May 3, 2009

Decoupling mortgages from the borrower

Posted in Your Ideas · 1 comment ·
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As a business person and employer here in Ireland I can confirm that there is NO new credit currently available to trading businesses from banks here in Ireland (beyond a few token loans to promote the false impression that the “banks are open for business”).
While the government spends billions trying to get the banks back working (able to start lending again) there is structural damage being done to small and medium sized businesses. A small Irish business that needed access to credit six months ago, won’t be in a position to meet the “fixed banks” lending criteria in six or twelve months time. The banks will be fixed, but the businesses will be too broken to be able to borrow. We need action now!

Decoupling mortgages from the individual

It occurs to me that there is ample credit in the Irish market place. The problem is that it can’t be turned over from one person (or business) to another. If you owe a bank an amount of money on one loan, and you can repay it, but need this same amount by way of another facility, the bank will gladly accept the repayment of the first amount, but will not advance the amount again by way of another loan.

Let’s get specific with three different examples how this idea would work:
1. Firstly for the homeowner wishing to sell his house
2. Secondly for the builder/developer that has a scheme of houses or commercial properties for sale
3. Thirdly, for a farm machinery dealer with a yard full of machines that farmers or agricultural contractors can’t get finance to purchase

Firstly for the homeowner wishing to sell his house

Let’s say you own a house and you have a €450K mortgage. Currently this mortgage is costing about €650 p/m interest only (0.75% over ECB including c€100 p/m mortgage interest relief). But if you try to sell this property, the chances of finding a buyer that can get a mortgage is slim at best.

Why not decouple the mortgage from the property owner. If this house could be put on the market for €50,000 plus the €650 p/m mortgage payment to the bank on the same terms as existed for the previous owner. This would result in a €500,000 property sale (no doubt less than what would have been expected two years ago!). The exchequer would receive 6% stamp duty and the vendor would be in the market for a more suitable property, starting the chain of events that feeds an economy.

This concept would generate the best use of the money already in the economy; the very same money that the banking system has accepted they aren’t going to get back any time soon. There isn’t going to be more money available anytime soon. We have to be creative in how we use the resources that we already have available to us. Remember, under the terms of the Bank Guarantee, we can force the Irish Banks using the guarantee to facilitate this strategy.

Secondly for the builder/developer that has a scheme of houses or commercial properties for sale

Mush as in the previous example for the private home seller, the builder/developer can divide the total debt associated with a particular development, and apportion the debt pro-rata to each of the housing or commercial units that he needs to sell. The individual properties would be selling with their associated level of debt.

For example, let’s take a development of 13 properties that have been built at a total cost/debt amount of €4M. The interest rate for this type of development funding would be in the region of 2.7% over EURIBOR (1.4% + 2.7% = 4.1%) or €164K p/a.
Per unit the interest payments c€1,051 p/m (less than the rent of the same unit would be).
Allowing these 13 properties being sold for the cost of the debt already associated to the properties would bring stamp duty of 6%, along with the potential for some CGT. But most importantly, the economy would be moving, and revenues will start flowing into the exchequer.
Decoupling the mortgage from the property owner allows this idea to become a reality.

Thirdly, for a farm machinery dealer with a yard full of machines that farmers or agricultural contractors can’t get finance to purchase

The farm machinery dealer (this could just as easily be a car dealer) has a load of machines in his yard. His customers need to use these machines. The banks won’t/can’t do the finance for the farmers and contractors to buy these machines. However, these machines are already financed by way of credit from suppliers and stocking loans. The dealer can work out the cost of each machine per year for a farmer/contractor (finance/depreciation/service/parts/other stuff) and charge the farmer this amount for the machine for the season. This would be like selling it to the farmer, organizing him finance to pay off your finance, and trading it back in from him at the end of the year.
So you rent it to him instead. Same benefits to Dealer & his customer, except you use the existing finance.

We are where we are!
We have the resources we have!
Let’s get on with it!

This can all be delivered by politicians with the business acumen and motivation to deliver real solutions to the actual problems our economy is facing.

We need to get business moving forward again. We need to accept that it will not move forward in the same way that it used to. Instead of worrying about how we can’t get new money into the system, we have to look at how we can better use the money that is already in the system. And there is plenty of money in the system!


  1. HeavyEnlightenedOne

    There is something in what you say. Good man!

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