Negative Equity - Am I being harsh?

Procrastastudy

I wanted to ask people's opinions on the current crop of negative equity cases*. There seems to be an increasing number of people who want to take legal action to try and get out from under NE and I'm wondering in what situations this could be justified.

My personal opinion is that if you (as I am) are in NE then "them's the breaks - the market goes up as well as down". That said practical solutions such as being able to move NE to a new property seem sensible.

I suppose the bottom line is why should I pay more on my mortgage so other people can emigrate and not have their credit rating adversely effected? If you default next time you want a mortgage you should be paying a higher interest rate based on your poor history in my opinion. I wonder what other, more informed, opinions are out there?

* The number of which has been scientifically sampled by looking at boards.ie posts and occasionally switching on the telly.

Predalien

Personally I'd be in favour of non-recourse mortgages, the risks are weighted heavily against the borrower at the moment.

Procrastastudy

I actually can't make my mind up on that - I think you're probably right though as I could see it forcing banks to be more responsible in the future.

krd

GCDLawstudent wrote: »

My personal opinion is that if you (as I am) are in NE then "them's the breaks - the market goes up as well as down". That said practical solutions such as being able to move NE to a new property seem sensible.

It may not be that practical. And I'm not sure how possible it is. By allowing the transfer of negative equity to another mortgage, the bank are loaning more than the property is worth. It think this effects their balance sheet. There may be some regulation against doing that. To do these NE mortgages, the banks may need funds from the government to cover the NE. Which means the state borrowing billions.

One thing I know, though I'm not sure how this is regulated, if it is regulated at all. I have heard there is law in England that covers it, but I'm not aware of prosecutions. The banks, through lending are not meant to jig the market up. They are not meant to knowingly lend more for a house than they know it's worth. This is something that is incredibly easy for them to do, but it's also an incredibly bad thing for them to do, as it can crash the market.

The idea of non-recourse is it should spread the risk between the buyer and the bank. That's the theory. In reality bankers are completely out of control, not just here but the US, the UK, Spain, etc. Out of control 12 year-olds on red bull.

The idea is that bank will not lend a non-recourse loan unless they know the asset is rock solid. But if you look at what Anglo were doing with non-recourse - and the golden circle. Jail time looks like the only remedy.

Non-recourse loans wouldn't get people out of negative equity and it wouldn't spare them a bad credit rating.

Many people who got into property were incredibly naive - the whole non-recourse idea is just clutching at straws.

There is widespread delusion. There are property speculators who have been in default for years. The banks are moving very slowly because there are so many of them to deal with.

Procrastastudy

That actually reminded me krd - When I was buying in Scotland - I got knocked back by the valuer on a couple of properties as he said they weren't worth the asking price. If I wanted to continue I would have had to stump up the difference in what he though they were worth vs what the asking was.

When looking at properties here (2006) I was told - 'market value is what someone is willing to pay - what are you willing to pay?'

Don't get me wrong - it was still our (wife and I) decision and I believe in standing over it unless we literally can't. The mad thing is even if I could get out of the mortgage I possibly wouldn't as to rent the same flat would be €200 more than the mortgage.

ronjo

I see the non recourse option mentioned a lot, but surely if this was the case then interest rates would have to go up due to extra risk on lenders side?

Procrastastudy

It's not my intention to answer each post I promise!

I don't think current loans should be converted - new loans should probably be issues as non-recourse though. I'd say market forces would keep interest rates low if it was a level playing field. What is probably would do is curtail property price recovery.

I think its a case of drawing a line under what has happened and making sure its not allowed to happen again.

Predalien

ronjo wrote: »

I see the non recourse option mentioned a lot, but surely if this was the case then interest rates would have to go up due to extra risk on lenders side?

At the moments interest rates are rising as banks are struggling to recover massive losses. Non-recourse mortgages exist in the US and the affordability of traditional mortgages has never been a problem. The extra risk isn't that big as it should be countered by more responsible lending which helps create a stable housing market, with less chance of bubbles due to lax regulation.

The sub-prime crisis in the US was partly caused by banks encouraging those who should never have been buying houses to borrow way beyond their means, the banks were confident prices would continue to rise and designed mortgages that were almost doomed to default with the bank still profiting from the rise in the price of the house.

krd

GCDLawstudent wrote: »

I actually can't make my mind up on that - I think you're probably right though as I could see it forcing banks to be more responsible in the future.

No. Jail is the only thing that will work.

One thing I've learned, which did not contribute positively to my mental health, is the mentality of that whole social strata that manages banks and businesses in Ireland have a really child like mentality. It's bluff, fibs and cheating - a do it just don't get caught. It's a kind of craziness.

And the craziness gets to such a point, if you're sane, people look at you crooked like you're cracked in the head.

It's not just Ireland. If you look at the scandals for the last five years in the UK, and the US, and nearly a new one emerges every week. It's the same mentality. Managers are appointed. They do things they shouldn't. They haul in record profits for a few years. Then it emerges they were doing things they shouldn't have been - like the most recent is handling drug and Iranian money. And bang all the record profits turn into record losses and they wipe out far far more value than the risks they took justified. The list is nearly endless. There's is hardly a bank in the world, where did not have someone doing something incredibly stupid or lots of stupid things.

These guys are not going to jail, because they're being protected - it's the craziness again - It's like Brian Leninhan jnr, believing he was restoring Irish banking to it's former glory, when the glory days were problem.

Ireland is making a better move on it. It's a pretty tough rap sheet many of the Anglo guys are facing.

It's no kind of deterrent if a bank manager can earn millions in a few years, and then only get the sack when they get found out. It encourages perverse behaviour.

Say, if Sean Quinn was in Australia. He could be facing jail time for his mis-management of Quinn insurance.

krd

Predalien wrote: »

The sub-prime crisis in the US was partly caused by banks encouraging those who should never have been buying houses to borrow way beyond their means,

the banks were confident prices would continue to rise and designed mortgages that were almost doomed to default

with the bank still profiting from the rise in the price of the house.

Well, it's not how it worked out, is it.

Irish banks were actually taking the same approach. It had worked for them before. Anyone who got in trouble with their mortgage was able to get out of it reasonably easily. Even make a profit, both for themselves and the bank.

There's a really funny thing with the US housing market though. Once a house is repossessed American's nearly consider it to be tainted with bad luck. So, a house that might normally be on the market for 250,000, could be on the market for 45k. It's funny. If the bank can get the borrower to co-operate with the sale, they get the full market value, if however they repossess it, they get the repro price.

krd

GCDLawstudent wrote: »

That actually reminded me krd - When I was buying in Scotland - I got knocked back by the valuer on a couple of properties as he said they weren't worth the asking price. If I wanted to continue I would have had to stump up the difference in what he though they were worth vs what the asking was.

Yeah. Because the Scottish bank would do a valuation. And they would not offer you more than their valuation for the mortgage.

That's the way it's meant to happen.

When looking at properties here (2006) I was told - 'market value is what someone is willing to pay - what are you willing to pay?'

Yep. Valuations are really straightforward in the UK. The land registry is open to the public - you can see the real prices people have been paying. There are no fees and lots of websites where you can just type in the post code and see several years of history.

Irish banks were doing really strange things. A house might have sold on a new estate for 150,000 (someone who got in quick). And then within weeks someone else is paying 250,000 for a similar house on the same estate. That should not have been able to happen.

There was so much strange stuff going on. Irish estate agents were advertising houses as sold for really high prices when they hadn't. And they were doing this silly thing, which they're still doing, of every so many weeks switching the 'for sale' sign outside a house to 'sold'. There's a house around the corner from me (pretty awful looking) - it's had a 'for sale' sign on it for years. Every so many months, it's 'sold'. And now they've just put up a new 'for sale' sign.

Don't get me wrong - it was still our (wife and I) decision and I believe in standing over it unless we literally can't. The mad thing is even if I could get out of the mortgage I possibly wouldn't as to rent the same flat would be €200 more than the mortgage.

For a lot of people the negative equity is not that serious. If the mortgage is not that high, then they're not really in too much trouble.

On the other hand, some people are down by millions.

FreudianSlippers

GCDLawstudent wrote: »

There seems to be an increasing number of people who want to take legal action to try and get out from under NE and I'm wondering in what situations this could be justified.

What's the cause of action? Breach of contract? nah... misrepresentation? perhaps, but all of these contracts have terms that say interest can go up as well as down and everybody knows housing prices fluctuate... negligence? I suppose giving 100%+ mortgages may be negligent, but is there really a duty of care there in the commercial transaction (perhaps under banking legislation?).

It just all seems a bit wishy-washy and like people are trying to find a legal loophole. I just cannot see the case in my mind without a specific example (of which I'm sure there are some). But for the average person in NE, I don't think there is a case to be answered.

krd

FreudianSlippers wrote: »

What's the cause of action?

It's more of a kind of call for government intervention. And it is very wishy washy.

Breach of contract? nah... misrepresentation? perhaps, but all of these contracts have terms that say interest can go up as well as down and everybody knows housing prices fluctuate... negligence?

If you had in writing, all the things the mortgage agents, etc, told people in the process of giving them a mortgage people might have a strong case. People were very naive. They were told the government would step in to stop house prices falling. They were told all kinds of things.

Autumn 2007 the Bank of Ireland ran a 'Halloween' campaign. A poster in their branches of flying witches and pumpkin heads. With a tag line that went something like 'don't be afraid...jump on the property ladder'.

I suppose giving 100%+ mortgages may be negligent, but is there really a duty of care there in the commercial transaction (perhaps under banking legislation?).

In the US people have tried to take on the lenders. Sometimes they've won, because the banks were so sloppy in creating mortgage backed securities, many of the original documents were lost. If the bank can't find their documentation they have no claim to the house.

Also what was going on in the US. And I heard an US estate agents pitch on this, so this is what was happening. People where being enticed into what's called sub-prime loans. The loans had something called arms. That's periods of different interest and repayments. Some might have an arm of a year or more where no repayments were made. Then a five year arm of low interest. And then the final arm where the interest shot up.

Agents and everyone else were telling the borrowers that they could easily re-finance when the five years was up.

Now the US borrowers are being painted as idiots. Some were but there was strong historical reasons to believe they could refinance. While I was there I refinanced my friends mortgage. They were on a fixed rate mortgage. The Fed, had made some cuts in their rate since they'd bought the house, and they were considered a better credit bet. So, I called all the banks up and haggled with them and eventually got a new fixed mortgage at 2% lower.

The thing is. If you have negative equity, you cannot re-mortgage. And that is where all the people on sub-prime were caught out. But they weren't that stupid. After the first five years, they would have built up equity in their houses, so even if there was a drop in the market, they should still have been able to re-mortgage. But the drop was much larger than anyone expected.

It just all seems a bit wishy-washy and like people are trying to find a legal loophole.

There's so much delusion in the world of Irish property. There are people who believe if people who are "trading up", are allowed carry negative equity into a new mortgage, then it will kick start the property bubble all over again.

Delusion is rampant. The guy who built Achill henge, blames the government and Anglo for the collapse of his business and the property market. The couple of property speculators who were evicted from their mansion, blame the government for deliberately keeping property prices low. Sean Quinn's delusion is that it was just one little deal that snagged him - that all his other investments and businesses were perfectly fine, when they weren't.

ComfyKnickers

Was just reading this thread and noticed that every piece quoted as being said by Procrastastudy is coming up as GCDLawstudent, am I cracking up here or what??

Procrastastudy

I changed my name due to long running issues with identifying the fact I was a law student - or was it that I was at GCD?

ComfyKnickers

Procrastastudy wrote: »

I changed my name due to long running issues with identifying the fact I was a law student - or was it that I was at GCD?

Aha, thanks for that!! Great contributor to the forum I must say, whatever name you use!!

Procrastastudy

ComfyKnickers wrote: »

Aha, thanks for that!! Great contributor to the forum I must say, whatever name you use!!

I think prolific might be a better description - seems to confer the air of quantity over quality