Debt warehousing: Irish solution to excessive mortgage debt
While the US and many other countries around the world inflated housing bubbles, Ireland tried to surpass them all. From 1996 to 2006, house prices in Ireland increased more than 300%! As in the United States, Ireland inflated it’s housing bubble with lender debt. When the toxic brew of mortgages poisoned borrowers, delinquencies mounted, and house prices crashed.
An issue of solvency
When the service on existing debt exceeds the borrowers capacity to make payments, the borrower is insolvent. The limit of insolvency is also known as the Ponzi limit. Once this threshold is crossed, only additional infusions of borrowed money used to make debt service payments keeps the borrower afloat. Every dollar loaned to a borrower beyond the threshold of solvency, beyond the Ponzi limit, is a dollar lost by the lender.
When lenders push a Ponzi over the limit of solvency, they also sentence that borrower to financial death. When a Ponzi dies financially, the lender risks the borrower declaring bankruptcy and wiping out the lenders original loan capital. To avoid taking a loss, lenders will offer borrowers better terms including lower interest rates to get them back to the brink of solvency. This sentences the borrower to a lifetime of debt servitude, but it keeps the lender from losing money, which is all they care about anyway.
The plethora of loan modification programs we’ve seen here in the United States is our banker’s solution to the problem of widespread borrower insolvency. We lowered mortgage rates from 6.5% to 3.5% to make the payments manageable. We put borrowers on temporary loan terms similar to the toxic Option ARMs that have 2% teaser rates with a staircased 1% increase each year until the borrower defaults again. The loan modification programs maximize lender revenue while doing little or nothing to retire the original debt or help the debtor. Through these programs, lenders can kick the can long enough for the bubble to reflate when they can toughen their stance on struggling borrowers and force them to pay up or get out.
Ireland faces the same problems the United States does. The central bank and government are trying to prop up their banks rather than nationalize them and start over. Since their housing bubble was much larger than ours, they have an even larger problem with “legacy loans” and excessive debt leading to widespread borrower insolvency. Their solution has many similarities to ours, but the obviousness of the debt servitude is more troubling to observers there.
A colorful explanation of the Irish banking problems
THE solution favoured by the Central Bank for mortgage holders in arrears will leave homeowners worse off, experts say.
As well as criticising split mortgages, they accused banks of attempting to get homeowners to consolidate credit-card and other short-term debt on to the split mortgage.
Central Bank governor Patrick Honohan said last month that split mortgages were the best way to keep over-borrowed families in their homes.
Interesting that a central bank governor openly acknowledge that borrowers are “over-borrowed” insolvent debt slaves. You don’t see that here in the US.
The details of how they “solved” this problem are fascinating.
A split mortgage is an arrangement where part of the mortgage is ‘warehoused’, with payments to be made on the balance.
“Warehoused” means a portion of the debt is treated as a negatively amortizing mortgage just like the toxic Option ARM. Borrowers dutifully pay down the other part on an amortizing schedule while the warehoused part keeps growing like a weed. It is a ridiculous smoke-and-mirrors attempt to make it look like borrowers are solvent and paying down debt when in fact, they may not even be treading water.
Those payments are reduced for five or 10 years.
Families only make repayments of capital and interest on the amount of mortgage that they can now afford.
This is the illusion of getting ahead.
The other part is parked and dealt with later, but Bank of Ireland, Danske Bank and Permanent TSB charge interest on both parts of the split mortgage.
So they aren’t making any payments on the other part and the banks are still charging interest. Since no payments are being made on this part, the interest must be added to the balance. Depending on where the mortgage is split, it’s entirely possible the borrower may be accruing unpaid interest faster than they are paying down principal on the other part.
These people are screwed.
Now the Association of Expert Mortgage Advisers has called for this type of split mortgage to be banned.
DJ O’Donovan, of the association, claimed that paying interest on both parts of a split mortgage would leave families worse off in the long run.
“There is a distinct possibility that they are misleading the homeowner into believing that they have secured a long-term viable solution to their financial troubles – when in fact they are simply racking up further debt for another day,” he said.
The group said homeowners would have to win the lottery or double their income over 10 years to clear the parked portion of the mortgage.
Perhaps they too and reflate their bubble and bail everyone out, right?
Split mortgages have also come in for criticism from the Money Advice and Budgeting Service, which found that huge numbers of those in mortgage trouble were in their 40s and 50s. These people would be retired by the time they came to repay the warehoused part of the split mortgage.
Can you imagine living that way? How would you like to spend your most productive wage earning years treading water knowing that you will have a massive debt to pay off in your retirement? Rather than accumulating savings to have a more comfortable retirement, these people are accumulating
death debt for a stifling old age.
The association claimed some banks were trying to force troubled mortgage holders to consolidate short-term debits, such as car loans, into a split mortgage – a practice that has been widely condemned in the past.
Wow! The Irish actually recognize that debt consolidation is a bad idea. Is it wise to pay for an evening out or a posh vacation with 30-year debt? The “sophisticated” American debtor who lives by periodic debt consolidations hasn’t figured this out yet. As one financial adviser pointed out, “it isn’t the consolidation that was the poor decision, it was accumulating the short-term debt in the first place that was the mistake.”
The mortgage group recommends that the parked amount of a split mortgage should not have any interest charged on it.
Bank of Ireland charges full interest on the parked portion of the split mortgage, while Permanent TSB has been charging 1pc interest.
A spokesman for Permanent TSB said it was now rethinking this. Bank of Ireland had no comment.
That’s their accommodation? Don’t charge interest on the massive debt they can’t afford? I suppose it’s a step in the right direction. If I were in those circumstances, I would strategically default, declare bankruptcy, or go off the grid. Better to wipe out a debt like that and start over. I am shocked that the citizens of Ireland are willing to spend a lifetime in debt servitude to save their bankers. I wouldn’t.
Long-Term Ponzis implode
The former owners of today’s featured property owned it for a long time. My property records pick up in 1998 on this property when they borrowed $238,800 in what looks to be a second mortgage. By 2001, they started their Ponzi journey.
- On 1/3/2001 they refinanced with a $958,750 first mortgage and obtained a $221,250 stand-alone second.
- On 4/2/2002 they obtained a $396,750 stand-alone second.
- On 10/21/2004 they obtained a $640,000 stand-alone second.
- On 1/31/2006 they refinanced with a $1,500,000 first mortgage and obtained an $85,000 stand-alone second.
- On 6/2/2006 they refinanced with a $1,750,000 first mortgage.
- On 5/29/2007 they opened a $140,000 HELOC.
They quit paying the mortgages on their property, and the bank let the squat for over a year.
Look at how these people lived. This is exactly the kind of behavior that recessions are supposed to purge. They became dependent upon Ponzi borrowing, and it obviously is not sustainable. The longer this was allowed to go on, the more money the final lender was going to lose.
So how do lenders respond? By lowering interest rates and giving borrowers like this a chance to do it again. Do you think that will work long term?
[idx-listing mlsnumber=”OC13106677″ showpricehistory=”true”]
$1,399,000 …….. Asking Price
$1,928,138 ………. Purchase Price
11/1/2012 ………. Purchase Date
($529,138) ………. Gross Gain (Loss)
($111,920) ………… Commissions and Costs at 8%
($641,058) ………. Net Gain (Loss)
-27.4% ………. Gross Percent Change
-33.2% ………. Net Percent Change
-47.2% ………… Annual Appreciation
Cost of Home Ownership
$1,399,000 …….. Asking Price
$279,800 ………… 20% Down Conventional
4.48% …………. Mortgage Interest Rate
30 ……………… Number of Years
$1,119,200 …….. Mortgage
$278,650 ………. Income Requirement
$5,658 ………… Monthly Mortgage Payment
$1,212 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$291 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$37 ………… Homeowners Association Fees
$7,198 ………. Monthly Cash Outlays
($1,697) ………. Tax Savings
($1,479) ………. Principal Amortization
$463 ………….. Opportunity Cost of Down Payment
$195 ………….. Maintenance and Replacement Reserves
$4,680 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$15,490 ………… Furnishing and Move-In Costs at 1% + $1,500
$15,490 ………… Closing Costs at 1% + $1,500
$11,192 ………… Interest Points at 1%
$279,800 ………… Down Payment
$321,972 ………. Total Cash Costs
$71,700 ………. Emergency Cash Reserves
$393,672 ………. Total Savings Needed