By far the most important statistic to come out in Ireland in the past few days is yet more evidence of the relentless rise in the number of people falling into mortgage arrears. Since 2006, this column has been arguing that the inverse of a house price bubble is a debt bubble and, as night follows day, when the house price bubble bursts, so too will the debt bubble.
The biggest myth of the boom was that house prices always go up. The second biggest myth was the soft landing in prices. The biggest myth of the bust is that the debt is sustainable. The second biggest myth is that there will be a soft landing in debt defaults. The soft landing in defaults suggests that defaults will be limited to very exposed borrowers.
In the same way as wishful thinking in the boom was nonsense; wishful thinking in the bust is similarly misplaced.
Central Bank figures show that 86,146 private residential mortgage accounts are in arrears of more than 90 days. Over 67,000 are in arrears of more than 180 days.
Unless this is arrested, we are likely to see a pattern in mortgage default much like we see contagion in a disease. Defaults go viral.
Think about the way viruses spread. Initially, incidents of the disease are isolated to what are called high-risk groups. Those not in the high-risk group content themselves that they are not really at risk and that they can carry on like normal. But gradually the disease tips over into the general population, creating the conditions for a pandemic.
The way in which defaults tip is one part financial and economic and one part psychological or social.
The key to the economic part is income. If your income is rising faster than the cost of debt or your overall ability to meet debt and other bills, all might just be okay. If not, you are goosed.
This is where yesterday’s GDP figures come in. There is good news in the income data. Forget GDP, which measures output and focus on GNP, which measures income.
Yesterday, the GNP figures were strong. This newspaper reported that “Gross national product fell 0.4pc in the third quarter from the second quarter but rose 3.7pc from the year earlier period.”
So here we have a conundrum. The national income is going up, yet the defaults on mortgages are rising rapidly. What does this mean? It implies that the total income of the country is not percolating down to wages, which is the main source of income for most of us. So what is happening?
Well, when you break down income it can be either wages, that is the proportion of income that goes to workers or it can be profit, which is the proportion of income that goes to capital. Could it be that profitability in Ireland is recovering quite rapidly? This is what you would expect after five years of downturn. Typically profits recover much faster than wages, as an economy stops contracting.
This might be the best interpretation of the disparity between domestic income rising and mortgage arrears also rising.
The other factor is, of course, taxes — both direct and indirect — and the labour market.
If your mortgage is taking a significant proportion of monthly income, then two factors determine whether you will have enough at the end of the month to pay it.
The first is obviously work. The better chance you have of working, keeping your job or moving to a better one, the better chance you will have of paying your mortgage.
Looking out to 2013, the outlook for employment is not rosy, while the chances of getting a pay rise are equally slim. In contrast, we now know that taxes are rising across the board, this reduces take home pay, which reduces the amount of money left to pay the mortgage.
Consequently, the squeeze on households will remain vice-like in 2013 even if company profitability recovers.
This may lead to the strange and seemingly counterintuitive picture emerging over the next 12 months where corporate investment recovers as it has been these last few quarters, yet household incomes and defaults continue to rise.
If this is the picture that emerges, we can actually figure out a way of manipulating the economic cycle to the betterment of society.
How?
Arrears are a sign that debt is simply too big and needs to be reduced. Cyclical upswings in investment mean that the corporate balance sheet is beginning to mend itself. Meanwhile, rising profitability is what should be now happening.
This means a mortgage debt deal is more necessary than ever because that part of the economy, which wasn’t in huge debt before the crash, is healing. This is a huge positive and this crucial change is what can be gleaned from the cumulative national income statistics.
In fact, if it could be executed, a debt deal could use the banks as a skip for bad debt. For the first time the banks, which have dragged the economy down for the past five years, might actually be used as a quarantine zone.
They would take on all the debt, rather than the people taking on the debt.
Here’s the deal. A large debt for equity swap needs to be done for the mortgages to prevent more arrears and defaults. If the ECB, which is proving itself much more inventive, can be convinced of the merits of this, we have a chance.
The banks take 50pc ownership of homes. These homes are sold in 20 years’ time. The banks get paid then. In the meantime the people pay half the mortgage, which is affordable. They don’t default now but get on with the business of living. The ECB takes as “collateral” the potential equity upside that banks are holding. In effect it gives the banks a price today on Irish houses which are not worth much today but will be in 20 years.
This is a large debt for equity swap where the ECB acts as the lender of last resort for the Irish banks, who in turn act as a quarantine mechanism for the toxic Irish household debt. This prevents the default disease from spreading and becoming a financial pandemic.
All the while the embryonic recovery we may be seeing in national account figures is given a chance to take hold.
David McWilliams’ new book The Good Room is out now.
Have read your column for years… it is the first idea that I agree with…
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Mortgage Debt Deal CANNOT prevent ‘default disease’ from spreading I am in agreement of the pre-ambles to this article but I am in Total Disagreement with ‘the deal’ proposed at this juncture. The truth of reality is not reflected and the facts shown are selective in determining the proposed solution . It simply will Not Work and any time given to this will be a waste of time and money. The Elephant in the room is not the ‘mortgage debt’, rather it is the TIME we have left to return to normal living . It is assuming that the banks… Read more »
20 Years? You gotta be kidding! First, we live in times of Libor fraud, Bank of Ireland, the largest credit card operator in Ireland, rising interest rates 4% on credit cards one week before christmas, HSBC is allowed by Obama and Cameron to continue operations instead of smahsing the bank into the ground after it was clear that they were laundring drug cartel funds etc., and perhaps most important, we live in times of utter political incompetence. Technocrats took over political key positions, the EU gets the Nobel Peace Prize and is one of the largest weapons exporters on the… Read more »
How can the debt swap be done for equity David, when the whole creation of money is debt based in the first place? Plus fractional reserve banking and securitisation employed by the banks is fraudulent. As far as I am concerned, between the above and the bail out, the banks have been paid for the mortgages anyway! What our Government and the banks are doing to the peoples of Eire is immoral and criminal. Worse, the courts are in collusion with them! All in the state of Eire is sick with greed & indifference. There is no humanity left in… Read more »
If the people of Ireland boycott the new household tax, it will be a good start.
Unless there is a massive turnaround in the labour market, and unless it sucks in the people in negative equity (and unless it is sucks them in first), there is no way that the current mess will get cleaned up. Basically, it all comes down to the labour market. In particular, the participants will need to readjust to the available jobs. And secondly there will have to be restrictions introduce so as to ensure that there is no addition to the supply of labour. Basically, a country with high cost labour compared to it’s nearest neighbour, has to some how… Read more »
Hi David: I actually specialized in selling bank-owned properties (known as REOs) in California before, during and after the worldwide property boom. I even gave regular seminars on the subject throughout the ‘80s, 90s and into the naughties. I used them to recruit salespeople for my real estate and mortgage business. It was a profitable niche market for me when everybody else was assuming that there are no foreclosures in a boom. When the bust came every tom-dick-and-harry became a “foreclosure specialist”. The central message of my seminars was that a certain proportion of any population fails to manage their… Read more »
Ray Mc Sharry has trouserd 250k in fees as a public interest bank director of in the past 4 years. Ditto Joe Walsh. LOL.
Can anybody explain the logic in having the highest birth rate in the western world, an open door immigration policy aligned with chronic unemployment ? 70,000 school leavers hoping to enter a labour market with fewer retirees @ self employed white collar level and school/college leavers trying to compete with ready made experienced staff ,imported from across the globe is disastrous. 100,000 people on FAS schemes within 12 months !
No DMcW, your wrong when you say “(Irish property) will be worth more in 20 years time”. This is just wrong. All the talk of the rise of Asia, the world shortage of oil, natural gas and other resources, the rise and rise of free stuff and pirated stuff undermining the profits of businesses (but good for consumers) means that very few people will be taking out €300K mortgages in Ireland in 20 years time. They will just as likely be squatters in a post-oil industrially decaying dystopia, as so many sci-fi authors have presciently forecast, for the West at… Read more »
FFS – why are we thinking so insular, are we disconnected from the real world of Debt – NO !!! Stop thinking Micro and relate to the Macro problem, otherwise you are conning – yes conning the public, as sure as the banks are conning the Govt. Some real figures Total credit market debt (TCMD) = 200 TRILLION DOLLARS. Growth in TCMD – 80 TRILLION TO 200 Trillion in the last 10 years. over 10% annually. The largest peacetime accumulation of debt (fast approaching the total debt after world war 2) Real Global GDP = Just OVER 3 % European… Read more »
David,
> Forget GDP, which measures output and focus on GNP, which measures income
GDP – you learned well from my responses, excellent :)
GNP is also failed concept. Excellent article well worth reading:
http://library.mises.org/books/Oskar%20Morgenstern/Does%20GNP%20Measure%20Growth%20and%20Welfare.pdf
The Banks are not fit for purpose now. That is why Bank Of Ireland raised rates. Pure desperation. They operate now soley in a small damageed economy with high bad debt levels. There is very little appetite to borrow and very few who would meet repayment criteria. Banks cannot cross sell without lending. They cannot build reserves to rebuild their businesses so will limp along for years, cutting costs except top salaries increasing fees and charges on the few viable customers they have left, paying barristers to obtain useless judgements or force many into insolvency. The Banks are not repossessing… Read more »
The government just simply don’t have enough money to bail out the mortgage book there’s to much money involved.
Another thing if you do deals with some people and you run out of funds and can’t help others is not going to be fair.
I think we will limp along with this for some time ,but the way this country is heading,it seams that unless labour pulls the plug on this coalition the government will limp along as well.
First they came for the communists,
and I didn’t speak out because I wasn’t a communist
http://en.wikipedia.org/wiki/First_they_came…
David your spot on, there will be no debt forgivness. If in 20 years time the properties are still worth nothing, then extend it by another 20 years, debt is an asset,keep it on the correct side of the balance sheet. Or how about inter-generational mortgages? If the kids don’t want to take over the remaining debt when the time comes then the banks get to keep the property. The simple reality is people signed contracts with the banks and part of that contract was that they would pay back the money. Calling the banks nasty names in a mob… Read more »
Another take on this issue:
http://www.rte.ie/blogs/business/2012/12/12/its-time-to-deal-with-mortgage-arrears/
Jeffrey Sachs – another ex-Kilkenomics guest:
http://www.ft.com/intl/cms/s/0/369d77da-483f-11e2-a1c0-00144feab49a.html#axzz2FcfK6uuZ
As the IMF was mentioned above, let’s have a look at what it thinks about any kind of a “deal”. Enda and co. better have a look at this and realize who else occupies the Good Room – Mm Lagarde. Argentina Should Leave the IMF, Urge Europe to Break With the Euro Dec. 18, 2012 (LPAC)–IMF Managing Director Christine Lagarde, who a year ago characterized as “odious” any suggestion that Greece might embrace Argentina’s model of sovereign default and debt renegotiation, is now threatening to “censure” Argentina, and possibly expel it from the IMF, for allegedly issuing “faulty” growth and… Read more »
The word ‘ Restructuring ‘as used in this mornings newspapers when referring to Bank of Ireland and ‘The Deal’ as used in the above , all amount to the same ie deception of the borrower .
Departing IMF economist blasts fund for eurozone ‘failure’; Lagarde is ‘tainted’
London (CNN) – A senior economist at the institution spearheading the bailouts of three eurozone countries has lambasted its lack of leadership and said its first female chief is not fit for the job.
In a letter obtained exclusively by CNN and addressed to Shakour Shaalan, dean of the executive board of the International Monetary Fund, 20-year veteran Peter Doyle says he is “ashamed to have had any association with the Fund at all.”
Enda, no austerity here, the Good Room is having a Tea Party!
The IMF’s Obscene $350,000 Christmas Bash
Fresh Cups!
At this stage will be better off by electing a new Government, that would give the People A new Deal “Ã la” F.D. Roosevelt, that would establish a State own Bank, and will pull out of the euro, to start afresh with our own currency; and will proceed with debt forgiveness , and NO co ownership of family homes by the rotten Private Sector Banks, that only want to perpetuate usury. . Of course that is contrary to the interest of the elites in the Public and Private Sector, including most of the Political Class, that at the moment are… Read more »
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Its a bad idea because it involves the ECB lending Irish banks money to take part in the biggest property speculation scheme in Europe. The banks would be speculating on house price rises with borrwed money. The cost of money over 20 years has to be recouped as well. European money would be beter spent on infrastructure. Why should irish gambling debts be converted into another longer term gamble with european taxpayers money?
People can take their flags and national days and sovereignty and passports and stick them all where the sun doesn’t shine. I don’t recognize any of them and never will.
I like helping my friends (including foreign friends here and Irish friends overseas), family and community first, anything else is a bonus. If everyone else did the same we’d be fine.
Further to my earlier post re Ulster Bank, I have had some intriguing discussion with ordinary Irish People who are exercising their right to take High Court Action where they say their rights have been impinged on and they are suffering undue distress as a result. Several Irish people have now experienced the same treatment/reaction from Ulster Bank when they attempt to serve Plenary Summonses at Ulster Bank’s Group Headquarters on Georges Quay in Dublin. In all cases, when the main reception attendee is identified clearly as an Ulster Bank employee and then served with an originating summons, the individual… Read more »
A few songs for this season of mortgage defaults Have fun
http://www.youtube.com/watch?v=M0nc0PS3_vg
http://www.youtube.com/watch?v=PBk3eopxKtM
http://www.youtube.com/watch?v=bBBvA8Ccvvc
http://www.youtube.com/watch?v=bBBvA8Ccvvc
Britain again moves towards Glass-Steagall. This is the essential step before any kind of debt deal and reconstruction can happen. July 4 marked the first British move with the FT editorial, now continuing. British Banking Commission Calls for Electrified Ring Fence Dec. 21 (EIRNS)–A report from the British Parliament’s Banking Standards Commission calls for an electrified financial ring-fence, where the shock will be total bank separation for those banks which violate it. The move is contrary to the wishes of anti Glass-Steagall Chancellor of the Exchequer George Osborne, who wanted the Commission not to reopen the debate about the structure… Read more »
Prosecutors in Frankfurt raided Deutsche Bank headquarters for the second time in a fortnight. This time the focus is on suspicions of witness collusion, in connection with a scandal that could cost the bank as much as 1.5 billion euros. The raid took place on Wednesday, with fewer police than in the first raid the week before, then 500!, but the dark cloud of suspicion that hangs over Deutsche Bank is getting bigger.
This is the shape of things to come for the banks!
HSBC caught drug-money laundering, (imagine shipping $7 billion of Mexican cartel cocaine dollars to NY!), the LIBOR scandal and now Deutsche Bank caught in CO2 fraud. After the 2007 financial heart attack desperate liquidity foraging brought the forced-march green renewables swindle linked to this Co2 fraud.
Again the link between green economics, drugs, and the catastrophic banking system. Add to this the housing bubble to get perspective.
WAS TD DEATH RESULT OF TOTALITARIAN WHIP SYSTEM?
http://www.irishtimes.com/newspaper/frontpage/2012/1222/1224328122232.html
The writing is on the wall. The banks will be the new landlords, why would they ‘lose money’ if they don’t have to. The banks are going after the buy-to-let houses first. Most people in Ireland will not have any sympathy for someone losing an investment property, and the government has let lose the dogs of the bank…basically go after buy-to lets and we’ll leave the owner occupied house alone to a degree for now. http://www.independent.ie/business/personal-finance/property-mortgages/new-law-to-bring-surge-in-seizures-of-buytolet-properties-3333203.html Having a 2nd house repossessed will not lose as much votes as evicting families. http://www.independent.ie/business/personal-finance/property-mortgages/banks-offer-mortgage-interest-cut-to-owners-who-give-up-their-homes-3323191.html The banks will let some of the houses continue,… Read more »
David took a couple of knocks for writing this article and has been accused of being on the side of the banks
His recent articles suggest however that he cares more about society than the banks
I suppose this is seen as a lack of consistency
Here is an example of the difference between pseudo sciences like Ecconomics and hard Engineering based disciplines such as computer programming
Question – Best C++ Ide for Unix / Linux?
Answer –
“closed as not constructive. As it currently stands, this question is not a good fit for our Q&A format. We expect answers to be supported by facts, references, or specific expertise, but this question will likely solicit debate, arguments, polling, or extended discussion.”
It’s nice to predict with 100% accuracy the consequnces of ones actions.
[…] whether you will have enough at the end of the month to pay it. … View original post here: David McWilliams » Mortgage debt deal can prevent 'default disease … ← Don't Despair — Get Advice on Repairing Your Credit […]
Tsipras of Greece’s Syriza Party : “The Argentine model upsets neo-liberal hegemony internationally”. Dec. 23 (LPAC)–During a visit to Argentina, Alexis Tsipras, the leader of Greece’s Syriza party, was interviewed by the pro-government daily {Tiempo Argentino}, in which he blasted the criminal austerity being imposed across Europe by the speculative funds; questioned the future of the euro system itself and suggested that a new, unspecified “monetary architecture in the continent” might be in order; and praised the Argentine example of breaking with “neo liberal hegemony internationally.” Excerpts follow: “The majority of the governments of Europe behave as if they were… Read more »
An extremely nasty article by Donal Donovan, who is a former deputy director of the IMF and a member of the Irish Fiscal Advisory Council, and Ranique Mottes, a former sr. economist of the Central Bank of Ireland, saying we feel humiliated, but the idea that Ireland ever was — or will be — economically autonomous is delusional.
These represent the neo-liberal international hegemony, that Tsipras refers to above.
GFC II on the way? Another AIG? Add this to British Electric Fencing the banks to see something is terribly amiss. Visions of Financial Collapse Trump Sugar Plums Dec. 24 (EIRNS)–Two Christmas Eve articles– although neither directly mentions Glass-Steagall–reflect that the larger reality beyond the fiscal cliff is still shining through the Christmas haze: an imminent hyperinflationary collapse. “Another Global Financial Crisis May Be On the Way” is by American DeAnne Julius, a recognized establishment economist who has worked for government offices including the CIA, and an “A-list” blogger for the Financial Times. Beyond all the Eurozone crisis and war… Read more »
Interesting stuff.
test 3
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