equity anyway, this allows them to move (which until now was impossible) and it's obvious they will have to take their outstanding mortgage with them and add it to the new mortgage. Where is the problem in this?

its all about exposure. This works well if somebody was downsizing as it would reduce the exposure in a falling market.

However this would appear to be aimed at people upsizing. So imagine couple A is 150k in neg equity on a 2 bed house they paid 300k for.

They sell for 150k carry 150k neg equity into the new house. They buy a 4 bed as they want to grow their family for 300k and now have a mortgage of 450k not working out 92% ltv too much hassle) Lets assume the 4 bed and the 2 bed continue to fall in value equally by 20% before we hit the bottom

so before upsizing this couple would be in 180k neg equity after upsizing the couple are 210k in neg equity. The exposure on a default is now greater for the bank.

Not an issue if they dont default but why would any bank in their right mind want to increase thier exposure when their technically insolvent as it is ??

fontanalis

Where will their NAMA be when they realise they've dug a deeper hole for thelselves?

HardyEustace

Won't this cause apartments to slide even further in value? The people that seem to be most effected from a family point of view are people that bought a very overpriced apartment with the whole "make a shed load of money on it and buy a house in a few years when we want kids".

They're now trapped in shoe boxes which they feel are not suitable for raising families (and yes, I know that lots of people raise families in apartments etc. - separate topic) and are very anxious to "trade up".

Whereas, from listening to others, people in houses, however small, can either 1. build an extension 2. don't feel as panicked about raising a family in the small house.

blue_steel

Banks don't do anything that isn't in their own interest. If they are considering this move its only because they think they will make money from it.
The last thing lenders want is large amounts of people saying "feck this", handing the keys back and leaving the country. Being in NE by 20 or 30 grand is one thing but anyone who finds themselves down by a couple of hundred should do just this.

D3PO

blue_steel wrote: »

Banks don't do anything that isn't in their own interest. If they are considering this move its only because they think they will make money from it.
The last thing lenders want is large amounts of people saying "feck this", handing the keys back and leaving the country. Being in NE by 20 or 30 grand is one thing but anyone who finds themselves down by a couple of hundred should do just this.

Obviously banks dont do anything that isnt in their interest. Doing this is likely to inflate house prices whilst having a detrimental impact to apartments. Banks considering this are likely to be those that have a heavy mix of housing in their mortgage portfolio.

As for your other point its just illogical. Your saying that people that cannot upsize but are keeping up with their repayments will just hand keys back. There is no logic to that.

dan_d

HardyEustace wrote: »

Won't this cause apartments to slide even further in value? The people that seem to be most effected from a family point of view are people that bought a very overpriced apartment with the whole "make a shed load of money on it and buy a house in a few years when we want kids".

They're now trapped in shoe boxes which they feel are not suitable for raising families (and yes, I know that lots of people raise families in apartments etc. - separate topic) and are very anxious to "trade up".

Whereas, from listening to others, people in houses, however small, can either 1. build an extension 2. don't feel as panicked about raising a family in the small house.

In all likelihood yes....and those townhouse things aswell.
I remember someone telling me once that with the property crash in the UK, apartments were the first and worst affected; they're not a long term investment to live in.

blue_steel

D3PO wrote: »

As for your other point its just illogical. Your saying that people that cannot upsize but are keeping up with their repayments will just hand keys back. There is no logic to that.

It's illogical to spend 30 years repaying a loan on an asset that isn't worth anything.

D3PO

blue_steel wrote: »

It's illogical to spend 30 years repaying a loan on an asset that isn't worth anything.

if its not worth anything then by definition its not an asset. See I can be pedantic too.

Now how about we get back on topic and you explain why somebody who can pay their mortgage would hand back the keys.

fontanalis

blue_steel wrote: »

It's illogical to spend 30 years repaying a loan on an asset that isn't worth anything.

It's illogical to sign a 30 year contract if you can't do basic maths.

Sarn

So how would this work?

2008 - Bob and Jane goes in to a bank on a salary of €60k are offerred a 100% mortgage at 8 times their salary i.e. €480k for a 2 bed apartment.
2010 - now €60k in negative equity. Want to trade up to a 3-bed semi. Are offerred 4.5 times their combined salary of €60k i.e. €270k. Add on the negative equity and I can't see how this would work. Either salary multiples go out the window again or the overall loan will include the negative equity which means they can afford a house worth €210k.

Or is it a case that the original €480k loan is transferred over minus the €60k to allow them to buy a house worth €420k (maintaining the reckless salary multiple) and giving them an advantage over someone who is not transferring their mortgage/first time buyer? I doubt it.

I realise that people could be moving to cheaper areas, thus getting better value for their money and that this is supposed to be for a select few (as per 100% mortgages back in the day). Unless someone has had a significant increase in their salary they definitely won't be staying in their current locality.

mdebets

blue_steel wrote: »

Banks don't do anything that isn't in their own interest. If they are considering this move its only because they think they will make money from it.
The last thing lenders want is large amounts of people saying "feck this", handing the keys back and leaving the country. Being in NE by 20 or 30 grand is one thing but anyone who finds themselves down by a couple of hundred should do just this.

That might have been true before NAMA, but these days the banks knw thath NAMA 2.0 will be along if they **** up again.
So it's a win-win situation for them they either make money from the borrowers or sell their losses to NAMA 2.0.

Eglinton

Who's supposed to buy the apartments/small houses these people are trying to off load?!?!!:rolleyes:

20goto10

bobbysands81 wrote: »

Think of it this way...

Person buys House 1 for 500k - they need to move and they sell for €250k.

Said individual then buys second house for 350k - what happens if that house is only worth 250k in a couple of years?

Good money ends up chasing bad money and the individual is 350k down as a result. There's a lot of danger here and this could be an attempt by the banks to stave off the American way of handing in your keys if you can no longer make your payments with no further recourse to the individual.

Unless you're suggesting banks should be banned from giving mortgages in a falling market then I really don't see what your argument is here.

fontanalis

Eglinton wrote: »

Who's supposed to buy the apartments/small houses these people are trying to off load?!?!!:rolleyes:

People wanting to get on the ladder.

ei.sdraob

my reply on the subject from this thread

ei.sdraob wrote: »

Yes this is a good idea

since it demolishes the main argument the Matt Cooper's "NAMA for Reckless & Gullible Fools" brigade has

that people in negative equity cant move home if they need to get job etc ....



aside: funny how negative equity is not a problem for people who get a car loan for a new car and are straight away in "negative equity" by few grand the moment they put a number plate on and their "negative equity" grows over time ... oh i forgot "house prices can only ever go up"

blue_steel

D3PO wrote: »

if its not worth anything then by definition its not an asset. See I can be pedantic too.

Now how about we get back on topic and you explain why somebody who can pay their mortgage would hand back the keys.

Their ability to pay the mortgage or not is irrelevant. I'd hand back the keys on principle. Why would someone stump up around 50% of their monthly income for a property they could now get for 15% of said income?
And don't say that they've taken the loan and have responsibilities yadda yadda yadda because everywhere they look they see politicians, bankers and developers getting a way out of their responsibilities and bad loans.
Only a fool would feel any sense of accountability for money owed to an Irish bank. Personally I'd rather walk away, work illegally somewhere like the States and let them sing for their money.

blue_steel

fontanalis wrote: »

People wanting to get on the ladder.

LOL

D3PO

blue_steel wrote: »

Their ability to pay the mortgage or not is irrelevant. I'd hand back the keys on principle. Why would someone stump up around 50% of their monthly income for a property they could now get for 15% of said income?
And don't say that they've taken the loan and have responsibilities yadda yadda yadda because everywhere they look they see politicians, bankers and developers getting a way out of their responsibilities and bad loans.
Only a fool would feel any sense of accountability for money owed to an Irish bank. Personally I'd rather walk away, work illegally somewhere like the States and let them sing for their money.

you do realise that you hand back the keys the bank sells and the difference is still owed by you. Now that debt doesnt go away so you either have the debt and no asset or you emigrate for the rest of your life.

Are you really advocating that everybody in neg equity should do this ? :rolleyes::rolleyes:

blue_steel

D3PO wrote: »

you do realise that you hand back the keys the bank sells and the difference is still owed by you. Now that debt doesnt go away so you either have the debt and no asset or you emigrate for the rest of your life.

Are you really advocating that everybody in neg equity should do this ? :rolleyes::rolleyes:

Of course I realise that. And of course I realise not everyone would be in a position to do a runner. But I'm just being honest when I say that if I found myself in a situation of having a 200K millstone around my neck for the next 30 years I'd take my chances. A debt like that is going to be a drag on every aspect of your quality of life - forever.
I know people who have been working illegally in New York for 15 years, have never been home and are perfectly happy.

20goto10

blue_steel wrote: »

Of course I realise that. And of course I realise not everyone would be in a position to do a runner. But I'm just being honest when I say that if I found myself in a situation of having a 200K millstone around my neck for the next 30 years I'd take my chances. A debt like that is going to be a drag on every aspect of your quality of life - forever.
I know people who have been working illegally in New York for 15 years, have never been home and are perfectly happy.

But you would have known that when you took on the mortgage. Whether house prices are rising or falling has no bearing on your mortgage. If prices were rising and your house was worth 400K, you'd still have a 200K millstone around your neck for 30 years.

ricman

Lets say you buy a house for 150k, in reality you end up paying 300k approx.Very few people will go to america to aviod paying a mortgage, even american college graduates are finding it hard to find a job in the usa.
it doesnt make sense especially for a couple with 1 or two kids.
for most people the fact that they can pay the mortgage is paramount,if they can they will pay it.
OBVIOUSLY a lot of people are losing their jobs or finding their wages being reduced.
it may help a small no of people as you could sell your home, and buy an
apartment for 150k or less.
of course we have seen in the boom some people will take on incredible
depts if they can , so hopefully the banking regulator will watch how this scheme is operated very carefully.

ei.sdraob

there is a interesting scenario worked out here

http://trueeconomics.blogspot.com/2010/06/economics-21062010-innovation-economy.html

D3PO

blue_steel wrote: »

I know people who have been working illegally in New York for 15 years, have never been home and are perfectly happy.

For now. What happens when a loved one perhaps gets terminally ill or passes away back in Ireland ? Their stuck in the US as if they leave they cant get back. Id much rather a millstone around my neck than be stuck in purgatory for the rest of my life looking over my shoulder wondering if I'm going to be deported.

blue_steel

20goto10 wrote: »

But you would have known that when you took on the mortgage. Whether house prices are rising or falling has no bearing on your mortgage. If prices were rising and your house was worth 400K, you'd still have a 200K millstone around your neck for 30 years.

When I say 200K I mean 200K of NE not the original asking price. 200K of property value that is going to take a hell of a long time to come back. When a lot of people took out these mortgages we'd been through 15 years of wage inflation. They'd never experienced wages going down. They are now more than likely earning less than when they took the mortgage out. As an older person it really annoys me to see people my age looking down their noses at young couples in NE and saying well they should have done their maths etc. Anyone could have ended up in that situation. And if I was one of them I'd feel extremely let down by this state. Tighter regulation now isn't going to help them and I have no doubt they will be left to suffer while billions are thrown at the crooks running the banks.